What a new government in Libya means for oil and pipelines

Libya has a unity government for the first time in seven years which is good news for the oil industry
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Monday 14th March 2021 was a new dawn in Libyan politics. For the first time in seven years, a unity government was sworn in with far-reaching consequences for Libya, the region and the oil industry.

Since the toppling of former dictator Muammar al-Qaddafi, Libya has been in turmoil. The country was split by warring factions and two duelling administrations, Fayez al-Sarraj’s United Nations-recognised government based in Tripoli in the west of the country and the administration of General Khalifa Haftar in the east.

The chaos led to instability and oil became a key bargaining chip. Libya is home to Africa’s biggest crude oil reserves, the majority of which are located in the east.

General Haftar’s supporters regularly prevented ports such as Es Sider, Ras Lanuf, Marsa el Brega and Zuetina from exporting in protest at what they felt was an unfair distribution of national oil revenue, all of which was funnelled through Tripoli.

Other militias and rebels would close down ports, pipelines and refineries all over the country in a bid to force the government into doing their bidding.

And if it was not oil facilities being shutdown, then it was oil infrastructure failing. Civil war meant years of little or no investment, resulting in leaking pipelines and faulty equipment, contributing to a 94 percent reduction in oil production when comparing 2020 levels to 2011 before Qaddafi was ousted.

Barely any oil was being pumped in the summer of 2020 when a truce was announced. The prospect of a unified government saw facilities reopened and resulted in steep growth in the second half of the year. Production in Libya climbed above one million barrels of oil per day in November.

Now that it is in power, the overriding objective of the new government will be to formalise peace. That will not be easy as plenty of divisions still exist between groups with conflicting interests ahead of scheduled elections in December.

Also high on the priority list will be restoring key services and rebuilding infrastructure. Various sectors have suffered through nine years of civil war.

To undertake a mass regeneration programme takes money, which is where oil comes in. The more oil that Libya can start exporting, the more they can raise for regeneration across the country.

As the new government takes office, Libya is now pumping 1.3 million barrels per day, more than several other members of the Organisation of Petroleum Exporting Countries (OPEC).

The National Oil Corp (NOC) wants to increase this to 1.45 million by the end of 2021, 1.6 million by 2023 and 2.1 million by 2025. To achieve these numbers, new oil fields will come online in the central and west of Libya and fields shut down by Islamic State attacks in 2015 are to be reopened as a matter of urgency.

Like many organisations in the country, the NOC is cash-strapped because of the civil war, even though it was one of the few institutions that managed to work with both sides across the west-east divide.

The NOC needs government assistance if it is to fulfil those ambitious targets, which will only be met if oil infrastructure across Libya can be upgraded.

Terminals are in a state of disrepair, storage tanks are collapsing due to corrosion and a widespread oil pipe repair programme is required.

If peace holds, then further investment might be forthcoming from foreign energy companies like Total SE, Eni SpA and Repsol SA, who have previously invested in Libya but scaled back their commitment during the civil war.

How seriously the government is taking oil is shown by the appointment of an oil and gas minister, Mohamed Aoun. Mr Aoun is well-known in the industry having previously been Libya’s representative to OPEC.

One advantage Libya currently enjoys is that because of the conflict, it is exempt from the supply cuts imposed on other OPEC members. OPEC has attempted to restrict the amount of oil being supplied in an attempt to boost prices following the collapse caused by the Covid-19 pandemic.

The speed with which Libya reached production rates of over a million barrels per day caught OPEC by surprise, impacting on the price of oil as more produce flooded the market.

Despite this, no OPEC member has yet called for Libya to be subjected to the restrictions – and with the price of oil climbing to a level whereby influential nations such as Saudi Arabia and United Arab Emirates can start turning a profit again, it seems unlikely that Libya will have supply cuts forced upon it anytime soon.

Good news for Libya, good news for its government and good new for its oil industry.

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