Libya’s comeback continues to surprise oil markets

By Salma El Wardany on 11/27/2020

(Bloomberg) --Libya’s oil industry, trampled by civil war and chaos, is roaring back.

Crude output has surged to nearly 1.25 million barrels a day from almost a dead start in September, thanks to a tentative peace between rival military forces. The OPEC member is already pumping about three-fourths as much as it did before the 2011 uprising that toppled strongman Moammar Al Qaddafi and triggered the country’s political and economic collapse.

The speed of the recovery took oil markets by surprise. It’s also causing anxiety for the Organization of Petroleum Exporting Countries and allies such as Russia as they restrict global output to prop up crude prices. Libya is exempt from the cuts and currently supplies more oil than several of its OPEC peers. The so-called OPEC+ alliance is sure to weigh the impact of Libyan oil when it meets next week to assess its strategy as the coronavirus ravages fuel demand in much of the world.

The big unknown about Libya’s production -- for traders, analysts and oil minsters alike -- is whether it can be sustained or even increased to pre-conflict levels of around 1.6 million barrels a day. The boost in output over the past two months may have been the easy part. To produce still more crude, the country will need buckets of cash to fix and upgrade its energy infrastructure. That in turn will require a lasting peace and political settlement.

“Libya will likely struggle to produce above 1.3 million barrels a day,” said Mohammad Darwazah, an analyst at consultant Medley Global Advisors. “There is not much upside from these levels in the absence of investment.”

Libyan officials have hinted that they won’t discuss a potential OPEC quota for the country until it’s pumping at least 1.7 million barrels daily. OPEC typically gives any member suffering from conflict several years to recover before trying to cap its output.

Although Libya holds Africa’s largest crude reserves, years of strife and lost production have impoverished the government and state-run National Oil Corp. The NOC must repair damage to its oil fields, pumping stations and other facilities, many of which have been idle for years. The lack of routine nuts-and-bolts servicing has left pipelines corroding and storage tanks collapsing. Remedial work at wells alone could cost more than $100 million, NOC Chairman Mustafa Sanalla told Bloomberg in June.

Sanalla said last month that the country targets pumping 1.6 million barrels a day by the end of 2021. The company has ambitions of eventually supplying more than 2 million barrels daily, an NOC official said to Bloomberg on Thursday, asking not to be identified because the matter isn’t public.

To achieve that, the NOC will need more money from oil exports as well as investment from foreign energy partners who pulled out amid the fighting.

International oil companies, including Total SE, Eni SpA and Repsol SA, have stakes in the country. But they’ll probably be loath to invest more until they see a durable peace accord and improvements in security. Many of them have withdrawn foreign staff.

In an incident highlighting the security risks Libya continues to face, the headquarters of the NOC itself came under attack in the capital Tripoli on Nov. 23. Armed men tried to storm the building but were stopped by guards.

Libya pumped 80,000 barrels a day in August, the thinnest trickle in nine years. It’s now producing on par with Angola. The main reasons for the turnaround: A blockade of many of the country’s ports and energy facilities ended in September, and Libya’s warring factions signed a permanent cease-fire agreement in October.

Multitrack negotiations, led by the United Nations, are feeding hopes of an end to a conflict in which Turkey has backed the Tripoli-based government of Prime Minister Fayez al-Sarraj and Egypt, the United Arab Emirates and Russia have supported eastern military leader Khalifa Haftar. The two sides have reached a preliminary agreement to establish a unified government and hold elections within 18 months.

Even so, there’s plenty of room for doubt. Previous efforts to broker a lasting peace have faltered, and because the nation’s strife has hardened into a proxy war involving regional powers, a lasting political solution also depends on events elsewhere.

The distribution of Libya’s oil wealth has been a major sticking point. People in eastern Libya long complained that they received less than their fair share from the Tripoli government based in the west. Their grievance was one of the main reasons for the oil-ports blockade in January; left unresolved, it could once again shatter the country’s relative calm.

Institutional infighting poses another risk. In an unprecedented step, the NOC this week said it won’t deposit money from crude sales with the central bank, keeping it instead with another lender until rival sides in the country’s civil war can reach a long-term political agreement. The NOC accused the central bank of issuing inaccurate data about oil revenue. This seemingly bureaucratic spat hints at a deeper dispute that could complicate efforts to move past the war and threaten Libya’s oil recovery.

“As long as the cease-fire holds, and political progress continues to be made, Libyan production will likely remain on the market,” Darwazah said. But if the NOC’s disagreement with the central bank spills over into the political process, he said, “that would be a warning sign.”

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