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Libyan oil unity?

A deal to unite the eastern and western NOCs could lift output quickly – or crumble in a battle over revenue

ON THE face of it, the 2 July announcement of unification between Libya's two rival National Oil Corporations (NOCs) is good news both for production and the country. But key questions remain about whether it will be implemented.

Two years of civil war between Libya Dawn militias in Tripoli and Operation Dignity forces of the House of Representatives (HoR) parliament in Tobruk have seen production capacity plummet from 1.45m barrels a day to around 300,000 b/d.

In recent months, the political chaos led to further dislocation in the oil sector, as the rival NOCs - and the political factions that they represented - sought control of the entire sector. Now a unification of the Tripoli and Tobruk companies promises a surge in production and export revenue.

The deal sees the head of Tripoli's NOC, Mustafa Sanalla, appointed as new chairman of the re-united company, and the boss of the eastern-based NOC, Naji al-Malghrabi, take a seat on the board.

The most immediate production dividend could come from the re-opening of two large fields in Libya's southwest: Sharara, with capacity of 340,000 b/d, and operated jointly by Repsol and NOC; and El Feel, a joint venture between Italy's Eni and NOC, with capacity of 100,000 b/d. The contracts for both fields were in place before the 2011 revolution. Both fields are under the control of the so-called Third Force - Misratan militias that are part of Libya Dawn. But the pipelines connecting the fields to export terminals near Tripoli are controlled, and for now blocked, by militiamen from Zintan, which is loyal to Dignity.

A swift restart in production following the NOC unification deal would sharply increase the country's output, which for now depends on flows from two offshore fields northwest of Tripoli - accounting for about 80,000 b/d - and those from the southeastern fields of Sarir and Misla, operated by NOC-subsidiary Arabian Gulf Oil Corporation (Agoco). Before 2011, those workhorse fields could produce up to 420,000 b/d. In recent months output has struggled to crest 250,000 b/d, hindered by power failures and insecurity that has prevented remedial work.

Exports could even resume from Libya's fourth major production centre, the once-prolific Sirte basin, if oil again begins to flow through Es-Sider, the country's largest oil port, and Ras Lanuf, its biggest refinery, together capable of exporting 0.6m b/d. Both ports have been under force majeure since Libya Dawn attacked them in December 2014. Both facilities have also been targets for Islamic State (IS), which in January destroyed several storage tanks.

That, at least, is the optimistic version. In reality, the unification deal comes with conditions that may scupper it. First is the promise that the new NOC will move to Benghazi, in Tobruk's sphere of influence. Benghazi is now a war zone, with fighting between Tobruk's army and militias allied with Libya Dawn.

Dividing power

A deeper problem is the question of how the unified NOC's revenues are to be split. The deal says that the NOC will be governed both by the UN-backed Government of National Accord (GNA) in Tripoli and the HoR, even though the HoR - until December the internationally recognised government of Libya - has not yet endorsed the GNA. After the deal was announced, Maghrabi said revenues will be split 50:50 between east and west. But Sanallah has already discounted this.

"Dr al-Malghrabi was speaking by phone and it must have been a bad connection because this is not correct," said Sanallah in an interview posted on the (Tripoli) NOC website. "Deciding on the split of revenue is not something Dr al-Maghrabi or I have the authority to discuss."

For the new agreement to work, both sides will now need to agree how the money is divided

By dint of recognition from the UN Security Council, the GNA holds title to Libya's oil revenues. But the government is still struggling to win control on the ground. Its seven-strong presidency, led by prime minister Fayaz Serraj, remains confined to a Tripolitanian naval base. Dawn militias still control the capital itself and Dignity refuses to have anything to do with GNA. Some militias from both sides have pledged support for the GNA, but on conditions: that they make the rules, leaving the GNA powerless.

The agreement is the climax of a dispute that began on 25 April when Tobruk NOC tried unsuccessfully to export 0.66m barrels from Marsa al-Hariga to a UAE company on the Indian-registered tanker Distya Ameya. When the UN Security Council ruled the export broke the rules and the tanker diverted to a GNA-controlled port, the east replied with a blockade of Tobruk, further crippling exports.

The blockade ended on 20 May, after the rival NOCs met in Vienna. Few details of a memorandum of understanding between Sanallah and Maghrabi were made public, but in a joint statement they agreed exports would resume.

On 10 June came another hiccup, when Agila Saleh, head of the HoR, complained to the UN about a deal signed last year by Sanallah giving Swiss-based Glenore exclusive control of exports from Marsa al-Hariga. The east's complaint was not about Glencore itself - it offered, at least, a guaranteed buyer for the east's risky oil - but the destination of the money.

"They (Tripoli NOC) said that they needed to have guaranteed cash flow and that Glencore committed to lift every cargo," says John Hamilton, director of London-based Cross-border Information. "It means Glencore are taking on all the risk, they will lift no matter what." But the east didn't like the export revenue being paid to the Libyan central bank in Tripoli - and not the east's own central bank in Tobruk.

For the new agreement to work, both sides will now need to agree how the money is divided - and militias, not politicians or NOC officials, will keep their casting vote.

"It is not these institutions that control the situation in reality," says Mohamed Eljarh, a fellow of the Atlantic Council, an international think tank. "Both are toothless and the power remains with those on the ground, ie the armed groups. Control over oil institutions or facilities means control over the flow of money and that translates into ability to influence the political and security situation."

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