How a Lingering Conflict Could Impact Libya's Oil Production

Will Libya’s oil sector remain unaffected by war?

Two months after General Khalifa Haftar’s offensive on Tripoli, the much-anticipated oil slump has not yet hit Libya. On the contrary, the National Oil Company’s (NOC) oil production has continued to increase during the conflict, adding 90,000 bpd in April and reaching around 1.3 million bpd in May, an amount likely to be repeated in June as the country expects to export nearly 1.2 million barrels from Brega port with two cargoes according to a credible loading programme. Overall, even if the past years have shown that oil production in war-torn Libya is too volatile to be taken at face value, the fact that output levels rise in spite of the conflict is surprising.

Actually, much of the current conflict is restricted around the capital’s surroundings whilst most oil facilities are at the hands of the side on the offensive, i.e. the Libyan National Army (LNA), thus preventing much instability in the oil sector. This stability might however not continue for much longer. As conflict lingers and Haftar’s options reach a bottleneck, the LNA general will consider more radical options to avoid a long stalemate. Until now, these options have not been fully tested but could rock the country’s oil sector if adequately pursued.

Crude Oil Production vs Exports for Libya (2006-2019)

Source: Libya Desk | Federal Reserve Bank of St. Louis

Despite controlling the majority of Libya’s oil exporting terminals, the LNA still respects a tacit agreement with the Government of National Accord (GNA) to transfer oil revenues to the Tripoli-based Central Bank of Libya (CBL). Short on cash, the LNA might renege on this understanding and increase efforts to independently sell oil on international markets, albeit this action is sanctioned by the UN Security Council Resolution 2146. Foreign backers of the LNA, including Egypt, Saudi Arabia, Russia and the UAE might agree to load oil on their own country-flagged tankers, which would then make UNSCR 2146 difficult to enforce.


MEES reported that the LNA-aligned Arabian Gulf Oil Company (AGOCO) contracted UAE-based SULACO to ship 2 million barrels of crude from Marsa El Hariga until the 20th of June, potentially earning General Haftar around $140 million. While this shipment would not be the first time the LNA tries to sell oil independently, it could be the initial start to a continuous flow of illicit oil from Libya. This time, the LNA has enough international backers ready to violate UN resolutions as they have already done with the arms embargo. With around 700,000 bpd under its direct control, the LNA could pocket at least $1.4bn per month through exports.

Taking over this financial stream would greatly help General Haftar in reinforcing his patronage networks, further securing oil fields, accelerating the rallying of militias and ultimately winning the war. Moreover, theoretically “neutral” state institutions such as the CBL have put themselves under General Haftar’s focus as their actions have not reflected neutrality. For example, in addition to allocating 2 billion dinars for Fayez Al Sarraj’s war effort, the CBL stopped issuing letters of credit to the LNA and cut three eastern banks from its electronic banking system, thus stopping their operations. Eastern banks are crucial for Haftar to gain foreign currencies and pay fighters; the more the CBL curbs their operations, the more critical Haftar’s financial position.

As a result, Haftar will stop seeing state institutions such as CBL and NOC as parties external to the conflict and will instead seek to control them in order to install his authority over the state. Since the start of the conflict, the LNA has “militarised” oil export terminals such as Es Sider and Ras Lanuf, by berthing military vessels, requisitioning tug boats and seizing airstrips for military use. Logistically speaking, Haftar could well take hold of such facilities for his own benefit in order to starve off NOC and the Tripoli-based GNA.

Alternatively, if the conflict lingers but the LNA does not pull out the oil card, observers should still look out for security risks coming from third-party attacks on oil facilities. In fact, the more warring parties’ finances are strained, the less likely it is that LNA-funded security for oil facilities will continue undisturbed. On the 29th of April, the Islamic State launched a rocket on Libya’s largest oil field: El Sharara (capacity of 300,000 bpd). More recently, the terror group attacked security personnel guarding oil fields in several locations, thus pressing NOC to condemn Libya’s “state of lawlessness”.

Why has oil remained unaffected?

