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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Is An End To Libya’s Oil Shutdowns In Sight?

  • The force majeure declared on various key oil sites and installations is a result of the latest political in-fighting between Libya’s various factions.
  • Around 550,000 bpd of Libyan crude oil production remains shut in as a result of the latest force majeure in Libya.
  • This fair distribution demand is the key to any resolution of this dispute, and has been a constant threat hanging over crude oil production from Libya.

Given the relatively delicate supply and demand balance currently at play in the oil market, and broader geopolitical nervousness over what comes next in the Ukraine-Russia conflict, short-term focus has fallen upon the likelihood that present supply disruptions in Libya will continue for much longer. The importance of Libyan crude oil output and of no additional serious geopolitical disruption adding to the volatility component in oil pricing was highlighted in the recent strong statements from the U.S. ambassador to Libya, Richard Norland. He urged the country’s central bank to safeguard oil revenue from misappropriation, and called for a resolution to the loss of around 550,000 barrels per day (bpd) of its oil production as a result of blockades on major fields and export terminals. In terms of the oil shutdown logistics, last week saw the closure of a second export terminal, the 60,000 bpd Brega operation, by Libya’s National Oil Corporation. This followed the previous closure of the Zueitina port, whose crude loadings average around 90,000 bpd, with production also stopped at Abuatufol, Al-Intisar, Anakhla, and Nafura. Just prior to this, the Sharara field in the west of the country, which can pump around 300,000 bpd, was also shut down and just prior to this the El Feel oil field, which produces 70,000 bpd, was closed. These sites are key suppliers of mostly high-quality light, sweet crude oil, notably including the Es Sider and Sharara export crudes that are particularly in demand in the Mediterranean and Northwest Europe for their gasoline and middle distillate yields. These shutdowns, in turn, followed the NOC declaring a legal state of ‘force majeure’ because, according to the company: “It is impossible to implement its commitments towards the oil market.” 

The force majeure declared on various key oil sites and installations is a result of the latest political in-fighting between Libya’s various political, military, and commercial interests, with this one centred on the supporters of the interim government of sitting Prime Minister, Abdulhamid Dbeibah, against those of former interior minister Fathi Bashagha. These two groups broadly align to the two rival power groupings that emerged after the parliament appointed a new prime minister in February, in a direct challenge to the U.N.-brokered government in the capital Tripoli. The specific groups that have been blocking the oil facilities most recently demand a fair distribution of crude oil income and the transfer of power to Bashagha.

Related: U.S. Rig Count Inches Higher As Oil Rally Halts
This fair distribution demand is the key to any resolution of this dispute, and has been an constant threat hanging over crude oil production from Libya since the removal of long-time leader, Muammar Gaddafi, in 2011, as analysed in depth in my new book on the global oil markets. The multi-factional civil conflict that ensued found some genuine relief only in the September 2020 agreement signed between Khalifa Haftar, the commander of the rebel Libyan National Army (LNA) and elements of Tripoli’s U.N.-recognised Government of National Accord (GNA). However, even back then, a key part of this deal was an in-principle agreement to look into establishing a commission not only to determine how oil revenues across Libya are distributed but also to consider the implementation of a number of measures designed to stabilise the country’s perilous financial position. Just prior to the September 2020 agreement, there had been yet another series of long-running oil blockades that had cost the country an estimated US$9.8 billion in lost hydrocarbons revenues. 

The September 2020 agreement included – propitiously it seemed at the time – plans for the formation of a joint technical committee, which would, according to the official statement: “Oversee oil revenues and ensure the fair distribution of resources… and control the implementation of the terms of the agreement during the next three months, provided that its work is evaluated at the end of the 2020 and a plan is defined for the next year.” In order to address the fact that the GNA effectively holds sway over the NOC and, by extension, the Central Bank of Libya (in which the revenues are physically held), the committee was also intended: “To prepare a unified budget that meets the needs of each party… and the reconciliation of any dispute over budget allocations… and will require the Central Bank [in Tripoli] to cover the monthly or quarterly payments approved in the budget without any delay, and as soon as the joint technical committee requests the transfer.”

