The ongoing confrontation between the two major forces in eastern and Western Libya is exacerbating the risk of disruption of the country’s oil exports. Since April, Khalifa Haftar, the military leader of Eastern Libya and commander of the National Army, has gone all the way south to occupy the outskirts of the capital Tripoli, and continued to engage in exchanges with the “Government of National Unity” (GNA), which is recognized and supported by the United Nations. The industry believes that the two major forces in Libya are seeking to “own” oil resources by force, and that war and division are seriously threatening the country’s oil production and export activities, thus affecting the prospects for supply and demand in the global oil market.
Scramble for oil wealth
The Financial Times reported that Haftar had been “coveting” Libya’s oil export revenue, and in order to gain control of the Libyan National Petroleum Corporation (NOC) and Libya’s Central Bank owned by GNA, his National Army was constantly approaching Tripoli. Although Haftar has not breached the capital’s last line of defense at the moment, the “East-West” forces have been red-eyed for oil wealth.
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Mustafa Sanalla, chairman of NOC, said in a signed commentary on Bloomberg that he was “militarizing” the oil facilities to bypass the NOC and sell oil privately in order to raise funds for the next military operation.
In the past two years, the eastern stronghold of Haftar has occupied most of Libya’s oil fields and related infrastructure, as well as docks and ports. But according to UN Security Council resolutions, Haftar cannot sell oil privately, because NOC is the only entity allowed to export the country’s oil resources, and its revenues from oil exports are deposited in the accounts of the Libyan Central Bank, both of which are controlled and managed by GNA.
However, for Haftar, who is “attacking south”, capital is the most advantageous factor to control the war, even more important than military strength. Therefore, seizing and controlling “oil wealth” has become one of its current priorities. More and more experts and analysts believe that Haftar is trying to militarize the oil facilities under his control.
It is understood that the National Army has now occupied an important landing runway at the Sidel oil port in northern Libya, intended for military purposes, while stationing a warship at the refinery near the Ras Lanuf oil port in eastern Tripoli.
Verisk Maplecroft, a risk consultancy, points out that Haftar also tried to sell oil independently last year, and GNA subsequently stopped loading on the grounds of “force majeure” at oil ports, which led to the “disappearance” of about 850,000 barrels per day of oil from the international market between May and June last year.
Mustafa Sanalla strongly condemned Haftar, writing in his signed article: “I have seen the relevant documents to prove that he is trying to illegally sell Libyan oil through other entities. Undoubtedly, the destruction of Libya’s oil export system and disruption of the normal operation of NOC will lead to the continuation of the national civil war. This profit-making action will undoubtedly lead to illegal financing activities of other operations and armed forces, which will have a very negative impact on Libya’s search for peace and stability.
Yield loss or up to 95%
British independent media “Eye of the Middle East” pointed out that Libya’s escalating civil strife will lead to significant losses in oil production in the country.
Mustafa Sanalla confirmed this directly. On the eve of the OPEC+Jeddah meeting on May 19, he said: “If the civil unrest continues to worsen, Libya may lose 95% of its oil production.”
Reuters pointed out that Libya’s oil production has remained unexpectedly good in the weeks following the invasion of Tripoli’s outskirts by the National Army. OPEC data show that Libya’s output even increased by 71,000 barrels per day in April, reaching 1.76 million barrels per day. Against the backdrop of the ongoing stalemate in the civil war, this growth is impressive. In addition, Libya’s oil and gas revenue rose 22% in April from March to $1.87 billion, but these trends clearly do not calm market concerns about the country’s oil industry.
Libya’s oil production reached an all-time high of 1.6 million barrels per day, and the outbreak of civil war after the Arab Spring led to a sharp decline in production. It began to recover in August 2016. From a historical low of 260,000 barrels per day to 1.05 million barrels per day in February 2018, Libya’s oil production is currently about 1.3 million barrels per day.
It is worth mentioning that 40 companies, including France’s Daudal and Germany’s Siemens, have been listed on the GNA’s “watch list” for their commercial support for Haftar’s “barbaric aggression against the capital” and will receive a “review and evaluation” in the next three months to determine whether to issue operating permits before continuing their activities in Libya. The Guardian pointed out that foreign energy companies were restricted to commercial activities in Libya, which would further undermine the country’s oil production activities.
“The situation in Libya is deteriorating, and the impact of the conflict on the oil industry’s labor force is very great, seriously damaging Libya’s oil production capacity. I believe that unless there is an immediate ceasefire, even oil exports will be seriously affected next.” Mustafa Sanalla stressed that “in fact, Sidra airport and wharf, which were originally used by the oil industry, are now occupied by the National Army and may be used for military purposes.”
Worries about supply disruption intensified
The International Energy Agency (IEA) also expressed concern about the situation in Libya in its latest monthly report. The IEA pointed out that although mixed signals were released in April, the geopolitical situation and industry disruptions blurred supply prospects, with Libya, Iran and Venezuela bringing great uncertainty and oil markets still fearing supply disruptions, which will continue to push up international oil prices.
The industry generally believes that the disruption of Libya’s oil supply lies in the “day and night”. Oil Price Network wrote that the escalation of Libya’s civil strife would lead to a large-scale disruption of oil supply. Hamish Kinnear, senior analyst at Verisk Maplecroft, said: “The civil war has affected Libya’s surviving and vital institutions, the Libyan Central Bank and NOC.”
In late April, the Libyan Central Bank, under the guidance of GNA, imposed restrictions on foreign currency transfers by the Eastern Bank on the grounds of “fighting corruption”. The National Army led by Haftar relied heavily on the foreign exchange business of the Eastern Bank, and financial constraints would not guarantee the safety of the oilfields and facilities under its control.
What is more worrying is that although GNA is an internationally recognized official government of Libya, it does not have a considerable army. Its action to cut off Haftar’s “final financial path” is undoubtedly “fuelling the fire”. Once the National Army breaks through the defense line, the regime change in Libya will be in a flash, and then the NOC and even the entire oil industry will be in chaos.