The ever-volatile Libya has been hitting headlines the past month, this time around against a quite upbeat atmosphere of rising output. The Libyan NOC chairman Mustafa Sanalla boasted of Libyan output reaching 1.25 mbpd in October, of the country being back on track to reach 2 mbpd production by 2022 and things gradually working out for the better. Yet behind the façade, there is a story replete with caveats and loose ends where only those stay who already were in Libya. A series of moderate successes notwithstanding, the country’s gradually improving stature is still at risk. There is a high probability that those oil majors who manage to sweat out the prospective jolting, be it parliamentary elections in a divided state, Islamic State terrorist attacks or the threat of resource nationalism, will reap sweet rewards, yet is the wait worth it?
For Mediterranean majors, spearheaded by the French Total and Italian ENI, the game is definitely worth the candle. Located very close to Libya and being traditional market outlets for light sweet Libyan crude, it is in many ways understandable, all the more so that if one is to omit the Libyan NOC, ENI controls 45% of the nation’s oil and gas production, whilst Total commands 10%. Despite the fact that when it comes to oil, not gas, LNOC is much more rapacious, ENI and Total are taking active measures to increase their Libyan footprint even further. This week, ENI agreed to take over 42.5% of three BP-allocated blocks – two in the Ghadames and one in the Sirte Basin – and become operator of the fields. Chairman Sanalla underlined that this was a clear signal of the opportunities Libya had to offer, yet remains somewhat vague on the inherent risks.
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The Libyan NOC, with no unified government to represent the Libyan nation in its entirety, has to placate markets and engage majors’ attention; it is their cross to bear. However, one has to say that Mustafa Sanalla certainly has several reasons to be confident about the future. Amid rising oil prices, the Libyan state, albeit split in two, is better off – oil and gas income from H1 2018 already exceeded revenues for the whole of 2017 ($13.5 billion against $13 billion). Libyan production, too, is on the rise, with September 2018 production volumes having reached 1.06 mbpd, fully rebounding from a June-July lowpoint. Sanallah’s words about production plateauing at 1.25 mbpd must be taken with a pinch of salt – communicating a few days’ ramp-up does not equal with average monthly numbers, especially given the troubles LNOC faced in the first decade of October.
Following the heavy June clashes which resulted in widespread damage in Ras Lanuf and Es Sider, for much of the past three months militias made only sporadic appearances and did not conduct any significant diversionary measures. Up until now. An increased militia activity was reported around Sharara, one of Libya’s largest oil fields and source of the eponymous naphtha-rich crude grade, bringing about a series of field evacuations. This is by no means a novelty; Sharara was evacuated for several times already in the past few years, with frequent attacks on pipelines and even a July 2018 incident of gunmen taking four oilmen hostage. Elated by the militia’s success, there is an even larger threat looming on the horizon.
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The September 10 attack of the NOC headquarters was orchestrated by the Islamic State, which sees Libya as an extension of the war it has waged and largely lost in Syria and Iraq. In the political vacuum created by the two competing administrations and plethora of ever-changing militias, the Islamic State intends to sow the seeds of its barbarous war and has stated via one of its Telegram channels that attacks against Libyan energy infrastructure are legitimate as the NOC is the “most important economic pillar” of its adversaries in Libya. Against such a roster of adversaries, one can appreciate the Sisyphian task of Mr. Sanalla.
Cognizant of the many impediments and threats the Libyan NOC faces, its CEO has started an Europe-wide charm offensive to persuade its traditional partners to invest in Libya, promising lucrative rewards in case investors provide funds. Last week Mustafa Sanalla made a tour of Russia, mooting both upstream and trade-related issues on the sidelines of the sidelines of the Russian Energy Week in Moscow. Surprisingly for some, both Gazpromneft and Tatneft (both had concessions in Libya before the onset of the civil war) pledged to return. Gazpromneft’s offshore block 19 seems a fairly safe bet under any circumstances (generally, offshore was the most insulated part of production and witnessed almost no interruption during the civil war), while its Ghadames license lies in territory controlled by the Tripoli-friendly Zintan Brigades militia.
It is telling that Sanalla managed to negotiate with partners from Europe, Russia and the United States, each time using a different platform. With the Europeans, Sanalla emphasized ramping up production and squeezing as much as possible from projects already ongoing, with Russia he advocated the return of Russian companies and sought their involvement in heavy crude developments, something which so far has been missing in predominantly light sweet crude Libya, whilst with US partners he propounded infrastructure and equipment issues.
Faced with manifold problems at the same time, additional revenues from oil sales might also help Sanalla coopt certain militias. Primary targets should be militias in and around key ports, such as Al-Zawiya where most of Libya’s imported products arrive, which routinely smuggle batches of the imported volumes back to Italy using a fleet of approximately 70 vessels. It is estimated by sources close to the Libyan NOC, that up to 9% of the Italian fuel retail market might be coming from smuggled Libyan products. In such a situation, the NOC does not get receive what it paid for and products shortages occur on the domestic market, furthermore, the smuggling enriches solely the relevant militias, providing them a financial lifeline to perpetuate the lack of proper governance.
Sanalla has so far done a fairly good job in surviving in one of the oil world’s most difficult jobs, he even managed to consolidate his position. International support for his persona has fortified along the years – having sidelined Ibrahim Jathran, the head of the Petroleum Facilities Guard (PFG), internationally, as well as garnering diplomatic support to prevent General Haftar from using Eastern Libyan port facilities to market oil independently, Sanalla’s business credibility has reached heights previously unknown. Consider a February case on his standoff with Jathran, after the PFG leader ran over the El Feel field, demanding hefty payouts, Sanalla boycotted him for several months until the former backpedaled and allowed the field to operate normally.
Stability will be the buzzword in connection with Libya – that is the only thing which will build genuine trust with investors and partners. Stability of energy policy is a top priority, a reversal to any form of resource nationalism amid shattered infrastructure and lacking know-how will be tantamount to economic suicide. There are early signs of it – as in the case of the Libyan NOC trying to preempt Marathon Oil this May from selling a 16.33% non-operated stake in the Waha block, one of the few places still governed by quite attractive extraction costs settled upon before the EPSA-4 kicked in. It has been reported that it is this attractiveness that led the Libyan NOC to covet Marathon Oil’s stake.
After several rounds of negotiations, however, it seems that Libya will allow the $450 million transaction in return for Total providing some additional guarantees of production ramp-up (Waha has been underperforming for quite some time, producing around 300 kbpd despite a 600 kbpd current potential). Yet the LNOC’s aspiration to commit partners that are already operating in Libya forcefully to new terms and conditions under the EPSA-4 should not underestimated. The German Wintershall refused to switch to the less profitable EPSA-4 on two concession, NC-96 and NC-97, and the LNOC prevented it from lifting any cargoes for four consecutive months. The fields currently produce 10 kbpd, despite a nominal capacity of 60 kbpd, allegedly due to infrastructure constraints.
Time, it seems, is also on the Libyan NOC’s side – infrastructure damaged by years of infighting is slowly getting back onstream, among others one should appreciate the speed with which repair works at Ras Lanuf (two storage tanks were blown up in June) were completed. However, the LNOC’s wellbeing rests in smooth parliamentary elections – heretofore Sanalla has tried to insulate the company from politics, but as one of the main international tools of the Libyan people, LNOC will take a part in the reconciliation process one way or another. Therefore, it needs the elections that will most likely take place in 2019 despite being scheduled for December, to be peaceful. That is the key ingredient in Libya overcoming a decade of regression.