Related: Morgan Stanley Ups Oil Price Forecast On Supply Fears

With these plans in place the oil ministry then began discussing exploration and development options with several international oil companies. The first agreement with TotalEnergies saw the French firm commit to continue with its efforts to increase oil production from the giant Waha, Sharara, Mabruk and Al Jurf oil fields by at least 175,000 bpd and to make the development of the Waha-concession North Gialo and NC-98 oil fields a priority, according to the NOC. The Waha concessions – in which TotalEnergies took a minority stake in 2019 – have the capacity to produce at least 350,000 bpd together, according to the NOC. The second deal was the approval by Libya’s Government of National Unity (GNU) of the sale of the 8.16 percent stake in the country’s giant Waha oil concessions held by the U.S.’s Hess Corporation to the remaining stakeholders – again, TotalEnergies (with a 16.3 percent share), and also ConocoPhillips (also 16.3 percent), each of which was offered first refusal on half of Hess’s stake.

These various agreements and deals appeared to be a sign that an agreement for fair distribution of oil revenues between the various factions in Libya was nearing completion. They also held out the hope that Libyan crude oil production might increase once again to somewhere close to where it was before Gadaffi was removed from power in 2011. It is easy now to forget with all of the political stymieing its oil sector but Libya is the holder of Africa’s largest proved crude oil reserves, of 48 billion barrels. Before 2011, Libya had been producing around 1.65 million bpd of oil, on a rising production trajectory, up from about 1.4 million bpd in 2000, albeit well below the peak levels of more than 3 million bpd achieved in the late 1960s. The NOC also had plans before 2011 to roll out enhanced oil recovery (EOR) techniques to increase crude oil production at maturing oil fields, and the NOC’s predictions of being able to increase capacity by around 775,000 bpd through EOR at existing oil fields looked well-founded. 

One of the key sticking points in the framework for fair distribution that has remained unresolved since the framework for agreement was originally drafted back in September 2020 is that neither the GNA nor the Central Bank of Libya have publically and unequivocally agreed to its core principles as yet. According to a Washington-based legal source at the time spoken to by OilPrice.com, the NOC had been working on “alternative banking arrangements for the oil revenues that may or may not involve the input on final dispersal of more players,” but the details of this have yet to be worked through. Much more likely to continue to derail the chances of any long-lasting agreement in Libya are the broader geopolitical intentions of the foreign players attached to each side. 

In this context, although the U.S. did an effective job in persuading Haftar to extend the September 2020 agreement deadline, its intention to bring Haftar decisively on side, prior to a presidential run came to nothing. The Presidential election was originally due to have been held on 10 December 2018 but was then delayed due to Haftar’s ongoing military disruption in the west of the country, and then in November 2021 he was disqualified from running in the rescheduled December 2021 election and then sentenced to death in absentia. A month later he was allowed to run for in the presidential election re-scheduled for 24 December 2021 before that election too was delayed. As it stands, the presidential election is now scheduled to be held in June of this year. However, an obvious sign that he has burned any bridges that were in the process of being constructed with the U.S. came last month when a lawsuit in the U.S. that accuses Haftar of war crimes, torture, and extrajudicial killings was ordered to move forward.

This said, Russia also has a longstanding interest in spreading its influence out into Libya from its increasing strongholds in the Middle East, concentrated currently in the Shia Crescent of power. For some considerable time it was Russia’s ‘Wagner’ group (Kremlin-directed mercenaries, also now operating in Ukraine) that were the key force in Haftar’s army. They have been supported by elements from Egypt and the UAE. Russia’s desire to stymie any attempts to increase its influence in Libya will presumably only have intensified in light of the global power-plays that have been expedited as a result of its current actions in Ukraine.


By Simon Watkins for Oilprice.com

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Leave a comment
  • DoRight Deikins on April 26 2022 said:
    « Russia’s desire to stymie any attempts to increase its influence in Libya will presumably only have intensified in light of the global power-plays that have been expedited as a result of its current actions in Ukraine. »

    Shouldn't that read "to stymie any attempts to decrease its influence ...", rather than "increase"?

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