The business and politics of oil in Libya

The oil industry has become a frontline of Libya’s civil war. No other commodity better represents the complex nature of Libya’s political, security and economic instability. As a highly valuable commodity trapped within a bloody civil war, oil has the power to either unite Libya’s factions and rebuild the economy or rip apart the very fabric of Libyan society. Oil can be Libya’s salvation or its downfall. The actors on the ground must choose which path to follow.

Oil as Political Leverage

Oil is frequently being used as political leverage in a country teetering on the edge of redemption. Many actors see Libya’s oilfields as a chance to make financial gains, extract concessions from the government and gain a foothold in the political arena. The main battle on Libya’s oilfields is a bitter rivalry between two parallel National Oil Corporations (NOCs), both vying to be the sole caretaker of Libya’s oil.





1. Rival NOCs

Following the June 2014 parliamentary elections, the elected government in Tobruk attempted to exert its power over three institutions pertaining to the oil industry: the NOC, the Libyan Central Bank and the Libyan Investment Authority. However, its weak political stature meant that the Tobruk government could not enforce its rule. Eventually, the authorities created their own rival institutions, perhaps expecting that their own status as an internationally recognised elected government would immediately allow the new NOC (known as NOC Bayda) to become the caretaker of Libyan oil. Authorities in the east have been attempting to undermine and overthrow the initial NOC (known as NOC Tripoli) ever since, in an attempt to win political leverage and consolidate their perceived power. They went as far as trying to sell oil unilaterally in April 2016, before the tanker carrying its oil was blacklisted by the UN and was refused entry into Malta.

When the government in Tobruk attempted to exert its control over the three financial institutions in Tripoli, all three maintained their political neutrality. The internationally recognised NOC in Tripoli continues to avoid any alignment with the rival hardline factions based in Tripoli and Tobruk, consistently refusing to accept budgets proposed by the rival authorities. It is a strategic move designed to preserve the NOC’s international legitimacy, as the politics of Libyan oil not only plays out on the national arena but also in the international political arena, as evidenced by the UN wading in and placing sanctions on an eastern oil shipment. The rival NOCs are both vying for the allegiance of the many oil subsidiaries and joint ventures that manage the oil industry. They are also competing for international buyers to invest in their products and to provide them with revenue. The revenue that can be drawn from the oil and natural gas sector can provide the economic boost that Libya needs to recover: but only if international buyers can find an effective and impartial interlocutor with which to do business. A neutral and legitimate NOC is a good place to start.

2. Marsa al-Hariga

The rivalry between the two competing NOCs reared its ugly head at Marsa al-Hariga oil port in late April. Eastern authorities prevented a Glencore tanker from loading barrels at the port on behalf of the NOC in Tripoli, again using oil as political leverage and undermining the rival administration. The blockage caused storage facilities to reach capacity and production from the Messla and Sarir oil fields to stall, further threatening Libya’s exports. Oil exports resumed at the port of Marsa al-Hariga in late May, after the competing NOCs reached an agreement during talks in Vienna. The first shipment allowed 660,000 barrels of crude oil to be released from Hariga on the Seachance tanker. Data from Bloomberg estimates that the re-opening of Marsa al-Hariga would allow the Arabian Gulf Oil Company (Agoco) to increase the port’s daily production from 90,000 barrels per day (bpd) to 180,000 bpd.[1] Mustafa Sanalla, chief of NOC Tripoli, believes that the agreement could lead to the ‘progressive re-opening’ of other oil terminals such as Es Sider and Ras Lanuf, if Prime Minister Serraj can reach an agreement with eastern authorities and the federalist militias controlling the terminals.[2] For now, the deal has provided short-term economic relief for the Government of National Accord (GNA) and demonstrates that the two competing NOCs can come together in agreement for the benefit of the nation.

3. The GNA

Managing this bitter rivalry will be the GNA’s first real test in the national political arena. Libya needs a strong oil industry to provide revenue for an economic comeback, but the rival NOCs are still squaring off in a battle that threatens to tear the GNA apart before it even has a chance to consolidate its power. Analysts at Stratfor posited that the GNA could have bolstered the recognised NOC in Tripoli by simply undermining NOC Bayda into irrelevance. However, this would only have sustained the grievances of the east, prolonged societal fragmentation and baited eastern authorities into retaliation.[3] Instead, the two rival NOCs reportedly came to an initial agreement on a unified NOC in late May 2016. The agreement outlines that institutions from east and west will be united to form a single oil company, investment company and central bank. NOC Bayda Chairman Nagi Elmagrabi stated that the deal would keep the new corporation politically neutral.[4]

The oil rivalry has mirrored the political divisions that are still present in Libya even after the establishment of the GNA, proving that Libya remains a nation divided between east and west. The tentative agreement on a united NOC shows promise for the oil industry, but it is not yet out of the woods. Both sides need to come together through the GNA, collaborate successfully on the details of a unified NOC and put this matter to rest for the future of Libya. As the Atlantic wrote in early 2015: “oil facilities are Libya’s patrimony and it is being squandered by both sides”.[5]

The Problem with IS

Of course the question of oil is not neatly tied up in pure politics, but also poses serious security issues for the entire nation: namely the problem with IS. As a beacon of wealth and political leverage, the oil and gas industry is a prime target for any group wishing to make illicit financial gains from the industry or to sabotage it. IS has carved out a base for itself in Sirte which is, not so coincidentally, at the heart of Libya’s largest oil fields. IS has launched several brutal attacks against oil terminals at Ras Lanuf, inflicting casualties and causing damage to the heart of Libya’s struggling economy.

