Could Libya’s Huge Oil Shutdown Last For Months?

Every episode of the late-1970s/early-1980s cult spoof TV soap-opera series, 'Soap', began with the recounting of a bizarre series of events followed by the phrase, 'Confused? You won't be after this week's episode'. The events behind every single oil shutdown in Libya that has occurred since the removal of long-time leader Muammar Gaddafi in 2011 make the introductions to 'Soap' seem as clear as crystal. The reasons that prompted the latest closures of the country's oil fields are no different and, given their eye-watering complexity, it may be a long time since the current standoff between the main actors involved is resolved.

It is apposite to note at this point that before Gaddafi was removed as leader, Libya had easily been able to produce around 1.65 million barrels per day (bpd) of mostly high-quality light, sweet crude oil. Production had also been on a rising production trend at that point, up from about 1.4 million bpd in 2000. Although this output level was well below the peak levels of more than 3 million bpd achieved in the late 1960s, its National Oil Corporation (NOC) had plans in place before 2011 to roll out enhanced oil recovery (EOR) techniques to increase crude oil production at maturing oil fields. There had also been plenty of interest from a slew of international oil companies (IOCs) to be involved in expanding production on existing fields and exploring new opportunities in oil and gas. After all, Libya still has 48 billion barrels of proved crude oil reserves - the largest in Africa.

Related: Oil Prices Drop as OPEC+ Considers Increasing Production in October

Following Gaddafi's forced exit from the top job, the power vacuum created sucked in multiple factions warring for the largest share of this huge oil wealth. By 2020, two broad power blocs had emerged - one being the rebel Libyan National Army (LNA) commanded by General Khalifa Haftar, and the other being elements of the then-United Nations (U.N.)-recognised Government of National Accord (GNA). A near-total blockade of Libya's oil producing fields had run from 18 January to 18 September of that year (conservatively estimated to have cost the country US$9.8 billion in lost oil revenues) before an agreement was reached between the two sides to end the dispute. Crucially, though, Haftar made it very clear that this agreement would be contingent on certain measures being undertaken that would more fairly distribute the revenues from oil sales between the principal warring factions. Very shortly after this demand by Haftar, then-GNA Deputy Prime Minister Ahmed Maiteeq said that an in-principle agreement had been made to establish a commission to determine by the end of 2020 how those oil revenues would be dispersed.

To address the fact that the GNA effectively held sway over the NOC and, by extension, the Central Bank of Libya (in which the revenues are physically held), the commission was also tasked to "prepare a unified budget that meets the needs of each party… and the reconciliation of any dispute over budget allocations… and will require the Central Bank [in Tripoli] to cover the monthly or quarterly payments approved in the budget without any delay, and as soon as the joint technical committee requests the transfer." According to a Washington-based legal source who works closely with the Presidential Administration on energy matters spoken to by OilPrice.com at the time, the NOC had been working on "alternative banking arrangements for the oil revenues that may or may not involve the input on final dispersal of more players [than Haftar and his LNA, and the U.N.-recognised elements of the GNA]."

However, the details of this were never worked through and no replacement ideas have been forthcoming since then. Consequently, Libya has been subject to repeated shutdowns of some or all of its oil fields, for various spurious reasons that simply disguise attempted asset-grabs by various of the warring factions involved. In the run-up to the current big shutdown, for example, a smaller one began in the first half of August seemingly caused by the arrest of Saddam Haftar, the son of General Haftar. The younger Haftar had been briefly detained at Naples airport after his name appeared on a European Union database over an arrest warrant issued in Spain for alleged weapons smuggling. This followed comments from former U.N. special envoy to Libya, Abdoulaye Bathily, that the country was becoming a mafia state dominated by gangs involved in smuggling operations, especially for arms. Indeed, last September, General Haftar travelled to Moscow for talks with Russian President Vladimir Putin, whose Wagner mercenary soldiers provide support for LNA forces in Libya. Early July also saw Italian authorities seize two Chinese-made military drones that were destined for Libya and disguised as wind turbine equipment.

One month on, the current shutdown stems from efforts to remove the present Governor of the Central Bank of Libya, Sadiq al-Kabir. General Haftar and his LNA forces in the east of the country (where most of Libya's big oil fields are located) oppose al-Kabir's removal. Prime Minister Abdul Hamid Dbeibah and his internationally-recognised Government of National Unity (GNU), based in the capital Tripoli in western Libya, want al-Kabir gone. As of a televised broadcast on 26 August, the separate Government of National Stability (GNS) - based in Benghazi in the east, and dominated by General Haftar's followers - said that a 'force majeure' would apply on all oil fields, terminals and facilities in the oil crescent, south and southeast, effectively halting the country's oil production. The following day, several key Libyan oil fields were offline, including the 70,000 bpd El-Feel field. Meanwhile, the Sirte and Waha oil companies both said in statements that they were gradually reducing their joint output of around 200,000 bpd of oil. As of the end of last week, Libya's crude oil production was down over 60 percent from the 1.15 million bpd average it had pumped in July. The last time such a shutdown was as rigorously applied by the same forces as are applying it now was the 2020 closure, and that lasted for eight months.

By Simon Watkins for Oilprice.com

More Top Reads From Oilprice.com

• Understanding Peak Oil: What It Is And Why It Matters
• ExxonMobil's Guyana Oil: A Trillion-Dollar Opportunity?
• Indian State Refining Giant Seeks $3.8 Billion Loan for Capacity Expansion