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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Libya’s Oil Future Depends On This Huge Oil Field

There is no respite for Libya on its bumpy road to recover crude oil production to the levels of 2011, when the toppling of Muammar Gaddafi plunged the country into a deep division between the east and west and an incessant strife for control over its vital oil industry.

A military operation launched this week could shape the fate of Libya’s oil production and exports for months and possibly years to come. The outcome is highly uncertain—it’s either boom or bust.

Barely a day had passed since the African OPEC member won exemption from the new OPEC+ production cuts in early December, when its largest oil field, Sharara, was shut down, after armed militia claiming attachment to the local Petroleum Facilities Guard (PFG) seized control and demanded ransom to re-open it.

More than a month later, Sharara remains offline, and Libya’s internationally recognized National Oil Corporation (NOC), which refuses to yield to ransom demands, says that “Oil production will now only restart at Sharara after alternative security arrangements are put in place.”

Sharara’s shutdown will result in daily production losses of 315,000 bpd, plus a loss of 73,000 bpd at the El Feel oil field because it depends on Sharara for electricity supply, NOC said last month, noting that the “combined daily cost to the Libyan economy of this unnecessary shutdown” is US$32.5 million.

In a new development this week, forces loyal to eastern strongman General Khalifa Haftar said that they had started a military operation to secure oil sites and facilities in Libya’s south, where Sharara is located.  

(Click to enlarge)

Haftar leads a self-styled Libyan National Army (LNA) with a base in the eastern city of Benghazi. LNA is the main opponent of the UN-backed Libyan government based in the capital Tripoli in the west.

Haftar forces already control the four oil ports in the so-called Oil Crescent in the east and the major oil fields there. The possibility to take control over Sharara could not only give the eastern forces control over Libya’s biggest oil field—which had the capacity to pump 340,000 bpd—but could also put nearly all of Libya’s oil industry in the hands of the eastern general.

This could lead to deeper divisions between the east and the institutions in the west and Tripoli and further complicate UN efforts to unify the fractured country. Haftar’s opponents could also fiercely oppose the eastern general taking control over Sharara, which could further undermine the security situation in Libya and around its key oil field. Related: U.S. Army Joins Race To Expand U.S. Oil Exports

At present, it’s not certain what Haftar would do if his forces secure the Sharara oil field. So this military operation is the wildest card for Libyan oil production and one of the wildest cards for global oil supply at a time when OPEC and allies are trying to clear the new glut with the production cut deal that began on January 1.

If Haftar manages to secure Sharara and the still operating Sharara-dependent El Feel oil field and hands them over to the internationally recognized NOC, this could lead to stabilization of Libya’s oil production. But if the eastern general were to hand Sharara over to the parallel oil authority in the east not recognized internationally—as he did for a few weeks with the eastern oil ports in the summer of 2018—then more blockades and supply disruptions could follow.

In June last year, Haftar recaptured the ports in the Oil Crescent in the east from armed groups after a week of fighting, and handed their control to the unrecognized oil company in the east. This resulted in a port closure that blocked 850,000 bpd of Libya’s oil—nearly all Libyan production—from being exported from the four ports for more than two weeks. 

But a few weeks later, Haftar agreed to hand back control of the ports to the NOC. Production started to gradually recover and grow from as low as 664,000 bpd in July to 1.1 million bpd in November.

However, Libya’s oil production and exports have been severely disrupted since early December, due to port closures courtesy of bad weather as well as the security incidents and issues at Sharara.

Related: Trade War Could Persist Unless China Caves

As a result, Libya’s crude oil production in December plunged by 172,000 bpd from November—to 928,000 bpd from 1.1 million bpd, as per OPEC’s secondary sources in the cartel’s Monthly Oil Market Report released this week.

The drop in Libya’s oil production last month was the second steepest decline among OPEC producers after Saudi Arabia, which cut production by 468,000 bpd from November to 10.553 million bpd in December.

But while Saudi Arabia is ‘leading by example’ and cutting oil production as part of the new OPEC+ deal, Libya—exempted from cuts again—saw its production decline due to its unstable security situation.

The next few weeks will be crucial to where Libyan production will be heading in coming months. If Haftar takes control over the biggest oil field, he could either hand it over to NOC, thus possibly ensuring some stabilization, or he could try to hand it to the parallel eastern authorities, which could deepen divisions and possibly shut in more Libyan oil supply for a longer period of time.

By Tsvetana Paraskova for Oilprice.com

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