Some analysts believe that IS in Libya are mimicking their tactics in Syria and Iraq: that IS are intent on seizing Ras Lanuf and other oil terminals to incorporate oil revenues into their holistic illicit economy. Helima Croft of RBC Capital Markets, however, argues that IS has no interest in controlling the oil fields. Instead, Croft argues that IS’ goal is to sabotage state oil infrastructure, to ensure that the GNA cannot extract enough money from the industry to rebuild state apparatus and stabilise the nation.[6] IS do not thrive in stable nations: they thrive in failed, or failing, states, and it is in IS’ vested interests to ensure that Libya stays unstable.

This threat to oil infrastructure only adds impetus to the unification of the rival NOCs because a unified oil structure would stand stronger against an IS insurgency than fractured and competing entities. However, even with positive meetings between the two rival NOCs and the establishment of a unity government, Morgan Stanley still believe that IS attacks on oil infrastructure represent a significant risk to production recovery, and thus a significant risk to the normalisation of Libyan society.[7]

The Economic Equation

Economic resurgence will be an important factor in Libya’s political comeback. Libya has the largest proven crude reserves in Africa and was once the economic powerhouse of the continent. Pre-2011, the country pumped a rate of 1.6 million bpd of crude oil, contributing to up to 65% of government GDP.[8][9] However, the civil war has shattered the economy, output has dropped up to 80% and Libya is now the smallest producer in the Organisation of Petroleum Exporting Countries (OPEC).[10] The production decline, coupled with a fall in global oil prices, has lead to a drop in foreign currency reserves and a growing budget deficit.[11] This economic hardship would threaten any government’s stability, but it is threatening the GNA before it even has a chance to consolidate true political power.

Oil is Libya’s quagmire. The GNA would need revenue to rebuild the nation and its infrastructure: it would need revenue to pay state salaries, provide services for the population and finance a fight against IS. The GNA requires a hike in revenue that could arguably only be provided by the nation’s oil industry. Yet, the resurgence of a strong oil industry would be dependent upon an improved security situation and the resolution of a political rivalry between two competing NOCs. Oil revenue is dependent upon political stability, while political and economic stability require revenue. Both issues need to be addressed if Libya has any hope of rebuilding its nation.

Conclusion

In Libya, oil and politics are indivisible: the failed state cannot be comprehensively addressed without securing a stable oil industry and vice versa. Many analysts have cited the establishment of the GNA as a sign that Libyan oil production will soon spike: but Morgan Stanley believe that the lack of a strong GNA, the persistent precarious security situation, and the presence of armed groups such as IS, make the predicted oil spike unlikely.[12] Indeed, the vision of Libya as a resurgent economic powerhouse appears distant – but this is not impossible. Oil will continue to be held hostage as political leverage until all actors feel included on the political spectrum, the country’s fragmentation has been addressed and a legitimate, functioning government rules. Ultimately, the resurrection of Libya’s oil sector comes down to the will of actors on the ground.

[1] Caroline Alexander, Bloomberg, May 20, 2016. http://www.bloomberg.com/news/articles/2016-05-20/libya-oil-deal-allows-small-step-toward-healing-political-divide (accessed June 3, 2016).

[2] Caroline Alexander, Bloomberg, May 20, 2016. http://www.bloomberg.com/news/articles/2016-05-20/libya-oil-deal-allows-small-step-toward-healing-political-divide (accessed June 3, 2016).

[3] Stratfor, In Libya, Political Unity Starts With Oil, January 15, 2016. https://www.stratfor.com/sample/analysis/libya-political-unity-starts-oil (accessed June 7, 2016).

[4] Petroleum Africa, Libya Factions Agree on Single NOC, May 19, 2016. http://www.petroleumafrica.com/libya-factions-agree-on-single-noc/ (accessed June 9, 2016).

[5] Frederic Wehrey, The Atlantic, The Battle for Libya’s Oil, February 9, 2015. http://www.theatlantic.com/international/archive/2015/02/the-battle-for-libyas-oil/385285/ (accessed June 3, 2016).

[6] Helima Croft quoted in: Elena Holodny, Business Insider UK, Don’t count on this oil ‘wild card’ coming back anytime soon, June 1, 2016. http://uk.businessinsider.com/libya-oil-isis-2016-5?r=US&IR=T (accessed June 6, 2016).

[7] Morgan Stanley quoted in: Elena Holodny, Business Insider UK, Don’t count on this oil ‘wild card’ coming back anytime soon, June 1, 2016. http://uk.businessinsider.com/libya-oil-isis-2016-5?r=US&IR=T (accessed June 6, 2016).

[8] Libya 24, Libya to resume oil exports, May 19, 2016. http://www.libya24.tv/news-en/38550?lang=en&fb_ref=Default (accessed June 2, 2016).

[9] Geoffrey Howard, Control Risks, Libya’s volatile mix of oil and politics, February 2014. https://www.controlrisks.com/en/our-thinking/analysis/libyas-volatile-mix-of-oil-and-politics (accessed June 7, 2016).

[10] Libya 24, Libya to resume oil exports, May 19, 2016. http://www.libya24.tv/news-en/38550?lang=en&fb_ref=Default (accessed June 2, 2016).

[11] Caroline Alexander, Bloomberg, May 20, 2016. http://www.bloomberg.com/news/articles/2016-05-20/libya-oil-deal-allows-small-step-toward-healing-political-divide (accessed June 3, 2016).

[12] Elena Holodny, Business Insider UK, Don’t count on this oil ‘wild card’ coming back anytime soon, June 1, 2016. http://uk.businessinsider.com/libya-oil-isis-2016-5?r=US&IR=T (accessed June 6, 2016).

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