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No end in sight in the war for Libya’s oil

Production and exports have collapsed and may fall further. The country may be split in two. Oil is at the centre of the zero-sum conflict

UNITED Nations officials breathed a sigh of relief on 1 May when the owners of Indian-registered tanker Distya Ameya obeyed instructions not to transport a cargo of oil being sold by Libya’s eastern government in Tobruk.

The decision by the owners to sail the tanker back to Libya, to territory controlled by Tobruk’s rival, the UN-backed government, seemed to have choked off attempts by eastern Libya to sell independently. The tanker episode was the opening shot in a worsening struggle between the country’s rival governments for Libya’s oil. Those governments now number three, with the arrival in March of the UN-supported Government of National Accord (GNA).

Forbidden from selling crude itself, officials of the Tobruk parliament, the House of Representatives, have since announced a total blockade on oil sales, cutting Libya’s exports by two thirds. Simultaneously, its forces launched an ambitious offensive to take control of the Oil Crescent – the Sirte basin – home to two thirds of Libya’s production capacity.

Libya holds Africa’s largest oil reserves, and the bounty from production that, in peacetime, could reach 1.6m barrels a day is now again the focus of a civil war that has been raging for nearly two years. The trigger were elections for the House of Representatives in June 2014 that defeated the country’s previous Islamist-led government. Proclaiming themselves the true guarantors of the 2011 revolution that overthrew Muammar Gaddafi, Islamists and their Misratan allies formed the Libya Dawn (Fajr) militia and captured Tripoli. The HoR fled the capital and relocated to Tobruk. War began.

While in theory both sides are ruled by their parliaments – a rump version of the previous General National Congress (GNC) parliament was reconstituted by Dawn in Tripoli – in practice the warriors call the shots. While Libya Dawn controls Tripoli, Tobruk’s war is directed by maverick general Khalifa Haftar, leader of Operation Dignity (Karama), a coalition of regular army and militia units. Effective political power in Libya’s two coalitions is devolved among a galaxy of tribes, a reality the arrival of the GNA has yet to alter.

Crude conflict

Since the beginning, the focus has been the oil. Aside from overseas funds, oil remains almost Libya’s only asset. In peacetime, oil and gas account for 95% of Libyan exports, and most Libyans are paid from its profits. Simply put, whoever controls the oil controls the country.

In November 2014, Tobruk fired Mustafa Sanallah, the head of the National Oil Corporation, the holding company for state oil assets, accusing him of siding with Libya Dawn. Sanallah refused to accept his dismissal, insisting NOC was independent. The claim was undermined when the GNC appointed an oil minister, Marshallah Zwai, to direct NOC policy.

Tobruk also fired Saddik-al-Kabir, chairman of the Central Bank of Libya (CBL), which handles payments made to Libya for its oil. He, like Sanallah, was accused by Tobruk of siding with Dawn by remaining in Tripoli.

That November, Tobruk’s prime minister Abdullah al-Thinni appointed new heads of NOC and the CBL and called for overseas oil buyers to pay the petrodollars into new accounts in the UAE, bypassing Tripoli’s central bank.

Dawn hit back by capturing Libya’s principal southwest fields: Sharara, which produces 340,000 barrels a day, jointly operated by NOC and Spain’s Repsol, and El Feel, a joint venture between Italy’s Eni and the NOC with capacity for 100,000 b/d. In turn, leaders in Zintan, a western mountain town that is home to one of Dignity’s strongest militias, promptly turned off valves at a hilltop pumping station, cutting the pipelines to the coast. The two fields – responsible for most of western Libya’s oil output – have remained shut ever since.

In December 2014 Dawn upped the ante further, launching Operation Sunrise, an offensive from its base in Sirte 200km east to attack Es-Sider, Libya’s largest oil port and Ras Lanuf, another large port and also the country’s biggest refinery. Together, the facilities had capacity to export 0.6m b/d.

Sunrise was beaten back by air strikes and opposition from the Petroleum Facilities Guard (PFG), a self-governing militia under commander Ibrahim Jadhran, which controls both ports. But the battle caused heavy damage. The ports were attacked by rocket and artillery fire and from the sea by Dawn speedboats, causing a week-long conflagration that destroyed eight storage tanks and 1m barrels of stored oil. Force majeure was declared for both ports and remains in force, and Libya’s production fell to between 400,000 and 0.5m b/d.

