The Slow Recovery of Libya’s Oil Industry

September 26, 2017

Global Risk Insights

In early July, oil production in Libya reached 1 million barrels per day for the first time in four years. The increase in production has sparked hopes that Libya’s oil industry is on a path to recovery.

The state-owned National Oil Company (NOC) predicted that oil output would increase to 1.25 million barrels by the end of the year. At a recent meeting, OPEC countries maintained oil cap exemptions for Libya to allow the country to rebuild its capabilities. Libya’s political deadlock and ongoing security threats, could nonetheless, pose serious challenges to the recovery of the oil sector.

 

Challenges to the revival of Libya’s oil industry

A recent attack by armed groups, resulted in the closure of three oil fields, illustrates the woes of Libya’s oil industry. Ninety per cent of the UN-backed government’s revenues is generated by oil. Since 2011 and in the chaos of the post-Gaddafi era, oil production has nonetheless been consistently unreliable.

Only in the last 12 months has it recovered. The Repsol-operated Sharara oil field, the largest in the country, reopened in December 2016, after a two-year closure, boosting production. Oil production also resumed at ENI-operated El Feel oil field following a joint venture with the NOC.

Libya’s current political situation, with three governments fighting for legitimacy, means that any efforts at rebuilding the oil industry are hampered while rivalries for the control of oil facilities intensifies. Libyan National Army (LNA) forces led by the eastern commander, Khalifa Haftar, recaptured the ‘Oil Crescent’ terminals of Ras Lanuf and Es Sider from rival forces in March. Power struggles between the UN-backed Government of National Accord (GNA) and the LNA have undermined the GNA’s authority as the LNA’s military operations have gathered pace.

Political turmoil continues to affect the economy, with gross domestic product per capita at almost two thirds below its pre-2011 level. Armed tribal groups regularly launch attacks on oil facilities as a result of the government’s inability to distribute oil revenues, posing a direct threat to the integrity of oil infrastructure.

Unreliable production has squeezed the GNA’s finances and increased the risk of protests. In August, the NOC declared a force majeure at Sharara, following a pipeline blockade. The oil industry continues to be a potential target for militant groups, including the Islamic State (ISIS).

 

Prospects

The next few months will be instrumental in determining whether progress in the oil sector will consolidate itself. The greatest threat to the recovery of the oil industry lies in ongoing political instability.

The head of the UN-backed Presidency Council, Fayez al-Serraj, and eastern leader Khalifa Haftar, have agreed to a ceasefire at peace talks in Paris on July 25. Despite the temporary ceasefire, Libya’s political deadlock will continue as the LNA gains ground in the central and eastern parts of the country and intensifies its siege in the eastern city of Derna.

The LNA’s plan to claim full control of Libya’s territory is increasingly at odds with a multi-party solution to the country’s conflict. With elections scheduled in spring 2018, tensions between Libya’s main political factions will also intensify.

The GNA’s isolation could increase public discontent in the areas under its control. Regular power outings are already affecting the government’s credibility and a weakened government could face a growing risk of attacks on oil facilities.

Despite consolidating its hold on Benghazi and the oil crescent ports, the LNA faces opposition from rival groups. After being expelled from their stronghold, militants belonging to the Benghazi Defence Brigades (BDB) could attempt to destabilise the LNA by launching attacks on nearby oil installations.

ISIS has failed to strike an oil facility in recent months and was recently expelled from Benghazi after losing its stronghold in Sirte in 2016. The risk of terrorist attacks will remain high as militants are regrouping in the southern Libyan desert. With ISIS’s territorial losses in Iraq and Syria, militants from neighbouring countries are retreating in Libya, capitalising on the country’s instability to rebuild their capabilities.

The recovery of Libya’s oil sector will depend on rival factions’ ability to strike a political deal and address the persistent threat of terror groups.

Tags: africa, libya, north africa, oil and gas, oil industry, recovery
Posted in Africa, Energy, Energy