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End of Libyan oil blockade comes with risks

An agreement to resume exports has reassured oil markets. But several hurdles remain, Chris Stephen reports from Tripoli

Libya's rebel oil blockade is not a sophisticated affair. When ethnic Amazigh, or Berber, villagers near the town of Nalut wanted to shut off a major pipeline carrying oil and gas from the Wafa field, 400 miles (643 km) southwest of Tripoli, they simply had to spin a set of hefty steel wheels at the nearby Juwebiya pumping station. The villagers blocking Wafa’s 30,000 barrels a day (b/d) of output took it in turns to guard the site. Some took “selfies” while balancing on the all-important wheels.

A year after it began, a deal to end a blockade that has cost Libya $30 billion has been hammered out, but unprecedented levels of fighting leave its completion in the balance. The blockade began in July 2013 when Ibrahim Jathran, a former revolutionary fighter and charismatic head of the defence ministry’s Petroleum Facilities Guard, announced a strike that closed four of Libya’s nine oil ports. All four are in the eastern province of Cyrenaica, home to two-thirds of Libyan production. Overnight, exports from terminals at Es Sider (340,000 b/d) and Ras Lanuf, plus the smaller Zueitina (70,000 b/d) and Tobruk’s Marsa al-Hariga ports (110,000 b/d) ceased. A fifth port, at Brega (90,000 b/d), later joined the dispute.

The blockade quickly spread to western Libya. While the villagers of Nalut closed the Wafa pipeline, ethnic Tobu militias closed the Sharara field, Libya’s biggest producer at 340,000 b/d, while further north Zintan militia closed the 130,000 b/d El Feel field. The protesters wanted more money, but they were also united in opposition to parliament, the Islamist-led General National Congress. Strikers demanded more spending on Libya’s impoverished regions and were alarmed that congress spent 900,000 dinars (about $750,000) in 2013 on the Libya Shield, a powerful militia force seen by opponents as a parallel army. Their solution was to cut off the government’s most important source of income.

The dispute saw exports plummet from 1.44 million b/d to an average of just 200,000 b/d over the past 12 months. Oil and gas make up about 90% of government revenue, and to meet shortfalls, the government spent $30 billion of an estimated $158bn in overseas assets. The strikes also denied world oil markets Libya’s oil, which is both light and sweet, putting it in the top 4% of premium world production.

Stalemate

Figure 1: Oil infrastructure of Libya

In March, Jathran attempted to sell oil independently, loading crude aboard the North Korean flagged Morning Glory at Es Sider. But the tanker was seized by US commandos and returned to port in Libya. Libya Shield forces then tried, and failed, to capture the eastern ports. A stalemate followed, with the government unable to regain the terminals and rebels unable to sell the oil. That stalemate paved the way for justice minister Salah Al Marghani, one of the few ministers able to bridge the Islamist-tribal divide, to negotiate the blockade’s end in April.

The deal Al Marghani brokered is vague, partly because the government itself has refused a formal agreement with its own striking oil guards. Protesters won pay rises, promises of regional spending and more transparency for Libya’s oil revenues. With a tentative deal struck, Libya’s state-owned National Oil Corporation (NOC), the holding company for all Libya’s oil assets, lifted force majeure for Hariga and Zueitina. It followed by lifting restrictions in June for Es Sider and neighbouring Ras Lanuf. Brega ended its own strike on 21 July. Western militias in June released their grip on Sharara and El Feel, the Berbers having already turned on the taps at Wafa.

Production jumped to 550,000 b/d on 17 July, then slowed to 450,000 b/d on 21 July, because storage facilities filled up at the coast with no tankers to load the crude. Hariga, in Tobruk, loaded two tankers with cargoes of 750,000 and 600,000 barrels at the end of June, but regular shipments depend on new contracts. Oil traders complained that NOC was trying to sell oil at near-market rates. “NOC is going to have to offer a significant level of discount,” says John Hamilton, a director at London-based Cross Border Information. “There’s a risk you are taking if you send your tanker to pick up Libyan crude and it has to wait outside port for one reason or another.”

But another problem is political. If the new parliament, elected in June and due to assemble in Benghazi in August, is still led by an Islamist majority, Jathran may end his co-operation. Fighting between Islamists and their opponents has divided the country into three loose zones. Islamists and their allies hold much of Tripoli and the centre while a fractious group of opponents dominate the east and west. While that gives the opponents, including Jathran, control of the oil, it also brings closer the threat of another civil war. “Lifting the blockade is all conditional on the politics working out,” said Hamilton. “The interim government is on the way out, so whatever conditions it agreed will have to be honoured by the new administration.” If the blockade deal sticks, it promises a bonanza for foreign companies.

State of decay

Libya’s oil infrastructure is in dire need of repair. Pumps and other surface facilities that were neglected during the 2011 revolution and again during the blockade need to be replaced. Oil ports need computerisation while the electrical grid supplying the pumps needs substantial overhaul.

Executives in NOC’s glass-walled headquarters in Tripoli have prepared a draft oil law setting out much-needed regulatory structures. Under Colonel Muammar Qadhafi, oil management was kept opaque; he issued the orders, the NOC obeyed. Since the revolution, Libya has added an oil ministry, though its powers are ill-defined. The draft law defines those powers, and gives NOC a budget system that avoids the prevailing practice in which money for investment and repairs must be begged from parliament on a tiresome case-by-case basis.

Stability would also mean the return of exploration. BP is anxious to begin work on four huge blocks in the Gulf of Sirte, after expensive 3-D seismic surveys revealed what industry insiders say might be large exploitable reserves. “A modicum of political stability would likely mean a rush on Libya by international oil companies,” said Oliver Coleman, an analyst at Maplecroft, a risk analysis firm. “Libya’s blocks are under-explored due to years of sanctions.”

But violence is still keeping those companies away. In March, BP joined Shell and US firm Marathon in pulling out of the country. Following recent Tripoli airport battles, Italy’s Eni and Spain’s Repsol both evacuated staff. Engineers at the Wafa field know work can be halted in hours if the Berbers of Nalut decide to return to Juwebiya and turn those wheels.

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