A fractured oil sector
Years of civil war and terror have severely damaged Libya's energy capability. A recovery faces many hurdles
The unification announced in July of Libya's rival National Oil Corporations (NOCs), one in Tripoli, the other in Tobruk, should allow for a significant rise in Libyan production. That was the idea, anyway. The catch is that for now any decision to lift output rests not with the leaders of Libya's oil sector, its embattled NOC, or even their sponsoring rival governments, but with warring militias who control ports and fields.
The problem became plain in late July when Ibrahim Jadhran, head of the Petroleum Facilities Guard (PFG) that controls four key central oil ports, demanded a cash settlement to re-open them. The demand, and perceived encouragement from Martin Kobler, envoy of the UN's Special Mission for Libya, drew sharp criticism from NOC's chairman Mustafa Sanallah. In a letter leaked to Petroleum Economist and later in our interview with him, he complained that the payment amounted to a bribe and would encourage other militias to demand the same, putting the country's production at risk. Representatives from the Tripoli government went ahead and signed the deal with Jadhran anyway.
Welcome to the bitterly political, divided, dangerous and endlessly complex world of post-Qadhafi Libyan oil. It has become a constant source of anxiety for the global oil market. So prized is Libya's high-quality crude, that events in its oil patch remain hugely significant for prices. Yet the basic fundamentals and moving parts of the sec-tor are poorly known, leaving investors, traders and other outsiders bewildered.
A crux, if not a climax, in Libya's dis-order may be nearing, and is likely to play out in the country's once-prolific oil-producing heartland, the Sirte basin.
Libya's current civil war began in 2014-three years after the earlier one that ousted Muammar Qadhafi-and is now a three-cornered contest. Islamic State (IS) is fighting in the Sirte basin against Misratan Libya Dawn militias allied with the government in Tripoli; while Libyan National Army (LNA) forces belonging to General Khalifa Hafter's Operation Dignity, allied to a rival Tobruk government, and which have been battling other Islamists, are also now set up in the basin. IS's presence in the oil crescent, as the area is known, has been a major factor-alongside chronic underfunding and other factional violence-in the decline of Libyan production, which is now barely more than a sixth of output in early 2013, before the political vortex took hold. When and if IS is finally dislodged from Sirte, the three-way battle is likely to end up as a two-way one, with the two militia umbrella groups that have been fighting since 2014-Dawn and Dignity-squared up on a frontier whose location has everything to do with both sides' urge to control Libya's economy.
Before the war, hydrocarbons formed 95% of Libya's exports, and most of its 6m people depend on income from these receipts through pensions, subsidies and payments to a grossly inflated public sector which alone absorbs 60% of state spending. Oil receipts are not enough to meet this outlay; the difference being made up from foreign reserves. Libya is one of the world's least transparent states, but the World Bank estimated these reserves plunged from $107bn at the end of 2013 to $56bn two years later. Worsening all this: when the civil war began in July 2014 Brent Crude was priced comfortably above $100 a barrel. Ironically, perceptions of a recovery in Libyan oil output in the summer of 2014 helped spark the slide in global prices. Now they remain low in spite of Libya's troubles, and the country's oil revenues for the first seven months of 2016 were just $2.3bn. Even at today's oil prices, the value of Libyan production at its pre-war capacity would be close to $2bn a month. Instead, thanks to the lost output, it is less than $0.4bn. The US envoy Jonathan Winer tweeted recently that simply to meet its spending needs Libya would need production of 0.8m b/d.
The urgency to increase oil production seen in the Jadhran deal-and the rush by rival governments to control energy installations-are because Libya is surviving on fast-diminishing foreign reserves. Without higher production, soon, the country will run out of money.
Production at present of 200,000 b/d is made up roughly from 70,000 b/d produced at two offshore fields northwest of Tripoli and 130,00 b/d from eastern fields that are below their pre-war capacity. The central Sirte basin has capacity for 0.6m b/d and the western Murzuk basin for at least 400,000 b/d. But both are shut in.
The four Ps
A political settlement, even a partial settlement, will open huge opportunities for western specialists and project managers, with Libya's oil industry in desperate need of upgrades to the four Ps-pumps, pipelines, ports and power generation. All suffered decades of decay under the Qadhafi regime, partly as a result of international sanctions. The decline accelerated in the 2011 revolution and five years of chaos, war, underinvestment and neglect.
Agoco predicts that Sarir/Mesla could double production to over 400,000 b/d with improvements to pumping stations, wellhead pumps, better management at Hariga port and an upgrade of turbines at the antiquated Sarir power plant, where sporadic failures undermine production.
War has put huge obstacles in the way of international oil companies and services firms that once saw rich opportunity in Libya.
