Is Libya A Bigger Threat To Oil Prices Than U.S. Shale?

Submitted by Gregory Brew via,

Despite some suggestions that oil prices will level off at around $60 in 2017, since the initial surge of the OPEC production deal prices have barely nudged above $53. Over the long-term, outlooks are more bearish than bullish, and a major reason for that is the strong likelihood of increased production in three places: Libya, Nigeria and Iran.

All three countries were effectively exempt from the OPEC production cuts, for various reasons. Iran has agreed to keep its production level below 4 million bpd, allowing it to add about 90,000 bpd to its production level. Nigeria has suffered significant cuts to production over the last year, chiefly due to the activities of militants in the Niger River Delta.

Libya has been torn apart by civil war and a fight between its recognized government and separatists in its eastern regions, with the country’s rich oil fields and refineries the major prize in frequent skirmishes.

Cuts from OPEC members totaling 1.5 million bpd, together with non-OPEC cuts of nearly 600,000 bpd, have already pushed prices above the their threshold in 2016 of $50, but there’s strong evidence that the initial market impact of the OPEC deal is on the verge of playing itself out. Over the next year, activity in these three countries could continue to exert downward pressure on prices.

That is, of course, if Libya is able to stay the course and succeed in bringing its oil industry back to full strength. While the immediate outlook for a strong recovery in Libyan production is good, the political situation in the country is uneasy and instability, in the form of renewed fighting between rival factions, could return to disrupt oil production.

Libya succeeded in bringing the bulk of its oil production and export capacity back on line in Fall 2016. Between September 2016 and January 2017, Libyan production climbed from 300,000 bpd to nearly 700,000 bpd, a three-year high according to the National Oil Company (NOC). The increase came after military forces succeeded in retaking key installations in the east of the country, where separatist sentiment is strongest.

The government has announced plans to increase production to at least 1 million bpd by the end of the year. These plans were delayed this week by an electrical failure at the Sarir oilfield, which cut 60,000 bpd in production. This will likely be a short-term outage, and only days before, a spokesman from Libya’s internally recognized Government of National Accord (GNA) boasted that the country’s oil production had already exceeded 750,000 bpd.

Already, the country’s production has increased twenty-three percent since November, according to Bloomberg. A spokesman for Libya predicted on Tuesday that the country would its goal and pump 1.25 million bpd by the end of the year.

In 2011, before the revolt toppled the government of Muammar Qaddafi, Libya produced 1.6 million bpd. To recover to that level, the country will need between $100 and $120 billion in outside investment to rebuild its damaged infrastructure and explore new fields. There has been a moratorium in place since 2011, but the GNA announced on Tuesday that Libya’s oil fields are now open to foreign investment. 

How quickly production can reach the anticipated level of 1 million bpd depends on conditions inside the country, where violence could escalate and the weak grasp of the GNA over the oil fields and export facilities could be broken. American air strikes have helped Libyan authorities decimate local forces loyal to the Islamic State (ISIS), but the immediate future for Libya’s political stability are uncertain, with trends pointing towards a bid for power by General Khalifa Haftar, who had attempted to seize power in 2014 only to fail and endure a brief exile in the United States. He is now positioned to make another move towards putting himself in power, with strong backing from Russia’s president Vladimir Putin.

Haftar, as leader of the Libyan National Army (LNA), an organization with only loose ties to the GNA, has shunned the government in Tripoli and built a powerbase in the east of the country. The general was recently welcomed aboard a Russian aircraft carrier returning from Syria, and analysts now point to Libya as another arena in which Moscow is exerting its influence in the Middle East. Haftar, though previously backed by the United States, is now recognized as a Russia-backed actor with aspirations to seize control over Libya from the GNA.

Attempts by countries like Italy, which has a historic connection to Libya as its former colonial master and maintains strong strategic and economic interests there, to stabilize the GNA have had only a limited effect, as the government appears too weak to exert much influence over the other rival factions, including Haftar and the LNA.

Should Haftar, or forces loyal to him, attempt a move against the unsteady government in Tripoli, it could trigger greater instability in Libya, upsetting oil production. With production now just recovering, and an unsteady peace between Tripoli and Haftar, the immediate chances of a coup in Libya seem remote. But a change in the political situation could once again disrupt Libya’s recovering oil industry, with a corresponding upward effect on oil prices.