By the end of 2014, the oil-war had reached a stalemate, with Dawn unable to control oil facilities and Dignity unable to secure payments for that oil.

In theory, the Tobruk government should have been able to gain title to oil revenues by dint of being internationally recognised as Libya’s official government. One example often cited is that of World War Two Norwegian, Dutch and French governments in exile in London. The UK granted them control of their British assets, notwithstanding their central banks having fallen into the hands of the Wehrmacht. Tobruk could have followed the same course.

But it never did. One oil buyer, talking on condition of anonymity, said the problem was the lack of explicit legislation by the HoR itself. Thinni’s government sent buyers instructions for such a change, but no explicit law was ever passed commanding it. Sanallah’s NOC pointed this out in its correspondence, insisting the NOC’s “legal address” remained in Tripoli, empowering it to make decisions. Without an explicit law to change that address, he was correct.

The failure of the HoR to pass such legislation had two main causes. First was the fragmented state of the parliament, with many MPs fearing that diverting oil revenues to an account controlled by Thinni would benefit only a minority, not the HoR as a whole.

The other reason was practical. NOC and CBL staff were all in Tripoli. Managing oil sales – involving a complex web of contract payments to foreign companies –was impractical from the east, where the recognised government’s versions of NOC and CBL had only small staff.

Instead, most MPs were content for an implicit pact to operate between Tripoli and Tobruk. Sanallah and Kabir were given tacit approval to continue operations, providing Sanallah did not sign new contracts and Kabir ensured the east also received a share of oil income. By that stage, thanks to the shutting-in of Es-Sider and Ras Lanuf, the bulk of Libya’s oil was coming from the east, too, from the Sarir and Misla, two workhorse fields that exported their oil through a pipeline to Hariga, a port next to Tobruk.

In August 2014 a third force in the oil war arrived in Libya in the shape of Islamic State (IS), which wrested control of Sirte from Misratan Dawn forces and set up satellite bases. IS had a base in the oil crescent – and it set about a campaign of disruption.

In February and March 2015 its units stormed the oil facilities in the Sirte basin, killing 12 men at the Mabruk field, jointly run by NOC and Total. It also kidnapped nine employees of Vienna-based VAOS at the Ghani field. NOC declared force majeure on 11 fields, virtually shutting down operations in Libya’s most productive region.

Then, in January this year, IS staged its own version of Operation Sunrise, storming down the coastal highway from Sirte to attack Es-Sider and Ras Lanuf. Once again, the PFG held fast, despite the deaths of 18 men. But another seven storage tanks were destroyed along with 1.3m barrels of oil.

A commercial front

Worsening the situation, the implicit pact between east and west Libya over oil sales had already broken down. In the late summer of 2015 Thinni renewed efforts to get foreign buyers to divert oil payments from Tripoli, and a handful of companies seemed ready to agree.

In an apparent response to this, in September 2015 Sanallah signed a contract with Swiss-based Glencore, the world’s second-largest energy trader, giving it the right to all of the exports from Hariga. In theory, that gave it title to up to 420,000 b/d of oil produced by NOC’s eastern subsidiary Arabian Gulf Oil Corporation (Agoco), though in the past two years surface problems have restricted output at its two fields Sarir and Misla to around 300,000 b/d.

The deal, although not its detail, was made public on 26 November, with Glencore and Sanallah issuing a joint statement: “The NOC, at its legal address in Tripoli, remains the only legally empowered oil-contracting authority of the Libyan state.”

On 30 November, Sanallah unveiled contracts with Swiss-based Vitol and Litasco, the trading unit of Russia’s Lukoil, to be “sole legal supplier of fuels to all of Libya”. At a stroke, Sanallah had arranged for the bulk of eastern Libya’s oil, and all the country’s petroleum imports, to come through new traders.

Sanallah’s critics accused him of violating the status quo. His supporters countered that Thinni was himself changing the rules by trying to capture oil payments for the HoR. “Some competitors reacted badly to being cut out, believing Sanallah and western Libya had abandoned their established relations with the market,” says John Hamilton, director of Cross Border Information, a risk-analysis firm. “He signed an unprecedented long-term deal, committing oil from eastern fields to Glencore as a way of blocking eastern NOC’s attempts to sell the crude themselves.”