Even shipping in and out of Libya has grown more difficult. Insurance rates are spiralling for tankers lifting from the open ports. Frequent threats by Dignity to bomb tankers deemed unauthorised-the last warning in July, in response to the Jadhran deal to reopen the ports-and air strikes on two tankers in the past year, have combined with fears of charges for delays in loading or turnarounds caused by wildcat strikes. Brokers at London's Lloyds say that, while rarely refusing insurance, they will sometimes quote the hull price as the premium-in other words, an owner is charged the price of a ship for a single journey.
Libya's own tanker fleet, General National Maritime Transport Company (GNMTC), is now limited to about a dozen vessels capable of putting to sea and too small to take the strain. A Tripoli shipping manager says that plans, backed by UK and German banks, to create a Saudi Arabia-style dedicated Libyan oil-tanker fleet were turned down by the Qadhafi administration, with recent governments too chaotic to revive them. GNMTC has mainly been involved recently in shipping small cargoes between Libyan ports.
In late 2015, NOC chairman Sanallah signed two controversial contracts, opposed by Tobruk, giving Swiss-based Vitol exclusive rights to supply Libya with petroleum products, and Swiss-based Glencore a monopoly on exports from Hariga. In theory, this may oblige both to run shippers to fulfill commitments when other owners might not, at least giving Libya a guaranteed outlet for its crude. But the contracts are opposed by eastern politicians-leaving the ever-present threat of it shutting or refusing to supply Hariga.
The state-owned holding company is as antiquated administratively as it is technically, and still operates under rules laid down by Qadhafi that mean it has no real budget, but must request specific items from the government of the day. Executives at two NOC units Agoco and Sirte Oil Company complain, for example, that to get spare parts obliges them to request money from NOC, which in turn has to find a government coherent enough to process the request. A 2014 NOC reform plan has gone nowhere. NOC chairman Sanallah says the new unity government continues to withhold funds needed to start a recovery.
Before the revolution, Libya's oil production was considered under-par, and a near-doubling to 3m b/d was part of the aim of 43 exploration concessions made over the past decade. Onshore exploration and the search for greenfield offshore deposits has now halted altogether, following an exodus of big players: Shell suspended exploration in May 2012 and BP followed in January 2013, abandoning four prospective offshore blocks in the Gulf of Sirte. Total in 2014 suspended plans to install a rig to explore on the fringes of the offshore Jurf field. Security remains the chief obstacle: international oil companies (IOCs) won't commit money or personnel until signs of political stability arrive.
IS has been adept at exploiting the security vacuum. In March last year it rampaged through 11 Sirte basin fields, killing guards and stealing or wrecking equipment. The fields have been shut ever since. Hardest hit was Mabruk Oil Operations's Mabruk field (capacity 40,000 b/d), where surface facilities were heavily damaged. Further south, nine staff were kidnapped by IS at Zella, in which Austria's OMV is a partner. Dawn forces supporting the GNA have made major gains against the self-declared IS caliphate around Sirte, besieging the terror group inside the city. Combined with US strikes on IS's main western base at Sabratha in February, this has diminished the group-but it retains a guerrilla capability and members are thought to have fled into Libya's south. IS has explicitly stated its intent to strike at Libyan energy infrastructure.
The country's militia-strewn landscape is the biggest disincentive to IOCs, and was made sharper by a law passed in 2012 forbidding private-security companies from operating in Libya. IOCs with pre-existing contracts are allowed to deploy unarmed security staff, but newcomers are not. This effectively means IOCs doing business in Libya would need to pick a militia, and hope this does not lead to conflict with rival militias, or shake-downs for more money. Despite its name, the PFG is more akin to a militia-with tribal roots and untrained soldiers-than a genuine energy-installation security force.
Libya's fields and pipelines are notoriously difficult to secure and easy to damage. Early in the 2011 revolution, despite rebel control of eastern Libya and Nato air support, Qadhafi was able to send a jeep-bound column east to destroy the Sarir field's pumping station 9, crimping what was then the only exporting pipeline. Front lines in Libya are loosely policed, with all sides able to evade patrols for strikes deep into the other side's territory.
Offshore production, insulated from the onshore violence, has been Libya's sole constant, averaging over 60,000 b/d. It is evenly split between the Bouri field, operated by Mellitah Oil and Gas Company, a joint venture between NOC and Italy's Eni, and Jurf, operated by Mabruk Oil Operations, an NOC joint venture with France's Total and Germany's Wintershall. Eni also produces gas in the same area.
East: Sarir/ Mesla
The cluster of Sarir 1,2,3 and Mesla fields have been Libya's workhorses and together they are Libya's biggest producer. Benghazi-based NOC subsidiary Arabian Gulf Oil Company (Agoco) operates them. But Sarir was shut in August, and output from the complex was only around 130,000 b/d. The fields are located deep in territory held by Dignity-the militia grouping allied to the Tobruk government-which has control over the fields and their export pipeline to Hariga port, at Tobruk. Hariga's nameplate export capacity is 120,000 b/d, and the facility includes a 20,000 b/d refinery. A 10,000 b/d refinery is also integral to Sarir.
