Is Libya The Next Wildcard For Oil Markets?

Given the economic mayhem that energy price-fuelled inflation has caused for Western governments since Russia’s invasion of Crimea, the last thing they want is another oil production shutdown in Libya that would push oil prices higher again. However, last week saw Khalifa Haftar, the head of the Libyan National Army (LNA) that is based in the country’s oil-rich eastern region, order his forces to be standby until a fair distribution of oil wealth is agreed between the leaders of its main warring factions. The last time he issued such a warning, Libyan oil production of over 1.2 million barrels per day (bpd) collapsed, contributing to rising oil prices.

Haftar’s warning should be taken very seriously by Libya’s other main political factions and by the global oil markets as it harks back to an identical point he made back on 18 September 2020 when he agreed to an end to the nationwide blockade of key oil installations. At that time when the deal was agreed between Haftar’s LNA and elements of Tripoli’s U.N.-recognised Government of National Accord (GNA), he said that the lifting of the blockade was only in place for one month unless a further agreement that laid out precisely how oil revenues were to be divided was made. At the end of every blockade, he says the same thing, but no progress is made towards such a goal, although promises to do so are made. 

Back in 2020, it was GNA Deputy Prime Minister Ahmed Maiteeq who said that an in-principle agreement had been made to establish a commission to determine how oil revenues across Libya were distributed in the future and to consider the implementation of several measures designed to stabilise the country’s perilous financial position. At that point three years ago, the blockade from 18 January when it started to 18 September when it was lifted had cost the country at least US$9.8 billion in lost hydrocarbons revenues. According to the official statement in 2020 on the formation of this committee, it would: “Oversee oil revenues and ensure the fair distribution of resources… and control the implementation of the terms of the agreement during the next three months, provided that its work is evaluated at the end of the 2020 and a plan is defined for the next year.” 

To address the fact that the GNA effectively holds sway over Libya’s National Oil Corporation (NOC) and, by extension, the Central Bank of Libya (in which the revenues are physically held), the committee was also tasked to “prepare a unified budget that meets the needs of each party… and the reconciliation of any dispute over budget allocations… and will require the Central Bank [in Tripoli] to cover the monthly or quarterly payments approved in the budget without any delay, and as soon as the joint technical committee requests the transfer.” According to a Washington-based legal source who works closely with the Presidential Administration on energy matters spoken to by OilPrice.com at the time, the NOC had been working on “alternative banking arrangements for the oil revenues that may or may not involve the input on final dispersal of more players.” However, the details of this were never worked through and no replacement ideas have been forthcoming since then. 

Instead, Libya descended into further chaos, and more blockades. The most significant recent example of this was last year’s series of widespread blockades of various ports and installations, including the 60,000 bpd Brega operation, and the Zueitina port, with crude loadings average around 90,000 bpd. Oil production also stopped at Abuatufol, Al-Intisar, Anakhla, and Nafura. Just prior to this, the Sharara field in the west of the country, which can pump around 300,000 bpd, was also shut down and before this the El Feel oil field, which produces 70,000 bpd, was closed. These sites are key suppliers of mostly high-quality light, sweet crude oil, notably including the Es Sider and Sharara export crudes, that are particularly in demand in the Mediterranean and Northwest Europe for their gasoline and middle distillate yields. Overall, during that wave of blockades and shutdowns, Libya was losing around 550,000 bpd of its oil production. 

Framing these blockades was political tumult of an extraordinary degree, even by Libyan standards. Theoretically, the aim of this was to create a more stable framework for a longstanding agreement of the type that Haftar originally had in mind back in September 2020. Practically, it resulted in a situation that exuded all the stability and welcome to would-be Western investors of a puff adder on Benzedrine. July 2022 saw the GNU Prime Minister, Abdul Hamid Dbeibah, replace the widely-respected Mustafa Sanalla as chairman of the NOC with Dbeibah’s long-time associate, Farhat Bengdara, who…