Oil revenue access drives conflict
General Khalifa Haftar's LNA is battling the GNA for control of Tripoli. But what are his options and what are the longer-term implications for the oil sector?
Haftar's Libyan National Army (LNA) — long a regional hegemon, with a smattering of allies in other parts of the country — has in 2019 made a concerted attempt to become a truly national force.
Haftar has a core support base in eastern Libya, where the LNA has been fighting under a counter-terror narrative since 2014. Through careful coalition building, he has gradually cemented the support of most communities in the east, as well as the eastern branches of Libya's main political and economic institutions, including the parallel government based in Bayda.
In recent months, the LNA has expanded its reach into southern Libya and has also gained more allies in the western region. Due to these recent advances, almost all of Libya's key pipelines, fields, ports and terminals are now under LNA control, aside from the Zawiyya and Mellitah terminals and offshore fields. Its forces hold all five oil ports in the eastern and central regions, and more than 90pc of the country's oil fields.
However, despite securing these oilfields and ports, the LNA does not receive direct revenue from the sale of oil in areas under its control. Both international and Libyan laws require all of Libya's oil to be sold by the National Oil Corporation (NOC), with all the oil payments to be received by the Central Bank of Libya (CBL). Both these institutions are headquartered in Tripoli, meaning Haftar needs to control the capital in order to influence how the revenue streams are allocated.
Although the LNA has thus far been able to access alternative financial resources, reports indicate that these funds are drying up, exacerbated by the CBL cutting off access to hard currency for eastern commercial banks. If the money dries up, many of the LNA's auxiliary fighters may well disappear. An injection of counterfeit Russian-printed dinars could temporarily alleviate the LNA's financial pressure but cannot fix the underlying fact that Haftar has overextended himself geographically and financially.
The LNA controls more than 90pc of the country's oil fields
But admitting defeat would undermine Haftar's leadership and the current cohesiveness of the LNA, leaving the eastern faction severely weakened. Consequently, even though it seems that a decisive military victory for the LNA in Tripoli is unlikely, retreat is not an option.
On the opposing side, the main factor unifying the anti-LNA forces is their desire to prevent Haftar taking control of the capital and to forestall the existential crisis that would likely follow. Prior to the LNA's advance, many of these actors were squabbling among themselves for power, contracts and supporters. The government of national accord (GNA), and its prime minister Fayez al-Serraj, is the figurehead for this grouping, but has very little power over the militias fighting in its name.
Although most international actors continue to nominally recognise the GNA as Libya's legitimate sovereign and pay lip service to the need for a negotiated political solution, many countries overtly or tacitly support Haftar and his military operation — including Egypt, the UAE, Russia, Saudi Arabia and France. As a result, the UN Security Council has called for a ceasefire, but not for Haftar to backtrack territorially or politically. The GNA, a direct product of the international community, is quickly being abandoned by it. If the LNA takes Tripoli, the GNA would flee into exile or collapse completely. Serraj will, therefore, use any means available to him to prevent this from happening, including politicising the oil sector.
Politicisation of oil sector
The upshot of these local and international conditions is that protracted conflict around Tripoli and increasing polarisation of state institutions is the most likely scenario over the coming months. The paradox of the current situation is that, despite the growing instability, oil production in March hit its highest levels since 2013, at around 1.28mn bl/d, and in May production remains at around 1.1mn bl/d.
However, this is likely to be the calm before the storm. The de facto military stalemate is already having a destabilising impact on Libya's oil sector and this trend is only likely to increase in the coming weeks, as reiterated by NOC chairman Mustafa Sanalla in recent public statements.
From a purely security perspective, there is an increased threat of disruption to oil infrastructure. The Sharara and al-Feel oil fields are likely to see attempts by armed groups to retake the fields from the LNA. The LNA was only able to secure these fields in February after making deals with local communities, but the provision of security and supplies that underpinned these arrangements is now failing.
Opposing forces stationed around Sirte and the Oil Crescent region are on high alert and tensions appear to be growing, putting Sidra and Ras Lanuf oil terminals in the crosshairs. Disruption at any of these facilities would significantly decrease overall production.
However, Libya's oil fields and ports frequently face insecurity or blockades, therefore this does not represent a significant deviation in Libya's risk profile. The real threat, which could have devastating long-term impacts on the sector as a whole, is the increasing politicisation of the whole sector. This could unravel the tacit cooperation between Haftar and NOC which has stabilised Libyan oil production since September 2016.
NOC neutrality under fire
Sanalla's willingness to work with any group that can secure oil facilities effectively, and his subsequent success in increasing oil production, has strengthened NOC and encouraged slow but steady steps towards mending internal divisions within the institution. It has also allowed Sanalla to woo IOCs and oilfield services firms, further helping efforts to normalise the sector.
However, these developments have been predicated on NOC being perceived as a neutral actor, and that looks to be increasingly in doubt, despite Sanalla's best efforts.
The GNA has very little power over militias fighting in its name
Initially, NOC and its subsidiaries managed to stay out of the polarising dynamics created by the Tripoli conflict. This changed when NOC issued a statement condemning the LNA's militarisation of facilities at Sidra and Ras Lanuf and threatening to prosecute those responsible. The move was interpreted as an intervention in favour of the GNA, leading eastern NOC subsidiaries to publicly pledge their support for the LNA and its operation against Tripoli.
The following week, Serraj threatened to suspend the operations of 40 foreign firms in Libya, including France's Total, after he received lukewarm support from European heads of state. This was not of NOC's making, but the targeting of a major oil player is indicative of an increasingly risky environment for IOCs in Libya.
With us or against us?
NOC's neutrality has been the linchpin allowing the "dual-key" system, where one entity controls oil security, the other sales and revenue, to function. However, remaining neutral in these polarising times will be very difficult for NOC, especially as actors increasingly adopt the stance that if you are not with us, you are against us.
If the fighting drags on in Tripoli, it becomes increasingly likely that the LNA will attempt to export oil illicitly through the parallel eastern NOC, allowing it to directly pocket the proceeds and feed its war machine. Attempts are already underway, with the UAE-based Sulaco Group reportedly signing a contract with the eastern NOC to lift 2mn bl from Hariga port. While such attempts have been made in the past, they have usually been unsuccessful due to US and UN intervention. In the current climate, it is less certain that international actors will be as robust in their condemnations and counter-efforts as they had been previously.
If NOC's export monopoly is broken by eastern forces, or if the LNA refuses to export via NOC, up to 90pc of oil production could face uncertainties over its future export. Any large-scale production shut-in would be catastrophic for the Libyan economy, its people, and long-term prospects for the integrity of the Libyan state. The precise permutations are as numerous as they are concerning, but one certainty is that Libya's oil sector will not emerge unscathed if the conflict and political polarisation continue unabated.
Rhiannon Smith is the managing director and Jason Pack is the founder of Libya-Analysis, a consultancy which specialises in forecasting reports and mapping products of Libya's oil and shipping sectors.