First and foremost, General Haftar has for long entertained the idea that he is a stabilising factor in Libya’s unstable politics. Ensuring oil production and exports has enabled him to back this statement and raised his profile internationally. By allowing NOC, CBL and the GNA to create, collect and disburse oil and gas revenues, Haftar signals the world that he has enough respect for state institutions, regardless of who controls them.

Second, General Haftar knows that NOC is in a better position to maintain oil fields and export oil production as it is the sole licit Libyan oil seller according to the UN. Last year, his forces tried to export oil with a North Korean-flagged tanker which was ultimately intercepted by US Navy Seals. Winning over Libya’s complete state structure without full international backing would mean that Haftar’s Libya would suffer from the same sanctions-laden that Libyans experienced up until the 2000s with Muammar Gaddafi. Additionally, LNA-aligned oil subsidiaries of NOC -Sirte Oil Company (SOC) and AGOCO- have faced issues supplying power stations with fuel and must go through much maintenance work to avoid blackouts and oil pumping halts.

Third, drawing the conflict into the oil sector and bringing pumping to a halt would become a severe problem when General Haftar eventually takes power. In fact, Libya would not only lose oil revenues but also incur high costs restarting production, let alone reparation costs if facilities suffer damage. Due to the El Sharara shutdown and bad weather, oil revenues in Q1 2019 have been down by 20% compared to the previous year, thus showing the potential damage that a disrupted oil sector could have on Libya’s economy.

Libya’s oil: a domestic tool for power, an international reflection of powerlessness

Another reason behind unaffected oil production in Libya lies in ground-breaking changes on the international oil markets. Political actors within and outside the country know that Libyan oil does not bear the same political clout as it did in the past, when Libya produced 3.5 times more than it currently does. This is not only true for Libya but also for other traditional oil suppliers such as Venezuela and Iran, whose export levels have significantly dropped over the past year without any dramatic effect on global oil prices.

This is mainly due to the American shale revolution which is set to bring US oil production to 12.45 million bpd this year and 13.38 million bpd in 2020, thus adding 2.4 million bpd over a period of two years; enough to replace Libyan oil production twice. Additionally, the market rightly applies a low likelihood to the total removal of Libyan production: at the height of the conflict in 2016, Libya still produced nearly 400,000 bpd.


This does not mean that Libyan oil does not matter anymore. Quite the contrary, international oil corporations remain attracted by its location close to Europe and high-quality crude. Yet, this interest does not translate into a position of strength for NOC, which will struggle to reach its 2.1 million bpd goal by 2023 if the current situation evolves into an all-out war over Libya’s territory. For now, it is Mustafa Sanalla -NOC’s head- who is chasing after contracts with foreign companies, most recently in Houston seeking procurement contracts worth $60 billions.

Altogether, the new-found US might on the oil market could potentially be harmful to investors as they over-react to rumours of tariffs and subsequent economic downturn whilst turning a blind eye to inflaming tensions in Libya, Sudan, Iran, Venezuela which combined exported at least 2,1 million bpd in May, according to TankerTrackers. If these tensions intensify and OPEC+ continues cuts, there are high chances that US-centric analysis will backfire. Last month, the Russian Druzhba pipeline contamination showed how strategic Libyan oil remains for Europe. The Greek-flagged Aegean Myth and Maltese-flagged Tamara both arrived to the German port of Wilhelmshaven on the 10th and 14th of May respectively, carrying Sharara and Melita crude, which is rare as only three ships sailed there from Libya since 2017.

Finally, one should not overestimate the leverage the US holds over Haftar. Recent rumours suggest that President Trump is growing frustrated with Haftar’s lack of success on the ground and would therefore push for a US-backed ceasefire. General Haftar remains an independent actor who only seeks one thing from the US: plain support in his military campaign. If the latter is not provided, it will not be hard for the general to rebuff American suggestions. In other words, a ceasefire is highly unlikely. Observers should brace for an extension of the conflict.

For more info and analysis, follow @LibyaDesk on Twitter or subscribe to Libya Desk Memos to receive a curated selection of insights and updates from Libya, delivered straight to your inbox every month.