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Libya: A Great Regional War

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What Turkey Really Wants from Libya

The past week has seen the conflict in Libya take on far greater significance for external actors. The lines have been drawn in the sand here, particularly where it concerns Turkey. In the span of a week, Turkish aid has helped the Government of National Accord (GNA) retake a strategic town south of Libya from the forces of General Haftar, prompting a retaliation of Haftar targeting Turkish nationals and assets in the country. First, they kidnapped six sailors, provoking Erdogan into a frenzy. Then they shot down a Turkish drone in Libya. The sailors, none of whom were military personnel according to our sources in Istanbul, have now been released and remain in Libya. But the real question here is why is Turkey messing around in Libya to the extent of supplying the GNA with firepower and other support?

Turkey considers Libya as a keystone of proxy wars for Mediterranean energy reserves, and rightfully so. Turkish officials who number among our assets in the region have a very different take on Libya than their Western counterparts do. From the Turkish perspective, foreign powers are using the Islamic State (ISIS) in Libya as an excuse to pursue their own national interests. The Turks are retaliating by using the Libyan GNA to serve Ankara’s agenda to boost the Muslim Brotherhood in the region (along with ally Qatar, which is also on the anti-Haftar side of this fight). Ankara has been in a bunker mentality in Libya recently, according to an investigative journalist in Istanbul.

Libya’s GNA is only surviving at this point thanks to Turkish support, from Ankara’s viewpoint. And Ankara isn’t necessarily wrong, though it is not the only player in this equation. Haftar now finds himself fighting the Turks as he attempts to take over Tripoli. But Haftar has Egypt, the UAE, Saudi Arabia and Greece on his side quite tangibly, along with nods from Western powers. This is not an isolated conflict, but the makings of a great regional war.

Turkey’s ultimate goal, according to our official sources in Ankara, is to use the GNA to unify Libya in order to reach a deal for maritime demarcation of the Mediterranean. A Turkish Foreign Ministry official told us that such a deal would “push Greece, Cyprus, Israel and Egypt out of the equation”, and as such is a “strategic target”. In other words, Libya is the key to Turkey’s energy battle with the Greek Cypriots, and with Israel, and this is the sideshow unfolding while Turkey taunts Cyprus with its own drilling offshore in the Cypriot EEZ.

When it comes to Libya, the same official told us that Turkey is “on the right track”. “Haftar knows this and tries to push us to make us derail. We won’t.” He also derided “fake news” originating from the Haftar camp that there were military personnel amongst the six sailors held captive, which he described as “further evidence that Turkey also faces a smear campaign full of Haftar's fake news to provoke the situation”.

There was a suggestion here that Turkey is willing to take this further, militarily, with the official noting that “Libya is not as far from Turkey as some think”.

How 700,000 Could Disappear from Libyan Production

Last week, we explained the possibility of Libya halting all oil exports after Haftar’s allegations that the GNA is using oil revenues from the Central Bank in Tripoli to pay off militias.

The million-dollar question is, of course, will it happen? That’s what the markets want to know. The likelihood here is that if it does happen, it will not target the entirety of Libyan oil production; rather, it will target 700,000 bpd that comes out of the country’s east.

The head of the Tripoli-based NOC is now lauding an increase in Libyan oil production to 1.3M barrels per day, but he’s clearly worried about the 700,000 bpd that he says the parallel government in the east is now attempting to sell unilaterally, at below-market prices. This 700,000 bpd is at the oil terminals in the ‘Crescent’ - all controlled by Haftar. This is the immediate oil that Haftar would freeze if he makes good on his threat.

In the meantime, if the GNA is indeed using NOC Tripoli oil funds to pay off militias, Haftar will be worried about Tuesday’s report recording $2.3 billion from sales of crude oil and derived products, along with taxes and royalties for May. That’s a 24% increase over the previous month.

