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North Africa buffeted by fragile politics and markets

Libya's oil output is recovering. But both it and neighbour Algeria are struggling to market their barrels

Libya's violent ructions have recently inveigled the Gulf states, with the launch of air strikes by United Arab Emirates (UAE) fighter planes on Islamist militia targets in late August. That military engagement reflects the Gulf's discomfort with the rise of jihadist Islam, which they view as an existential threat. But the large Middle Eastern oil producers also see Libya as a challenge in more practical terms; given the dampening impact that reviving Libyan production is having on prices. 

The outage of more than 1 million barrels a day (b/d) of Libyan crude between mid-2013 and mid-2014, as a potent mix of industrial unrest and militant action sent production plummeting as low as 200,000 b/d, buoyed prices to the benefit of all Opec producers, including heavyweights like Saudi Arabia. 

Libya's fragile political leadership patched up a deal with the eastern rebels on 3 July, when the rebels agreed to surrender Es Sider and Ras Lanuf oil terminals. Since then, the country has staged an impressive recovery in production that has helped push crude prices lower. The 11-month blockade had shut in about 550,000 b/d of exports through those ports. Later, protesters also blockaded the 340,000 b/d El Sharara field in the west. That dispute is also now over.

By early October, Libyan production had reached 0.9m b/d, trebling production in the space of just three months. It remains well below the pre-2011 peak of 1.65m b/d. By mid-September, Libya's National Oil Corporation (NOC) was chipper enough to be targeting 1m b/d in output. That appears presumptuous. Militia violence continues and the country's government is now effectively divided into two camps - a secular, Western backed parliament based in Tobruk, and an Islamist-backed entity formed from the rump of the former General National Congress (GNC), which holds sway in Tripoli.

The fighting between the various factions - including those in the east, where jihadist elements are significant - means there is a substantial risk of oil production and exports being pulled down. NOC's ability to keep the oil sector afloat while GNC is seeking to challenge its remit appears limited.

No way back

There is little confidence that Libya has the capacity to re-emerge as a reliable Opec producer of old, given the extent of the chaos enveloping the country. Some international oil companies (IOCs), such as Germany's Wintershall, are still waiting on the NOC's green light to restart production.

Meanwhile, a dip in production reported on 21 September has raised concerns that the increase in output has already reached a ceiling. A sit-in protest at Sirte Oil Company by local residents demanding jobs was a reminder of the continued constraints confronting Libya. Recent protests have also cut output from Eni's Abu Attifel field, in the east, and at the Waha Oil Company-operated Jalo field. "The strikes at Zueitina, Abu Attifel and Jalo suggest a future of fluctuating production. My guess is the fluctuations will be large because from time to time Sharara, Sarir, Waha or other big fields might go down even if only for a week or so," says John Hamilton, a Libya specialist at Cross-Border Information, a consultancy.

Then there is the problem of marketing its barrels amid sharply rising tight oil production in the US, which has slashed that country's need for oil imports. Libya's rising oil output has arrived back in the market just as the Atlantic basin looks better supplied than it has in years. These fundamentals have left Libya, like its North African Opec partner Algeria, struggling to sell its crude, forcing NOC to discount its oil. Official selling prices are understood to be at record lows.
"There's not much chance of getting oil into the Atlantic basin at the moment as there's so much of it around. All West African light oil has been pushed out of the US market, so marketing is difficult in and of itself," says an oil consultant.

Libya faces a specific challenge in finding buyers, who have been spooked by the unreliability of the past year. "The politics is so febrile in Libya, even if they do seem to have an ability to produce in both the east and west. The trouble is it's sustainability and the marketing problems reflect that," says the consultant.
Many potential buyers don't know whether Libyan barrels will still be there in a few months time. Reorienting their crude slates towards Libyan crude again is risky.

In such circumstances, it may be too early to speak of Libya returning as a significant and active Opec participant - let alone re-adopting the 1.45m b/d quota it had before Muammar Qadhafi's fall - despite talk of it reaching 1.5m b/d by mid-2015. "How are you going to apply a quota on Libya with all this uncertainty in production," asks one oil analyst.

Rumours about infrastructure and reservoirs being overloaded because of the recent rapid rise in output are another worry for possible buyers, though no major technical blow-ups have been reported. Libya needs strong oil prices to build its production recovery. The weak budgetary situation means that the country lacks the resources that once enabled it to spend its way out of trouble with relative ease. Libya accrued a budget deficit of $16 billion for the first eight months of 2018, with budget revenue of only $11bn because of the extended oilfield shutdown, according to Libya's Audit Bureau.

Meanwhile, in Algeria

The story is a bit different across the border in Algeria, but it is no less gloomy. This long-term Opec price hawk has been pumping steadily at 1.1m-1.2m for the past few years, with little fluctuation in output, though maintaining this level is getting harder as big fields mature and state oil company Sonatrach struggles to entice IOCs to invest.

Political stability of a kind persists. Veteran president Abdul-Aziz Bouteflika won a fourth term in office in April 2014 and reappointed Youcef Yousfi as energy minister, providing a semblance of policy continuity in Algerian energy policy.

But Algeria has its share of problems, with the sacking of Abdelhamid Zerguine, the boss of Sonatrach, in July underlining the factional warfare that has afflicted one of the poorest performing NOCs in Opec. Political unrest - seen most brutally in the attack on BP's In Amenas gasfield facilities in 2013 - is an ever-present risk. Though its oldest fields have been kept going with the help of enhanced oil recovery, these efforts have largely run their course. As a result, predicts the US Energy Information Administration, Algeria's crude oil output will gradually decline, at least in the short- and medium-term.

Algeria is nonetheless still attempting valiantly to spark interest in its upstream, though energy regulator Alnaft announced on 30 September that only four of a possible 31 blocks were awarded to IOCs in its latest licensing round, launched in January this year - later than planned because of the attack at In Amenas. Despite all this turmoil, Algeria remains wedded to defending high oil prices. It has little alternative. "Algeria needs high oil prices and yet it has a declining production problem with nobody bidding in its latest round, which isn't a good sign. While these are all long-existing problems, the trouble is they are not being resolved," says the consultant. The government also needs funds to pay for an expansionary budget. State expenditure in 2015 will rise by 15% to $111bn, according to a draft budget approved in August. But if an Opec oil price cut is what Algeria wants, don't expect it to take any oil off the market. Says the Arab oil analyst: "Algeria will never cut. It never has and it's not going to change now." 

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