Predicting Libya’s future course is a head-scratcher for any oil analyst, things genuinely start to go steeply downhill the exact moment when some sort of trust is restored and people start dreaming about good things finally coming their way. Your humble servant, too, was surprised by the drastic turn for the worse in Libya, having predicted that the El Sharara incident would not jeopardize Libya’s future output. Well, it did, and it did so at a moment when everyone saw Libya as one of those bright OPEC spots where production growth could be possible. Despite all the international lobbying and pressure, the 315kbpd El Sharara field, Libya’s largest, remains shut since December 8, 2018 with no clear end in sight.
The Sharara and El Feel takeover seemed like straightforward extortion tactics – confronted with the prospect of seeing roughly 390kbpd of Libyan output cut off (the El Feel field depends on electricity supply from El Sharara, thus, if the latter is taken over by militiamen, El Feel goes off stream too), the government would acquiesce to tribal demands for more investment and better social services. And for quite some time it seemed that this would work – several days before Christmas, the Tripoli government claimed it had reached an agreement with representatives of the relevant militia, holding out the promise of 1 billion Libyan dinars ($700 million) spent on the improvement of social services in the south, to no avail.
Dealings with the grievances of southerners is a task that the Tripoli government might have settled – it is only understandable that people who did not receive salaries for months would not interfere with militias that assertedly act in their interests, it is only relatable that the struggling populace of the south that barely copes with the double whammy of living in a divided Libya and living in its poorer south would express its disgruntlement. However, in the past several weeks General Khalifa Haftar, leader of the Libyan National Army, got involved and the El Sharara saga took an unexpected twist, elevating it into pre-election dealbreaker category. Not only did he get involved, his army jubilantly took over the field in mid-February and has been holding it ever since, concurrently carrying out preventive airstrikes to warn off pro-Tripoli armed forces.
This should not mean that Haftar is against giving back El Sharara and El Feel to the relevant operation companies. Akakus Oil, the joint venture between the Libyan NOC, Repsol (10 percent share), OMV and Total (7.5 percent both) even went on to say that following Haftar’s takeover it hopes to resume production at El Sharara by March 2019. In fact, the Libyan NOC has a constructive relationship with Haftar’s LNA – initially Haftar tried to blaze his own commercial trails to market all the crude from territories under his control, however, against a withering backlash from the United Nations, was forced to route all exports through the Libyan NOC.
The US State Department reacted swiftly on the issue, advocating an undelayed return of NOC to the El Sharara site and a prompt resumption of production under the sole oversight of the Government of National Accord, i.e. the Tripoli government. Haftar might give back El Sharara to the NOC, fully cognizant that his sweeping march across the south was yet another sweeping win. The leadership of the Libyan NOC, the cashcow of the Libyan economy, understands this, as attested by Mustafa Sanalla’s recent call for an „oil army” to be set up to protect all of its fields and key infrastructure sites from tribal attacks and sabotage.
One could argue that Libya already has the Petroleum Facilities Guard, yet, in the words of Sanallah, Libya needs a national PFG, not a tribal one. At the same time, testing the muddy waters, Sanalla pointed out that the NOC’s armed forces could incorporate loyal PFG fighters, carefully vetted before joining it. This would make the Libyan NOC the first National Oil Company to have armed forces unit under its immediate command, an audacious gesture given the steep production decline of the past months. At public occasions, be it a keynote address in London or a casual interview, the Libyan NOC continues to dream big, with Mustafa Sanalla predicting Libya would reach 2.1mbpd of production in 2021 if security issues are resolved for good, even though the reality is different.
According to OPEC secondary sources’ data, Libyan production sunk to 0.895mbpd in January 2019 from 1.12mbpd in October 2018, entailing monthly losses for the Libyan NOC that approach $500 million. And even though last year proved to be the best financially since 2012 for Libya, bringing in $24.5 billion in oil revenues and more than halving the budget deficit to $3.3 billion, the spending allocation the Tripoli government routinely flaunts in the media rarely hits the bank accounts of the Libyan NOC fully. The NOC is the only major source of funding, but by far not the only subject to fund. Thus, against the background of little to no trust between the two rival governments, between militias and the NOC, it should come as no surprise that international investors are in no hurry to invest in Libya.
Libyan exploration activity is subpar, as venturing into untapped plains comes with significant safety requirements which are nowhere to be seen unless one of the vying political powers consolidates the country. Thus, all international majors present in Libya will keep on drilling within their own licensed blocks, yet will refrain from any adventurous moves. On a general basis, working in Libya’s offshore is much safer than any onshore projects, therefore projects like the Bahr Essalam Phase II by Melittah and partners will get green lighted in the upcoming months. However, it has to be said that Bahr Essalam is a gas project and although helpful in increasing gas exports to Italy, such developments will not ease the pressure on Libya’s oil sector.
Source: OilPrice data.
The elections might alter the current equation, one might say. Yet holding the much-needed elections, initially slated for March 2019, is a Sisyphean toil, with UN Libya envoy Ghassan Salame now claiming end of the year is a „real possibility”, meaning the countless overtures and provocations will continue for some time to come. All the while Libyan exports, exacerbated by frequent bad weather in the Mediterranean nation’s ports, have fallen to levels unseen since May 2017, at around 0.8mbpd. Trust me, I would be very happy to be proven wrong, however, in an environment where nothing is certain and not a single rule is carved in stone, the ever-fluent political reality will continue to overwhelm Libya’s crude sector.