It was a good run. After nearly a year without disruption, Libya briefly lost almost a third of its crude output when protests hit two oil fields. More may be on the way.
Around 350,000 b/d of Libya’s 1.2mn b/d of crude output was shut in on 13-14 July owing to protests at two key fields in the southwest. Although production was swiftly restored following a key politician’s release in Tripoli on 15 July, the incident is a timely reminder that the politically fragmented country remains a key risk to global oil supply. A sustained outage from Opec member Libya would only exacerbate an expected global supply deficit in the second half of this year.
The question now is whether Libya’s apparent political stability — always on shaky ground — is about to unravel and what this means for its oil sector. Libya has sustained output at 1.1mn-1.2mn b/d since August and has been haplessly trying to boost capacity to 2mn b/d for years (see graph).
The prognosis is not good. A powerful military figure, Khalifa Haftar, is effectively threatening to shut down up to 90pc of the country’s oil output unless he gets greater access to Libya’s oil revenues. His deadline is 31 August. The latest outages, which would not have happened without his approval, were merely a warning shot.
But in Libya’s zero-sum power game, if you give an inch you risk losing a mile. Haftar and the eastern-based administration he loosely supports have used blockades in the past to extract money and political favours from a rival, internationally recognised administration based in Tripoli.
Now they want more. The threat is credible. Haftar’s Libyan National Army holds sway over two-thirds of the country. This includes five of Libya’s nine export terminals that serve the Sirte basin oil heartlands — worth around 800,000 b/d — as well as the 300,000 b/d El Sharara and 70,000 b/d El Feel fields that were shut by the latest protests (see map).
Whether or not another oil blockade occurs depends on how much the Tripoli government and the central bank — which ultimately controls oil revenues ($27bn last year) — is prepared to institutionalise fresh sources of revenue for the east. If they give too much, they risk tilting the balance of power in favour of eastern factions that in the past tried to take over the country by force.
Running the risk
In market terms, the production disruption had little immediate effect because they were so short. Libyan cargo prices did not move relative to benchmark North Sea Dated, although they did rise earlier this month as part of a broader Atlantic basin light sweet crude rally (see graph). But the shutdowns have reminded the market about Libya’s capacity for instability and are likely to depress the price as buyers contemplate the risk of non-delivery, some market participants suggest.
One potential early reaction is that Greek refiner Helleniq Energy decided to buy Guyanese grade Unity Gold in a tender that closed on 20 July. The tender originally specified 600,000-1mn bl of Libyan Es Sider or an alternative crude for delivery on 1-5 September. Market participants speculate that the refiner is avoiding Libyan supplies because of Haftar’s threats of further disruption.
The tussle over oil revenues is symptomatic of Libya’s inability to escape political chaos since the overthrow of Muammar Gaddafi in 2011. The lack of a coherent central authority has allowed armed groups and politicians — some backed by opportunistic foreign powers — to twist and bend elements of the state to enrich themselves and consolidate power.
For many, keeping the country in limbo is the prize. Until a government can establish a monopoly on the use of force, Libya will continue to be at the mercy of factions prepared to shut down oil output for political and economic purposes. The latest outages have reinforced an already well-established practice. If you want something doing in Libya, switch off the oil.