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Attack at Libya's Es-Sider threatens oil industry

The attack at Es-Sider has plunged the country's oil industry into its ever-deepening civil war

Black smoke stained the sky and flames leapt 300 feet in the air as fighting left Es-Sider, Libya's largest oil port, ablaze. The fire, in December, was the culmination of a civil war fought for control of the country's oil industry. It may end up destroying it.

After six months of fighting, Libya has two governments, each a loose coalition of militias and tribal forces, battling each other along a tangle of front lines. But while the politics of this war are complicated, the objective remains the same - to control the country's oil.

Libya has Africa's largest oil reserves, an estimated 48 billion barrels of highly prized light, sweet oil. The country derives about 95% of government revenues from hydrocarbons - combatants on both sides of the civil conflict are well aware that winning the war means controlling the country's oil and gas production.

The oil sector was left almost untouched during the armed uprising that overthrew Muammar Qadhafi in 2011. Troops loyal to Qadhafi destroyed a pumping station serving the Sarir field in the southeast, but otherwise the country's oil infrastructure was left largely intact. Despite internecine fighting in the immediate aftermath of the revolution, oil production quickly climbed to pre-war levels of 1.55 million barrels a day (b/d).

But elections for a National Congress in 2012 saw a growing polarisation into two armed camps. The elections were won by a coalition led by the Muslim Brotherhood's Justice and Construction Party, allied with Misrata, Libya's third-largest city. Political rivalries with tribal and some liberal opponents in the east, south and west of the country saw continuing militia clashes. The insecurity was sharpened by a separate Islamist rebellion in Benghazi, in the east, led by Ansar al Sharia, blamed by Washington for the murder of US ambassador Chris Stevens that September.

An early casualty of the civil war was oil exploration. In 2003, sanctions imposed on Libya after the 1988 Lockerbie bombing were lifted and foreign companies rushed to snap up more than 40 exploration concessions. Now they began abandoning them. Shell announced it was suspending operations in May 2012, US supermajor ExxonMobil followed, abandoning its offshore concessions in 2013. BP shelved its work, both on- and offshore, shortly afterwards.

Oil, however, continued to flow until summer 2013, when congress allocated 900m dinars ($714m) to Libya Shield, a militia alliance viewed by some in the country as a parallel army.

Fearing Libya Shield's growing power, opponents in east and west Libya moved to cut the flow of oil. The Petroleum Facilities Guard, a militia led by a charismatic commander, Ibrahim Jathran, halted exports at Es-Sider (340,000 b/d), Brega (90,000 b/d), Zueitina (70,000 b/d) and Torbuk's Marsa al-Hariga (110,000 b/d).

Similar protests shut in fields, pipelines and ports in western Libya and lasted 12 months, bringing average exports down to 200,000 b/d. Wage demands and political jostling played their part in the disputes, but the key feature was opposition to congress and determination to crimp its income.

In March 2014, Jathran attempted to export a cargo of oil from Es-Sider via the North Korean tanker, Morning Glory. The tanker was boarded a week later by US commandos and returned to government control, with the United Nations security council passing a resolution committing states to buy oil only from Libya's recognised government. Libya Shield then attempted to capture Es-Sider, with units from Misrata advancing eastwards. Tribal militias from Cyrenaica stopped them.

Elections in June for a new parliament, the House of Representatives, saw Libya's balance of power shift sharply. Voters deserted Islamist parties, with opposition forces in the east, west and south winning overall control. That switch saw the oil blockade dissolve. By 22 August, oil production had ramped up to 562,000 b/d. In September, officials from state-run National Oil Corporation (NOC) said output was 800,000 b/d.

But by then, Libya was at war.

Earlier, in July, before parliament had even convened for its first sitting, the Islamist-Misrata alliance accused the House of Representatives of betraying the goals of the revolution. Libya Shield militias regrouped under the name Libya Dawn and launched an offensive in Tripoli, which saw the UN, most embassies and many foreign companies evacuate. Libya Dawn militias backed the reformation of the former congress, ushering it back into power in the city. It appointed Omar al Hasi, an Islamist politician, as its 'prime minister'.

With Tripoli and Misrata held by Libya Dawn, and Ansar al Sharia dominating Benghazi, the House of Representatives decamped to the eastern town of Tobruk. Its leaders had lost Libya's three key cities, but were in control of the majority of the country's oilfields and pipelines.

Narrow focus

Two governments now faced each other: congress in Tripoli and the House of Representatives in Tobruk. But congress was aware that its control of the capital meant little because, thanks to the power structures put in place by Qadhafi, the city depends on oil cash.

Qadhafi is said to have told his sons: "What is above the ground is yours, what is below is mine." The saying, probably apocryphal, explains much about the former dictatorship's reluctance to diversify away from oil. Qadhafi invested oil profits totalling about $158bn abroad, rather than at home. Indeed, Libya lacks the refining capacity to meet domestic demand, obliging it to import much of its gasoline.

Tobruk's prime minister Abdullah al-Thinni, not only controls the bulk of Libya's oil production; he also controls most of its oil income, by dint of UN recognition conferred on the parliament following the June elections.

Al Thinni's problem is translating legal control of Libya's oil revenues into practical reality. The central bank, like NOC, remains in Tripoli, under the sway of Libya Dawn. 

On 14 September, the Tobruk administration sacked central bank governor Saddik El Kaber after he announced he would remain independent from both governments, and refused summonses to visit Tobruk.

Then, on 10 November, Libya Dawn forces occupied the two main fields in the southwest, Sharara, producing 340,000 b/d, and El Feel, which produces 130,000 b/d. The fields, operated in partnership with Spanish firm Repsol and Italy's Eni, went offline. As they did, Libya's production fell to 580,000 b/d.

