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Libya's oil output restrained

Investment is needed to boost production capacity

Oil analysts collectively raised their eyebrows in late November when news emerged from Opec that Libya had joined the organisation's production cuts, reversing its much-touted expansion plans.

Previously, Libya's National Oil Corporation (NOC) had hoped to get production to 1.3m barrels a day by the end-2017, with further increases this year. Instead, the meeting's chair, Saudi energy minister Khalid al-Falih, announced that Libya, along with Nigeria, wouldn't raise output.

NOC has yet to confirm or deny such a production cut, which would limit output to its current 1m b/d, but nor has it renewed talk of expansion. Until November, NOC chairman Mustafa Sanalla had resisted calls to join Opec cuts, arguing that Libya needed the money. NOC officials believed they had a strong case to raise production because it's far below the 1.6m-b/d figure Libya enjoyed before and shortly after the 2011 revolution.

Libya's production recovery began in September 2016 when the Libyan National Army, commanded by Khalifa Haftar, captured four oil ports serving the Sirte Basin, a collection of fields in central and eastern Libya containing two-thirds of Libya's production.

By last summer, production had tripled to hit the million mark, triggering Sanalla's announcement of 1.3m b/d by year's end. With that plan apparently on hold, Libya is nevertheless seeing smaller incremental production gains: in January a complicated arbitration dispute between NOC and UAE's Al Ghurair group, joint owners of Lerco, operator of Ras Lanuf, Libya's largest refinery, was settled. Both sides agreed that refining, abandoned in 2012, would resume later this year.

Also in January, local tribes ended a three-month blockade of the Sirte Basin's As-Sarah field, operated by Wintershall, adding 55,000 b/d to national output. Then Nafusa Oil, an NOC joint venture with Indonesia's Medco Energy International, announced new production of 10,000 b/d from Block 47 in the southwest.

Meanwhile, mediation appears to have ended industrial and militia disputes which last year periodically closed Libya's biggest producing field, the 270,000-b/d Sharara, a joint venture involving NOC, Repsol, Total and Statoil. In a hopeful sign for the future, BP and Shell have returned to the Libyan market after a three-year absence, albeit thus far as buyers, with no plans to revive upstream operations.

NOC has probably reached the limits of what can be fixed without major investment. Most notably, Es Sider's and Ras Lanuf's capacities are limited because most of their storage tanks were wrecked by fighting, and only major engineering can replace them. "All the low-hanging fruit has been picked, the remaining reconstruction is more complex, it will need overseas companies to come in and do it," says Geoff Porter, director of US-based consultancy NARCO. But, with Libya torn between two governments, one in Tripoli and one in Tobruk, plus a galaxy of warring militias, foreign companies are nervous to risk personnel, rigs and finance there.

Sanalla insists investment is possible: in November, he announced the opening of an NOC office in Houston, Texas, saying NOC and foreign partners were ready to commit $20bn to the oil sector over the next three years. Yet no US company has shown interest in committing such sums, and neither has either of Libya's governments.

Sanalla, meanwhile, is battling against corruption, including what he calls "ghost stations"—gas stations that have closed, yet continue to receive petrol from NOC, their operators then selling it on the black market.

Adding to Sanalla's problems is the return of Islamic State, which has apparently recovered from defeat in 2016, striking on 1 February at the Sirte Basin's Dhara oilfield, operated by Waha Oil Company, an NOC joint venture with US firms ConocoPhillips, Hess and Marathon.

In the quest for peace, the UN's Libya envoy, Ghassan Salame, has unveiled what he calls a "Road Map" hoping for elections later in 2018 to unite the country. Yet simply holding an election in a country dominated by armed factions will be a tall order.

One silver lining for the NOC is that Opec's output cuts have seen the oil price edge upwards, touching $70 a barrel from the mid-50s last year. If the price holds, Libya could find itself getting close to the same income from 1m b/d as it would have expected last year from 1.3m b/d.

Source: Petroleum Economist
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