The contract dispute spread anxiety among outside powers that had pinned their hopes on the UN negotiating a power-sharing GNA to end Libya’s post-Gaddafi chaos. UN negotiations began in September 2014, but in October the following year its final plan, the Libyan Political Agreement, was rejected by both Tobruk and Tripoli.

After months of talks in Geneva and the Moroccan town of Skhirat, the UN backed a decision on 17 December 2015 by a 40-strong Libya-UN negotiating team to proclaim the GNA a reality. The unelected negotiators declared a new constitution and chose a nine-member presidency council headed by a prime minister, Fayez Serraj. He was thought a good compromise figure as he was aligned with neither Dawn nor Dignity.

International powers swallowed doubts about the new government’s shaky foundations and the UN Security Council passed resolution 2259, declaring the GNA Libya’s legitimate government. Its haste followed reports by UN sanctions monitors that both Dawn and Dignity had built up their military strength, after the UN failed to enforce its arms embargo. The GNA moved to Tripoli from Tunis on this past March – but worried about a lack of support and threats from Dawn leaders not to allow the GNA into the capital, or even shoot down its plane, the Serraj and other leaders arrived by motor launch. By then, two pro-Dignity members had quit the presidency, changing its balance more in favour of Dawn.

Since arriving in Tripoli, the GNA has failed to exert its authority, remaining in the city’s naval base and relying on Dawn militias for security. Sanallah and Kabir announced their own re-appointment and the GNA issued no objection, causing furious reaction in Tobruk.

Serraj convened talks between Libya’s rival NOCs in late April, but refused eastern demands to appoint new leaders for the NOC and the CBL. On 21 April Tobruk, fearing it would otherwise lose control of the oil, chartered Distya Ameya to load 0.65m barrels for a UAE buyer from Hariga. The same day, Sanallah persuaded Agoco to halt the loading, issuing a defiant statement: “Agoco employees and port officials understood this was a political attempt to divide the country, and I am very proud that they resisted the pressure to load this vessel.”

In the event, Sanallah spoke too soon. On 25 April, with support of eastern NOC chairman Naji al-Maghrebi, the tanker was loaded and set sail, into a legal quagmire.

The Security Council had already declared Libya’s oil belonged to the GNA. But the UAE, together with Russia, continues to recognise the Tobruk parliament, saying they will do so unless it votes yes to the GNA – an original stipulation of the UN agreement.

This puts the countries at odds with the US and EU, which recognise the GNA, although conversely Russia has also signed the UN resolution giving GNA control of oil revenue.

No port authority

Legally, the UAE company could argue that it can buy oil from Tobruk because its own government recognises the HoR. But the tanker was due to transfer its load in Malta, which recognises the GNA. Malta refused it permission to enter its territorial waters. A further complication is that the GNA has breached the terms of its constitution, which calls for new heads to be appointed to the state enterprises, including NOC and the CBL.

The tanker crisis was settled when the UN sanctions committee blacklisted the vessel on 28 April and its owners agreed to send its cargo to a port controlled by Tripoli NOC. But the HoR then raised the stakes further, announcing on 9 May a total blockade of Tobruk port, banning deliveries to Glencore. Its logic was plain: it is fighting a battle against Tripoli, so exporting oil extracted in the east and through an eastern port would simply hand revenue to the west.

Simultaneously, Dignity, equipped with new planes, helicopters and armoured cars, launched an offensive pushing deep into the oil crescent in early May. Dawn, its forces also equipped with smuggled weapons, fought back with air strikes. By mid-May Dignity, superior in both tanks and jets, had established a solid front, capturing the desert town of Zellah and ejecting Libya Dawn from the most of the area. The PFG, which had sided with the GNA, switched to Dignity, giving Haftar’s forces a solid grip on eastern Libya.

“There will be no political solution in Libya until all sides exhaust themselves and are no longer inclined to fight”

The sides are fighting for control of oil-export capacity, but the impact of the conflict has already been to slash production. Output plunged from 340,000 b/d to about 200,000 b/d by mid-May. It is likely to fall further: the eastern port of Brega has now also signalled its support for the blockade, which could leave Libya’s only production coming from two western offshore fields, where output is around 70,000 b/d.

