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Will Libya Turn Its Back On The OPEC Deal?

Oil tanker

The exploration of oil in Libya began in 1955, four years after the country was declared independent. 40 companies were given an area of 600,000 km2 to explore over ambitious geological speculations that the country may have some oil reserves underneath its surface. By 1959 it was a fact: the country is sitting on the largest oil reserve in the continent, and the 9th largest in the world (Currently estimated at around 48 billion barrels)

Libya joined the Organization of Petroleum Exporting Countries, OPEC, in 1962, a year after it started exporting oil, and has been a member since then. The country quickly became an important contributor to the global supply of light, sweet (low sulfur) crude oil, which was mostly exported to the European markets.

Oil exports from Libya quickly ramped up to 3.4 million barrels per day, creating an unprecedented source of revenues for the extremely poor country coming out of WWII. By the end of the decade, and as the Mediterranean country fell under the influence of the wave of military coups sweeping the region, the country's king, Idris I, was overthrown by a group of rebel military officers led by lieutenant, Muammar Gaddafi, who, in 1970, nationalized foreign oil companies operating in Libya.

Unsurprisingly, Libya's oil production started to deteriorate as the oil industry became a part of the public sector. The country's revenues, however, were not highly affected as the drop in production was offset by the increase in global oil prices after the 1973 oil shock. Nevertheless, Libya's hostile political regime eventually got it into trouble, leading to a U.S. embargo on the country in the 1980s followed by international sanctions in the 1990s. Oil production levels dropped to as low as 1 million barrels per day in the 80s, before gradually increasing to a steady 1.6-1.7 million barrels per day in the late 2000s, just before the uprising against Ghaddafi took place in 2011.

The country's output has dropped sharply since 2013 when the Libyan Petroleum Facilities Guard (PFG) announced the shutdown of the four oil exporting ports under their control in the eastern part of the country over alleged claims of corruption in the oil industry. Libya exported through six oil export terminals: Az-Zawiyah, Sidra, Ras Lanuf, Brega, Zueitina, and Al-Hrega.

The shutdown, which took around 900,000 bbl/day off the grid, was later combined with the closure of the Az-Zawiyah export terminal in the Western region, amid conflict between local militias over the control of oil fields in the south. Libya's production sat at a level of 400,000 bbl/day for more than 3 years, until the Libyan National Army recaptured Eastern ports last September. Libya's National Oil Corporation, NOC, immediately announced the resumption of oil production, and set an ambitious production target of 900,000 barrels per day before the end of the year. This unexpected change of events comes at a rather odd time Related: Could An Intense Winter Fuel The Oil Price Rally?

Since the Saudis' decision in late 2014 to cripple OPEC's ability to cut down production and control market supply, oil prices per barrel have fallen from a steady $115 to painful mid $20s. The supply glut has extended beyond most pessimistic analysts' projections, supported by the longer-than-expected production life of shale wells, the lifting of sanctions on Iran, and a historical ramp up of Iraq's production.

Oil prices hovered around the $40s range for over a year, until the end of last September, when OPEC countries' representatives met in Algeria to engage in a complicated negotiation round. The oil producing cartel announced after the meeting that it has reached a preliminary agreement to reduce the group's collective oil output from 33.24m to 32.5m bbl/day, and that further negotiations would be carried to agree on how member countries would split the production cut.

Libya's voice at this meeting was one of hesitation and weakness. On one hand, market supply control is extremely important for the oil producing country; with oil exports making 95 percent of its GDP, Libya is extremely vulnerable to oil price volatility, and higher oil prices would directly help the country's struggling economy. On the other hand, the country is finally resolving its export facilities' closure issue and is just getting ready to resume production. The country has roughly 1.3m bbl/day of spare capacity, and is in dire need to ramp up production as fast as possible to control its deteriorating oil-dependent economy and to avoid a financial collapse. Additionally, Libya has been going through a brutal civil war over the past few years and its economy cannot afford the proposed production cap. However, the country did not really have much say at the OPEC meeting as its production currently makes less than 1 percent of the cartel's total output, weakening its negotiation power

Speaking with several key officials within the oil industry in Libya, it seems that the country is facing a real dilemma: To cap or not to cap? Related: Is ISIS Giving Up On Oil?

If Libya agrees on a production cap at its current output levels (~ 500,000 bbl/day reported this week), then the country would be missing out a long-awaited opportunity to finally get its economy back on track and enhance the declining quality of life of its people. The country has been suffering from economic pressure due to the unprecedented 3-year, 80 percent drop in oil production, combined with the brutal civil war that has only added salt to its many wounds. Agreeing to cap the production is not only economically painful, but would be an act of political suicide for its recently formed Government of National Accord, GNA, a government that has been created after long and complicated UN-led negotiations between rival factions in the country.

On the contrary, if Libya refuses to abide by the OPEC deal and decides to go on with its plan to maximize oil production by adding ~ 1.3m bbl/day to its current output, then the current global supply glut magnitude of ~ 1.2m bbl/day would possibly double, especially if Nigeria joins the rebellion and increases its output as recently communicated by its Petroleum Minister. If this happens, oil prices could plummet back to the mid-$20s, or even lower, according to a number of market analysts. This substantial decline in prices is likely to offset any impact of the planned increase in Libya's oil production, leaving the country in the same situation of budgetary deficits and economic instability, only with a higher market share

This puzzle is quite challenging for Libya's NOC leaders, just as it is for OPEC's. Whether Libya can sustain high levels of production in the long run is still questionable, but today's fact is that the country is back and is pumping more crude every day. Unless OPEC makes room for Libya's additional barrels, it is very unlikely that any price control deal will hold up and become a success. Libya has more incentives to raise its output than to not, as reclaiming market share is essential for the country to regain its position in the market and benefit from any future demand-driven increase in prices, or unplanned supply shortages.

Either way, the upcoming few weeks before OPEC's next meeting are sure to reveal Libya’s oil strategy and the level of influence it yet holds within the cartel.

By Ahmed Ben Mussa for Oilprice.com

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Leave a comment
  • Bud on October 26 2016 said:
    Libya is exempt up to 900 Mbpd which should be more than they can produce in the short term.
  • Mustafa on October 27 2016 said:
    well done Ahmed, I look forward to your new article in which I suggest you write about business continuity and crisis management within the NOC as it proved that it was capable of pumping oil soon the army took control of the ports! despite the security and damage that was caused.

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