The battle for Tripoli and its impact on oil markets
Intense fighting has not yet impacted Libya’s oil output or exports. However, a protracted conflict could well make the North African country the kingpin for global oil prices.
What has happened politically in Libya?
As Khalifa Haftar’s “Flood of Dignity” enters its 6th day, violence and political instability in Libya continue to exacerbate. Tripoli became the setting of fierce clashes on Tuesday, April 9th, with Abusalim hospital struggling to keep up with injured patients, as Haftar ordered Libyan National Army (LNA) forces on an all out offensive in an attempt to gain as much control as possible before Wednesday’s UN Security Council meeting on Libya.
In the midst of all the chaos and uncertainty, Libya Desk examines the impact of the current escalation of conflict in Libya on the country’s Oil & Gas industry.
What is the direct impact on Libya’s oil sector?
The Brent crude price has increased by 3% in April.
Oil production and exports have not been impacted as an immediate result of rising tensions. In fact, fighting is taking place away from major oilfields and export terminals in Libya. For instance, the El Sharara oil field – accounting for ¼ of Libyan output – is 700km away from the capital Tripoli, where most of the fighting is taking place. Yet, the comeback of conflict in Libya has led to a slight increase in oil prices since the beginning of April.
What to expect if the conflict prolongs itself?
Any protraction of the conflict could lead the OPEC member to a potential loss of almost half of its oil production capacity.
Currently, the main risk facing oil production in Libya is that the conflict has been intensifying around Zawiya, which is the main export terminal for El Sharara (see map). Any blow to this terminal could well cost $1 billion per month to the country.
Interestingly, Haftar’s offensive could not have come at more crucial time. Around 6 million barrels of crude are scheduled to be exported from Zawiya export terminal this April, the biggest sale since Gaddafi’s fall in 2011. While we are unable to predict whether current fighting will jeopardise these exports, it is safe to say that if Haftar takes over Zawiya and fends off the GNA’s counteroffensive, he will be in full control of Libya’s oil industry, with six out of nine oil export terminals under his watch.
Any protraction of the conflict could lead the OPEC member to a potential loss of almost half of its oil production capacity. Even in the case of a unification of Libya under LNA supervision, things are likely to get uglier for Libyan oil before a sizeable improvement can be measured. Last time Haftar captured export terminals, he handed them over to an oil authority in eastern Libya, thus suspending exports for weeks and leading to an 80% decline in oil production.
Another important risk for oil is the impact of conflict on the security personnel watching over oil facilities. The National Oil Corporation (NOC) plans to spend nearly $1 billion on salaries this year alone. Yet, since 2013 expectations have risen as the government promised to more than double salaries for oil workers, a promise that remains unfulfilled. Both sides of the conflict are highly-leveraged and this begs the questions whether low-paid personnel will remain loyal and whether security guards will be drawn to the conflict, thus leaving oil facilities undefended and liable to attacks from IS or takeover by disgruntled militiamen. The financial sustainability of the current conflict will principally rely on foreign backers of both parties, mainly the United Arab Emirates on Haftar’s side and the United States on the GNA’s.
Libya’s decisiveness for oil prices depends on other global factors
Libya accounts for only 1% of global oil production. On a normal day, the country would not matter decisively for global oil markets. Yet, we live in a highly unstable epoch for oil supply. Anyone interested in the impact of Libya’s rising tensions on oil markets should also look at the underlying factors.
May will be a crucial month for oil. If America does not extend Iran waivers and Libya’s conflict prolongs, we should brace ourselves for soaring oil prices.
The stabilising factors
The US – whose President aims for low oil prices – is consistently increasing its inventories, adding on 2.5 million barrels last week for the third consecutive week. Moreover, American shale producers can provide former clients of Libya with a similar crude in terms of quality.
Lately, the IMF has cut down its growth outlook by 0.2 percentage points, presaging lower economic activity due to trade disputes and Brexit.
According to S&P Global Platts, Iranian exports have rebounded by 12% last March, up to 1.7 million bpd. Although this export surge is temporary, this unexpected development is likely to postpone dramatic oil price increases.
The inflationary factors
Iran remains the prime concern. Its March export surge is due to importers amassing as much as possible before their waivers expire in May. As reported by Reuters, India – Iran’s second client after China – is already holding up on booking Iranian oil for May, as it awaits Washington’s decision whether to extend waivers or not.
In addition to the late January US sanctions on Venezuela’s state oil company PDVSA – costing Caracas 500,000 bpd of exports – Washington has on 5th April blacklisted 35 Venezuelan vessels and sanctioned the country’s exports to Cuba.
In a context of output cuts from countries like Saudi Arabia and Russia, the May meeting of the Joint OPEC-non-OPEC Ministerial Monitoring Committee (JMMC) will be crucial in deciding on the continuation of cuts. Libya, Iran and Venezuela – the latter two accounting for 47% of recent OPEC reductions – will definitely appear in discussions.
Although President Trump is likely to oppose any anti-Saudi bill coming from the House of Representatives, a more assertive stance on Yemen and OPEC from American lawmakers might sour US-Saudi relations, thus pushing Riyadh to further cut output.
Libya’s oil sector in a few words
Libya’s oil, light in sulphur, remains a product of prime quality for International Oil Companies (IOCs). Yet, the latter were right to be wary about Libya and stay away from the country for 2019. Recent deals struck with BP, ENI and Total are stuck in a limbo and are unlikely to proceed considering current tensions. The current situation is likely to further hamper NOC’s goal to reach 2.5 million bpd by 2020 and leave the national company alone with its yearly budget of $2.5 billion to explore and drill new fields, far below the needed $20 billion in investments.
Moreover, this year is likely to see a lower role for oil in Libya’s economy. This has already been accounted for in the GNA’s budget, with oil revenues expected to fall by 21% compared to 2018. With nearly 14% of state spending going for subsidies, Libya’s oil industry is also likely to continue seeing cross-border smuggling.