Herman Wang &Kelly Norways
HIGHLIGHTS
- Subsidies, Russian supplies fuel illicit Libyan oil trade
- Russian oil exports hit by Ukraine’s refinery attacks
- Soaring subsidies pressuring Libya’s foreign reserves
Ukraine’s intense campaign of drone attacks on Russia’s refineries may squeeze a lucrative illicit oil trade more than 4,000 km away in Libya that has already inflamed political tensions in the volatile North African country.
Sources in Libya say fuel is regularly imported from Russia via middlemen in Turkey, in a trade route that has emerged for Moscow over the past year as it seeks new oil customers in the face of stringent Western sanctions and the EU’s import ban over the invasion of Ukraine.
But little of that oil stays in the country, with much of the cargo allegedly smuggled out of Libya’s porous southern borders into Sudan, where local sources and analysts say it is siphoned to Sudanese Rapid Support Forces (RSF) militia.
The RSF, who are reportedly backed by the Russian paramilitary Wagner Group, then in some cases reexport the fuel, including to Europe, generating billions of dollars in profit and fueling its civil war against the Sudanese Armed Forces, sources allege.
But in recent weeks, Russia has sustained heavy losses to its refinery capacity due to Ukraine’s attacks, impacting product flows as the Kremlin seeks to safeguard fuel supplies for its military and population centers ahead of peak summer demand. Russia has banned gasoline exports for six months from March 1, while rising diesel prices could trigger further intervention.
That may force the smugglers to find other fuel supplies to maintain Libya’s black market trade, a recent flashpoint between Prime Minister Abdul Hamid al-Dbeiba and his critics, including former ally Siddiq al-Kabir, the head of Libya’s central bank.
By the central bank’s accounting, the amount of gasoline and diesel being imported into the country should be more than enough to satisfy domestic demand. And yet, locals regularly report fuel shortages and long queues at filling stations.
Subsidies paid by the government for all goods have ballooned from 20.8 billion dinars in 2021 to 61 billion dinars in 2023, of which 41 billion dinars was for fuel, Kabir has repeatedly noted in recent weeks.
“This exceeds the needs of the national economy and confirms that a large portion of this fuel, it is smuggled abroad,” Kabir wrote in a pointed March 21 letter to Dbeiba, criticizing his handling of the economy.
“Moreover, the fuel subsidy bill is expected to grow during the year 2024, according to the National Oil Corp. In this regard, the government has not taken the necessary measures to address this phenomenon.”
Dbeiba, for his part, has rejected Kabir’s criticisms and said the Libyan economy is in strong shape, though in a March 18 meeting of the Supreme Council for Energy and Water Affairs, he called for NOC and its affiliated companies to “focus on the principle of disclosure and transparency in all implemented programs.”
Dbeiba’s office did not respond to request for comment.
Porous borders
Libya, an OPEC member and holder of Africa’s largest oil reserves, pumped 1.14 million b/d of crude in February, according to the latest Platts survey of the group’s output by S&P Global Commodity Insights. Much of that crude is exported to Europe, as Libya’s refining sector remains decimated by decades of civil war, with production of some 140,000 b/d of products from the Zawiya refinery and other limited facilities.
Refining capacity limitations have left Libya reliant on hefty fuel imports to meet domestic demand, prompting a pivot to cheap Russian supply in the wake of the war with Ukraine. According to S&P Global Commodities at Sea data, refined product flows from Russia to Libya were up almost tenfold on the year in 2023.
Some 60,600 b/d of gasoil, gasoline and naphtha flowed between the two countries in 2023, up from just 6,800 b/d in 2022, snatching market share from Mediterranean gasoil suppliers, as around half of the 8-10 cargoes bound for Libya have been fulfilled by Russian supply, according to traders.
The fuel is sold at subsidized rates of 3 cents/liter at retail, a legacy of the Qadhafi regime, making smuggling and black-market sales a vastly lucrative trade and an open secret amongst the various groups vying for power in the country.
“External sanctions and active intervention have curbed the ability of non-state actors to conduct crude sales, but subsidized products can be sold to neighboring states at higher prices, offering a tempting illegal source of revenues for those in border areas as well as organized gangs and militias,” said Catherine Hunter, who heads North African E&P risk analysis for S&P Global Commodity Insights, in a recent report on the country’s oil governance.
The issue could come to a head soon, as Russian oil exports have slumped in recent weeks due to the flurry of Ukrainian drone attacks.
Already, product shipments to Libya have suffered. According to S&P Global Commodities at Sea, Russian diesel and gasoline exports to Libya breached 100,000 b/d for the first time on record in January, up 35% on the month, but have since more than halved to 48,000 b/d in March, though some volumes of dark fleet shipments may not be fully captured in the data.
Diesel exports, typically accounting for the bulk of supplies, have suffered the sharpest volume declines, with gasoil flows falling from 68,300 b/d in January to 40,000 b/d in March, the CAS figures show. Russian gasoline flows to Libya fell 76% in the same span to just 7,600 b/d.
Entrenched subsidies
The dramatic changes in flows leave Libya in a potentially precarious position, with the growing criticism of fuel smuggling threatening the tenuous hold of Dbeiba’s UN-backed Government of National Unity (GNU) in Tripoli. A rival Government of National Stability (GNS) supported by the Libyan National Army is seated in Benghazi.
Kabir and his allies accuse Dbeiba of turning a blind eye to the smuggling and are pressuring the prime minister to reform the subsidy program, which is draining the country’s foreign reserves.
NOC Chairman Farhat Bengdara, whose controversial appointment to the position in 2022 was seen as a compromise between the GNU and the GNS, has also come under scrutiny.
Mohamed al-Menfi, who chairs the presidential council, has launched an investigation into the NOC’s handling of the country’s fuel imports and alleged smuggling, The Guardian newspaper reported March 25. Bengdara’s office did not respond to a request for comment.
Adding to the turmoil, Libyan oil minister Mohammed Aoun, who has feuded with the NOC over oil revenues, was suspended March 25 by the country’s Administrative Control Agency due to a legal investigation, which could be related to opposition to deals with international oil companies, sources told S&P Global Commodity Insights. The ministry and Aoun declined to comment, while Aoun denied being served a suspension order March 25.
Meanwhile, the revenues generated by the smuggling are also perpetuating the civil war in Sudan that forced South Sudan to declare force majeure on its roughly 150,000 b/d of crude exports that flow via pipeline through its northern neighbor.
Illiasse Sdiqui, an associate director with Libya-focused security firm Whispering Bell, said the government’s inability to track fuel transport and consumption has allowed the smuggling to flourish. Removing the subsidies that encourage the trade would be a major political risk that could destabilize the already fractured country, he added.
“It is an established trade involving multiple stakeholders that have grown more sophisticated at re-exporting the smuggled fuel, either to neighboring countries by road or by sea from eastern ports,” Sdiqui said. “Instability in neighboring Sudan has exacerbated the issue because demand for smuggled fuel increased.”
________________