Production could ramp up quickly from the southwestern Murzuk basin's two key fields, Sharara (340,000 b/d), jointly operated by NOC and Spain's Repsol, and Elephant, also known by its Arabic name El Feel (100,000 b/d). It is operated by Mellitah Oil and Gas, a joint venture between Eni and NOC.
The fields and two pipelines running north to NOC's export terminals at Zawiyah (200,000 b/d refined- or crude-export capacity, and fed by Sharara) and Mellitah (160,000 b/d capacity, fed by Elephant) are reportedly in good shape, but political obstructions have closed production. One of Dawn's Misrata militias controls Sharara and allied militias from the Tebu ethnic group control Elephant; but Dignity's Zintan militia have blocked pipelines since 2014. Zintan also controls the nearby Wafa gasfield, run by Mellitah Oil and Gas, which feeds the Greenstream pipeline from Mellitah to Italy. That remains on line, and shipped 7.6bn cubic metres last year.
The Zawiyah complex also includes Libya's most secure refinery (capacity 120,000 b/d, but operating well beneath this): the PFG unit protecting it is independent from Jadhran, staffed by Zawiyah militiamen and with a surveillance security centre with video over the perimeter and a dedicated coastguard boat to intercept attacks from the sea.
Zintan's militias have not damaged the pipelines to the ports, closing valves at Riyayna, 40km north of Zintan. This should mean the pipes can, technically at least, be re-opened rapidly. But the politics are complex. Zintan is the most powerful Dignity militia in western Libya and reopening will depend on a wider political settlement between Dignity and Dawn-a dim prospect for now.
Centre: Sirte basin
The Sirte basin is the heartland of Libyan oil production and exports. But it is also the apex of frontlines in the war: Dawn to the west, Dignity to the east and IS holding onto the coastal town of Sirte.
Production mostly ceased after Dawn attacked two export terminals, the NOC-operated Es-Sider, (447,000-b/d capacity) Libya's largest oil port, and nearby Ras Lanuf (refined- or crude-export capacity of 220,000), also Libya's largest refinery, in December 2014. The attack failed, but several storage tanks were damaged at Es-Sider, prompting NOC to declare force majeure at the port. It hasn't been lifted, despite assurances from Jadhran-who hasn't the authority to end the measure but whose PFG control the ports-that they will be soon.
The biggest Sirte Basin producer is Waha Oil Company (capacity 350,000 b/d), an NOC joint venture with US firms Hess, ConocoPhillips and Marathon Oil. Its Gialo, Waha, Samah and Dahra fields are linked by a long looping pipeline from the southeast of the basin to Es-Sider. This means it is vulnerable to attack and can operate only if the basin is under singular control. Five years ago, Waha had plans to almost double production to 0.6m b/d, the limitations being pipeline and port capacity.
Harouge Oil Operations, an NOC joint venture with Canada's Suncor (after it bought PetroCanada), can pump 100,000 b/d from its Amal, Farlah, Ghani, Jofra and Tibesti fields in the central basin. But IS destroyed four of the 13 storage tanks it uses at Ras Lanuf in January.
Germany's Wintershall, partnering with Russia's Gazprom, is the only foreign oil company operating in Libya without an NOC joint venture, and can produce 100,000 b/d from eight fields in the eastern part of the basin. It has suffered numerous stoppages, but last year partnered Agoco in completing a 52km bridging pipeline allowing it to shift exports from Ras Lanuf to Zueitina port (capacity 70,000 b/d), south of Benghazi. The port has survived the war unscathed but pipelines connecting to it have been frequent targets. In August Libyan National Army (Dignity) forces were preparing to take it from Jadhran's PFG. The port did, though, begin loading a 0.6m cargo of stored oil for shipment to Zawiyah.
Zueitina Oil Company (capacity 58,000 b/d), an NOC joint venture with the US' Occidental and Austria's OMV, operates a tight cluster of fields centred on Didda and Zella and feeds Zueitina and Ras Lanuf. Many of these fields were among 11 damaged by IS in March 2015.
Sirte Oil Company (capacity 35,000 b/d), a unit of NOC, operates the central and eastern fields of Raguba, Bahi and Nasser. It exports oil to Brega terminal (total capacity 60,000 b/d, including output from a small refinery). The fields and the port have been undamaged by war. The fields are tightly concentrated and away from the Dawn and IS frontlines; while Brega is controlled by militias from local villages, outside the control of the PFG, and has remained open throughout the conflict. Most of its exports are shipped to Zawiyah refinery for processing into fuel for Tripoli.
This article is part of a report series on Libya. Next article: The oil world's most difficult job