The next confrontation came at the 27 November Opec meeting in Vienna. Both Libyan governments demanded to be invited. Mashallah Zwai, the oil minister in the Libya Dawn-backed congress, threatened unspecified legal action against Opec if he was not invited to attend. Opec followed the UN's lead and recognised the Tobruk government as the legitimate Libyan representative.

The night before the meeting, the Tobruk government's deputy prime minister Abdelrahman Al Taher beckoned journalists and the curious to gather around him in a sumptuous Vienna hotel. He announced that NOC chairman Mustafa Sanallah, who had declined to come to Vienna, had been sacked. His replacement was Al Mabrook Bou Seif, little-known in the oil industry but from the same tribe as Jathran, whose oil protection force Tobruk wanted to keep on side.

Some in the oil industry were dismayed. Bou Seif was a successful IT officer in the oil industry, but lacked Sanallah's experience and contacts. "Foreigners respect Sanallah, he talks sense, dyed in the wool," said by John Hamilton, a director at London-based Cross Border Information.

The move was all the more surprising because, in August, al Thinni had confirmed Sanallah as NOC chairman. Sanallah may have hoped to avoid the political chaos because his role is more limited. Oil income passes to the central bank, not NOC, and day-to-day management of the sector rests with individual production companies, leaving NOC with the job of negotiating the oil price and managing the sector, a duty both governments support.

With Opec recognition in the bag, al Thinni announced on 10 December that oil revenues would be decoupled from the central bank, hoping to ensure cash would no longer reach Libya Dawn.

On paper, Tobruk was now in charge of both oil production and revenues, but this presented logistical problems. For the new NOC boss, there was the task of administering a complicated oil sector with a tiny staff.

Most Libyan oilfields are operated as joint ventures with NOC, involving complex payment procedures. Waha, or Oasis, producing 91,000 b/d in eastern Libya, is typical; it is a joint venture with US companies ConocoPhillips and Marathon, each holding a 16.3% stake, and US independent Hess holding 8.3%. Managing the division of exports, insurance and other payments is a complex process, requiring the resources of an NOC bureaucracy that remains physically in Tripoli. "Marketing the oil is a complex procedure, you can't just set up a marketing department (in Tobruk), only the NOC really has the set up to manage it," said Hamilton. "This is the problem that Tobruk has got. It's not that they don't have the legal right to the oil, it's that if they can't manage it credibly, it will be a big problem."

Desert operation

In Tripoli, the implications of the loss of central bank revenues sank in. Three days after Al Thinni's announcement, Libya Dawn launched its most ambitious offensive of the war, Operation Sunrise, a 180 km drive from Sirte to capture the eastern oil terminals. Tripoli leaders knew possession of the ports would not allow them to sell oil. But combined with control of Sharara and El Feel, it would give them political leverage.

Units from Misrata, Tripoli and Ansar Al Sharia crammed into 300 armed jeeps, mounting guns on their flat beds, and charged, Mad Max-style, across the desert, reaching the gates of Es-Sider on the first day.

There, Jathran's forces put up a fight, and in the ensuing days the air force, loyal to Tobruk, pounded Libya Dawn units strung out across the desert. Two weeks of fighting saw the offensive pushed back 35 kms to Bin Jawad.  On 25 December, Dawn tried a new tactic, assaulting Es-Sider from the sea. Militia units in speedboats attempted an armed assault on the terminal. They were repulsed, but in the battle a rocket struck one of the port's storage tanks.

The resulting conflagration spread to seven tanks, destroying -- by NOC estimates - 800,000 barrels of oil and triggering a smoke plume visible from space. In a reprisal attack, Tobruk's air force bombed Misrata, striking the airport three times.

On 4 January Tobruk's planes struck a new target, hitting the Greek-owned tanker Araevo, which was contracted by NOC to deliver fuel oil to the eastern town of Derna. Tobruk accused the tanker of failing to stop for inspection, amid suspicion it was moving weapons to IS militants established in the town. Two crewmen, a Greek and a Romanian, were killed, triggering protests from NOC in Tripoli and from Greece.

The fire at Es-Sider was extinguished on 2 January, by which time Libya had declared force majeure both at Es-Sider and at neighbouring Ras Lanuf. Libya's oil production had, at that point, plunged to 300,000 b/d.

While the Tobruk government claimed victory in the oil ports battle, it may prove to be short-lived, as Libya faces economic disaster. In December, the central bank reported a balance of payments deficit of $22bn for 2014, a hole being plugged by fast-depleting foreign reserves. The IMF said those reserves had fallen from $121bn at the start of the year to $102 by August, with nobody sure how much of the remaining reserve can be quickly converted to cash. The misery is compounded by the steep fall in oil prices, further lowering Libya's income. And there is growing reluctance of tanker operators to enter Libya. "After the speedboat attack, no tanker master is going to want to take a tanker into Libyan waters," said one executive of a European oil financing company.

Outwardly, both governments remain confident. Libya Dawn has probably lost the chance to occupy the eastern ports, but knows its threat to them provides political leverage. Tobruk, its air force continuing to grow with strong support from neighbouring Egypt, is confident of winning the war. In January, its deputy Prime Minister Salam Al-Badri told pan-Arab newspaper Asharq Al Awasat that despite the fighting, Tobruk controls 80% of the oil industry.

UN special envoy Bernadino Leon has seen his calls for the central bank and NOC to be independent of both governments ignored by Tobruk. As Petroleum Economist went to press, scheduled UN peace talks – which had been postponed three times – were called off after the Islamist-led Tripoli government refused to take part.

Few foreign observers will go on the record when discussing Libya's oil industry, but the mood is gloomy. "[I am] very, very pessimistic," said one London-based consultant. "The [foreign] companies who are out are glad to be out. Libya right now is on a dangerous and dead-end trajectory."

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