Meanwhile, IS continues to follow its plan to strike at all sides, to inflict maximum destruction to energy facilities – a goal it has made public. In early May it captured Abu Grain from Dawn, a victory that will close off Dawn’s access to the Sirte basin, aiding Dignity. Both sides are in effect engaged in a trial-of-strength along an old Libyan faultline: while the historical eastern province of Cyrenaica has a third of Libya’s 6m population, it contains two-thirds of the country’s oil reserves and productive capacity.

The eastern government wants a confrontation with western Libya, says Hamilton, “and they are going to use oil and military confrontation to provoke this. It’s no coincidence that they coordinated the oil blockade with the military offensive. But the blockade is going to be very dangerous for Libya’s finances.” NOC says that Libya has already lost almost $70bn in income from the collapse of its output in recent months.

Dignity leaders calculate that they can survive this game of brinkmanship longer than the GNA and Libya Dawn in Tripoli. Libyans depend on imports of food, clothing, medicines and petrol bought with oil income, and economic collapse is on the horizon. But the east calculates its smaller population centres can withstand the shock more easily than Tripoli, with two million inhabitants, and that Dignity allies Egypt, the UAE and Russia will step in to help Tobruk with critical supplies. Western governments have said they will now arm the GNA to fight IS, a move that seems to see Dawn’s battle in the Sirte basin as one against the terror group, not against Hafter and the forces aligned to what was previously the internationally recognised government. The east’s Gulf allies continue to provide weapons to Hafter and his Libyan National Army.

The east’s blockade carries technical risks. Agoco’s oil is waxy, so shutting down throughput to Hariga could lead to oil congealing in pipelines and deterioration of pumping equipment. NOC Tripoli may also halt the payment facility enabling Agoco to buy equipment in Europe. With the international community having shown willingness to switch recognition status to suit the political climate, both Dawn and Dignity have concluded that, long-term, possession is nine-tenths of the law in the oil war – either gaining control of oil-export facilities for their own side, or denying it to the other.

That war may be decided in the three-way struggle for the Sirte basin, with Dignity and Dawn battling each other – and IS. IS appears to have no option for selling the oil it controls, its aim being to destroy it and deepen Libya’s chaos. Publicly, both Dawn and Dignity have pledged to crush IS in Sirte, but the reality is that both see the other as the key threat, with IS more of an irritant. Dignity forces are now deployed in strength to prevent IS advancing from Sirte on the oil ports, while units further south are blocking Dawn from the fields themselves. Neither alliance relishes the prospect of losing men in bitter street fighting in Sirte.

Libya is already in effect split, only the central bank’s decision to continue payments to the east binding the two opposing regions

“There will be no political solution in Libya until all sides exhaust themselves and are no longer inclined to fight,” says US political analyst Geoff Porter. “The country is in for a long grind. That doesn’t mean actors shouldn’t continue to push the political track, but they shouldn’t expect much.”

International oil companies are mostly confined to the role of spectators. Italy’s Eni continues to draw significant income from Libya, principally through its Greenstream gas pipeline from the western terminal at Melittah, but other oil majors have either shut down or pulled out. BP and Shell abandoned exploration projects last year. Sanallah frequently tours Western capitals to speak at conferences, talking up NOC’s plans for new exploration and production. But for the foreseeable future those are pipedreams.

The outside world is almost powerless. The US, Britain, France and Italy, the key international supporters of the GNA, are left backing a fledgling government with no electoral legitimacy, minority support, no security force of its own and no control of the NOC. Libya is already in effect split, only the central bank’s decision to continue payments to the east binding the two opposing regions. For ordinary Libyans, the new round of war spells disaster. “The fight for oil will be the main problem, east-west,” says activist Nadia Ramadan. “My biggest fear is if the country gets divided.”

Tripoli NOC said in April that the civil war has already cost the country 880 million barrels in lost production. Not the least of Libya’s problems is that its oil – highly prized on international markets for its quality – was priced at $108 a barrel when war began in June 2014, but now fetches just $45/b or so. At that level, current production is unable to meet Libya’s needs, forcing the bank to draw on ever-depleting foreign reserves. Whoever wins Libya’s oil war, the victory may prove pyrrhic.

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