Libyan oil in turmoil

Although it has some of the lowest oil production costs in the entire world, attractive geology counts for little in war-torn Libya. Few welcomed the brutal rule of Muammar Qaddafi but since his overthrow the country has been riven by a range of ethnic, regional, religious and political differences that are tearing at the fabric of national cohesion.

Production on most oil fields has been halted and with no end in sight to the fighting, oil companies are beginning to write off their onshore assets, although the picture is a little less bleak offshore.

One of the biggest problems facing oil firms with interests in the country is the divided nature of Libya. Rival factions have controlled different parts of the country since the fall of Qaddafi in 2011. The government in Bayda, which is led by Abdallah Al Thani, is recognised by most western states but a rival regime under the leadership of Omar Al Hassi controls Tripoli and Misrata. Once the growing influence of Islamic State is thrown into the mix, the political picture is very bleak.

Oil fields, pipelines and export terminals are often under the control of different militia, which makes getting oil out of the country difficult on most fields. Even where armed groups allow exports they often demand hefty bribes in return. Groups opposed to the Tripoli government have blocked pipelines in the west of the country, including from the El Sharara Field, which would normally produce 340,000 b/d. Oil production has fallen from 1.6m b/d before the civil war to between 350,000 b/d and 380,000 b/d today, according to figures from the internationally recognised government.

Oil exports are the primary means of financing each militia and political authority, and some groups have attacked oil tankers and terminals in an attempt to cut off funding to their rivals. In late May, a tanker operated by the General National Maritime Transport Company was bombed by the Libyan Air Force, which is under the control of the Bayda government, as it arrived at the Port of Sirte. According to Bayda, the tanker was carrying arms as well as fuel. Insurance premiums for all vessels entering Libyan ports have rocketed, making it expensive to deal in Libyan oil at a time when global oil prices have fallen.

In addition, some of the refugees seeking to cross from Libya to Europe have attempted to stow away on tankers. Libya has become the most popular sailing point for refugees and economic migrants seeking to enter Europe because of the lack of effective border controls in the country. Finally, workers have halted operations on some fields and pipelines in pay disputes, while protests by local people have seen pipelines cease operation for weeks at a time in some areas.

The Petroleum Facilities Guard has been set up to defend oil and gas industry assets held by the Bayda government, including the country’s biggest oil terminal, Es Sider. However, it is struggling to contain advances by Islamic State. A spokesperson for the Guard said: “Battles in populated areas cannot be won by air power alone, ground forces are needed and we, once again, affirm that we can do it if weapons and ammunition are made available.”

The two NOCs

The situation is further confused by the existence of two state oil companies, both called the National Oil Company (NOC), based in east and west Libya respectively. Most international customers continue to deal only with the NOC in Tripoli but the Bayda government is trying to change this. In mid-August, the new chairman of NOC Bayda, Nagi Al Maghrabi, said: “We are about to announce an international conference in Benghazi so the world can meet the legitimate firm. I call on the world to heed this call.” Dealers are obviously concerned about the legal ownership of any oil they handle but Bayda’s international recognition should help it to secure legitimacy for its own NOC.

The Bayda NOC has now lifted the force majeure on Ras Lanuf, which it announced in December 2014 because of security threats. It is now considering re-opening the facility, which in turn could enable production of 300,000 b/d to resume on mothballed fields. Al Maghrabi is also keen to resume operations at Es Sider. However, a spokesperson for maritime security firm MAST warned in late July: “Under force majeure Ras Lanuf was not a target for ISIS. As it returns to working status, it is likely to be of increasing economic importance to the Bayda-based government and ISIS forces may therefore see it as a potential target for a terror attack. Care must therefore be taken by vessels visiting Ras Lanuf.”

Some European oil companies operating in the country have been forced to write off or write down the value of their Libyan assets. BP and Total have written off $1,355m between them this year. BP returned to the country in 2007 when it signed a huge exploration deal but has been forced to suspend its exploration efforts as a result of the dire security situation. Italian firm Eni, which is the biggest foreign investor in the country, has managed to maintain some of its operations, although some of its staff have been kidnapped. Most output in eastern Libya is controlled by Arabian Gulf Oil Company, an offshoot of the NOC, which is currently producing about 220,000 b/d. Onshore oil production in western Libya has been almost entirely halted.

The United Nations talks designed to create a government of national unity out of some of the main groups are making slow progress but now also include efforts to reach agreement on oil terminal management. The MAST spokesperson commented: “UN-sponsored unity government negotiations appear to have stalled for now, with the Tripoli government withdrawing from the talks. However, the UN process will continue and it is likely that a series of ad hoc discussions will take place between the various government and tribal factions.”

Neil Ford