Aramco IPO Back in Full Swing

MBS has not forgotten about the Aramco IPO - part of his legacy, despite advisors who consistently fight against it. Preparations to list Aramco are again underway. There were indications as early as last week when the Kingdom very publicly cut Aramco’s spending on the oil ministry. This is a move designed to show investors that there is a degree of separation between state and company and that once Aramco goes public it won’t be funding hotel expenses for the oil minister, among other things. This week, it has emerged that Aramco has been meeting with investment banks to get the IPO back on track. The atmosphere for this still is not ideal. MBS has not yet managed to shore up his damaged reputation over the Khashoggi murder, and if 2020 elections in the U.S. end up producing a Democratic president, all bets on fixing that reputation may be lost. MBS is hoping the conflict with Iran, helped by continually Israeli pushing, will aide in his reputational needs.

Global Oil & Gas Playbook

- Novatek - Russia’s biggest private gas producer - has sold a 10% stake its upcoming project, Arctic LNG2, to Japanese consortium partners JOGMEC and Mitsui & Co. The project will liquefy natural gas in Russia, with commencement expected in 2023. The target markets for this LNG are Asia and Europe. Novatek estimates the entire project development cost to be $23 billion.

- In a major port deal, Dubai-based DP World - one of the largest port operators in the world - has acquired marine logistics company Dubai-based Topaz Energy and Marine in a deal worth $1 billion. Topaz has a fleet of 117 vessels and operates in the Caspian Sea, the Middle East and West Africa. Topaz had a backlog of $1.6 billion in contracts at the end of March. It works with everyone from Exxon to Aramco.

- Marathon Oil has now fully exited the UK, closing the sale of its UK operations, which consists of the Brae area fields and Foinaven, to UK independent producer RockRose Energy PLC for $95 million. Last year, Marathon company boasted 21.4 Mmboe of proved reserves in the UK, with some 13,000 barrels of oil-equivalent per day Boe/d of production.

- State-owned Kuwait Oil and Halliburton have signed a $597 million contract to explore for oil off the coast of Kuwait, looking to add another estimated 100,000 barrels to the country’s daily production capacity. Kuwait currently pumps as much as 3 million barrels of oil a day from its wholly-owned fields with target a daily capacity of 4 million barrels by 2020.

- Iran has now breached the 2015 nuclear deal, which Trump abandoned. Iran wants to maintain the deal, and this new game is now about leverage over that same deal. In order to get the deal back on track, it has to break the deal first. Europe has not managed to fulfill its commitments to Iran to save this deal, so Tehran must act on its own. This isn’t about Iran making a nuclear weapon - it’s about salvaging the nuclear deal. It’s about restoring sanctions waivers. It’s not about war. And there are signs that Iran’s brinkmanship may be working. There are indications that the State Department is considering a loophole that would allow China to import oil from Iran in very quiet talks.

- Venezuela is exporting increasing volumes of heavy crude to China (it’s primary market now), which has seen June’s export figures recover somewhat from the previous month. The country has shifted to largely producing Merey heavy crude to make up for the huge drop in exports of other grades and refined products. Merey heavy crude is the preferred grade in China.

- An airstrike on a migrant center outside Tripoli has killed 44 people. Haftar claims that the GNA launched the strike, while the GNA claims it was Haftar. The level of carnage in this attack, and the fact that this was not a strategic target in this conflict suggest it was intended to get the attention of the UN. The greater likelihood (with no evidence as of yet) is that the GNA and its proxies intended for this attack to be blamed on Haftar at a time when the UN is looking to examine the Central Bank’s documents for indications that they are paying off militia with oil revenues in the war effort against Haftar.

- The dust has not yet settled on Algeria’s political instability in the wake of the resignation of Bouteflika and the installation of an interim leadership that has seen the military clan gain power from the presidential clan, but Italian Eni seems confident that it’s all systems go now. Eni has met with Algerian state-run Sonatrach to discuss fast-tracking the development of new oil and gas projects in North Berkine, the first phase (oil focused) of which started up in May. The second phase is now expected to launch in September (gas focused). The second phase is awaiting the completion of a pipeline.

- Also in Algeria, a fire broke out Tuesday at the country’s massive Arzew energy complex, hosting three LNG facilities, a refinery and a petrochemicals plant. Sonatrach reps say the fire has not affected production and is now “under control”.




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