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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Wildcard In OPEC's Next Deal

When last week news broke that Libya’s UN-recognized government and the eastern rival government might just be willing to settle their differences and hold elections early next year, its significance for oil markets passed more or less unnoticed as everyone was watching OPEC and Iran. Now, the head of Libya’s National Oil Corporation has suggested that this significance could turn out to be pretty major.

Earlier this week, Mustafa Sanalla told Bloomberg that the NOC hoped Libya would be exempted from any new OPEC-wide production cuts that are under discussion by some OPEC members right now in response to the latest oil price decline. “The OPEC community has understood the difficulties we face –- Libya has withheld more than any other country from the global market,” Sanalla said.

While this may be an overstatement—after all, in terms of production withheld Libya has got nothing on Venezuela—it is a fact that Libya won an exemption from the first cuts agreed back in 2016 because it was having a lot of trouble keeping its production steady, with growth not even a top priority. But that was then, when the Petroleum Facilities Guard held the oil terminals and used this to blackmail the government into paying for using the terminals. Then came the Libyan National Army led by General Khalifa Haftar who is affiliated with the rival eastern government. The LNA took over the terminals and passed them on to the internationally recognized NOC to operate. Since then, production has been growing.

Now, this growth has been uneven as militant groups continued to challenge the NOC’s control of Libya’s oil industry, blockading fields and pipelines, and earlier this year briefly closing down two of the four export terminals. All this has had the expected effect on oil prices, strengthening Libya’s reputation as a wild card in global oil. Yet in July things began to change. Related: Trump Thanks Saudis For Lower Oil Prices, Wants Even Cheaper Crude

At the time, Libya was producing 660,000 bpd of crude thanks to outages and clashes between LNA and opposing groups at the oil terminals. Just a month earlier, its production had fallen to half a million bpd. Now, Libya is producing 1.3 million bpd and plans are to boost this to 1.6 million bpd. OPEC’s intention to resume cutting comes at the wrong time for Libya.

The North African country has probably the largest reserves of crude oil on the continent and revenues from selling oil represent pretty much all of its export revenues. Yet because of the chaos that followed the toppling of Muammar Gadhafi in 2011, these revenues are not being used to improve the situation of most of the population and as much as 40 percent of Libyans live below the poverty line. Now that there is a chance of at least some of the conflicts—perhaps the most important one between the Government of National Accord and the House of Representatives—may be on the road to resolution, things could change.

If, and this is a big if, this happens and Libya manages to hold elections without armed clashes, it would be stepping on the road to recovery, and recovery means higher oil production. The country simply cannot afford to cut production at this point and it wouldn’t be able to afford it for the foreseeable future as any new government, hopefully, prioritizes putting an end to the chaos and trying to bring the country back to normality. If the elections fail, more oil production outages are a certainty, and Libya would be in a position to argue for an exemption from the same place it was two years ago. In any case, getting it to agree to cuts will be a tough job.

By Irina Slav for Oilprice.com

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