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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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How Much Further Can Libya’s Oil Production Fall?

As the 2019-nCoV coronavirus continues to wreak havoc on the oil markets, dropping oil prices more vehemently and abruptly than the 2003 SARS outbreak did, the current plight of Libya has been somewhat underreported. Once perceived as the wildcard of OPEC+ production cuts, Libyan oil output has plummeted sixfold to less than 0.2mbpd in less than two weeks as the production and export closure imposed by Field Marshal Khalifa Haftar continues to strangle Libya’s capacities. With Libya’s export terminals placed into force majeure regime, storage capacities at ports like Es Sider or Ras Lanuf (where aggregate storage possibilities do not exceed 2MMbbls) filled up very soon, compelling oil producers to halt production as well, unable to store it anywhere. Can it get any worse than now?

The narrative of the ongoing Libyan force majeure situation is fairly straightforward. As the fate of Libya suddenly turned into one of the main subjects of Eurasian politics, with separate Putin-Erdogan summits and two quite representative international summits taking place to settle the issue, Field Marshal Haftar decided to take things into his hands and elicit a beneficial outcome by sheer force. When the Russian-Turkish document on an immediate ceasefire starting immediately from mid-January was finally carved out, with Fayez Serraj (the head of the UN-recognized Government of National Accord) agreeing to it, Haftar plainly rejected it and flew back to Libya. Suspicious of the subsequent Berlin Conference’s outcome, he declared force majeure on all major ports in Libya. Only the Bouri and Farwah terminals remain operational as of now, both several dozen miles out in the sea.

Graph 1. Libyan Oil Production since the naval blockade was launched on January 17, 2020 (in million barrels per day).

Source: Libyan NOC.

With the Libyan NOC being unable to take sides in the long-standing conflict, as it has sought to present itself as an entity that serves the interests of the Libyan people regardless of the political leader, its CEO at least warned of the manifold adverse consequences such a force majeure will bring about. Mustafa Sanalla compared the blockade to “setting one’s own house on fire”, claiming that it would deprive Libya of oil and gas revenues, bring forth the collapse Libyan dinar, push all foreign companies out of the country and damage infrastructure to such an extent that it might take months if not years to restore it. To back it up, the NOC has started to publish a bulletin on the losses it had reluctantly incurred. Related: Chevron Ramps Up Oil Production In Venezuela

If we are to take the production levels witnessed before January 17, the cumulative loss of Libyan oil production has surpassed 20 MMbbls by February 10, leading to financial losses upward of $1.3 billion. Simultaneously, the NOC was forced to shut the 120kbpd Zawiya Refinery on February 10, effectively leaving the eastern part of the country without fuel supply (the Haftar-controlled territories can still avail themselves of fuel supplied from the Ras Lanuf Refinery). But the blockade does not affect only territories under GNA control – with all onshore ports in force majeure and production curbed, power plants in and around Benghazi had to close down because their natural gas supply was cut.

Even from if one is to look at the larger picture, the timing of the blockade could not have been worse for the Libyan NOC – after 2015-2017 barely saw an onshore exploratory well spudded, drilling activity has just started to pick up gradually, to the extent of 9 exploratory wells drilled in the second half of 2019 alone (there were none in H1 2019). Interestingly, all the exploratory wells were located within Haftar-controlled territory, none in the country’s west if we disregard the offshore Mellitah field. Moreover, it might be a bit far-fetched to perceive other oil-producing nations in the Mediterranean as capitalizing on the Libyan turmoil, yet the truth is that the disruption has regionally alleviated the consequences of the coronavirus-induced market panic by boosting light sweet crude prices.   Related: Oil Traders Could Lose Big On Coronavirus Panic

Rival Saharan Blend rose to a 9-year high with its February official selling price set at a 2.46 per barrel premium over Dated Brent and current trades heard around a 2.9 premium to Brent, rising almost 1 USD per barrel in the past 3 weeks. The impact has been even more palpable with Azeri Light/BTC which has risen by almost 1.5 USD per barrel to a 6.5-6.9 USD per barrel premium against Dated Brent. Even medium sour Urals trading in the Mediterranean rose by 0.5 USD per barrel compared to January 17. Although Libya still did not fall to the lowest possible level – if only the offshore fields and condensate supplies were to be supplied, its exports would fall to a mere 70kbpd – any further decrease is unlikely to alter the Mediterranean light sweet market as both its offshore grades, Bouri and Al-Jurf, are heavy crudes with a relatively high Sulphur content.

The only resolution to the Libyan crisis will be political, as can be ascertained by Field Marshal Haftar’s disdain for the pleas of the Libyan NOC. However, there is no Libyan summit scheduled, there are no active preparations for a multi-party conference or anything of that sort. Even the UN Security Council is lagging behind in exerting pressure onto Libyan warring entities and can only express its (purely verbal) deep concern for the ever-increasing number of mercenaries fighting in Libya. Although much of the Berlin Libya Summit boiled down to the UN finally becoming the only negotiations platform on a national conciliation plan, 3 weeks later UN Secretary General Guterres talks again of the African Union taking a greater role in mediating between the sides. Looks like there might only be a military end to see the blockade lifted once and for all.

By Viktor Katona for Oilprice.com

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