How Libya's oil troubles have literally become everyone's nightmare

Published June 11th, 2014 - 11:14 GMT
The existence of rival governments and rival prime ministers in Tripoli are a nightmare for foreign oil companies, oil traders and diplomats.
The existence of rival governments and rival prime ministers in Tripoli are a nightmare for foreign oil companies, oil traders and diplomats.

Even though saudi Arabian, Emirati, Kuwaiti, Iraqi and American shale oil production is at record levels and Chinese GDP growth and petroleum products imports have fallen to the lowest level in the past decade, world oil prices are high near $108 for Brent. 

This is due to the supply shocks in Libya.

The existence of rival governments and rival prime ministers in Tripoli are a nightmare for foreign oil companies, oil traders and diplomats. Libya has paid steep financial and diplomatic prices for its protracted political crisis since the fall of the Gaddafi regime. The central bank’s foreign currency reserves have fallen below $100 billion from $132 billion in July 2013. Libyan oil production has fallen from 1.5 million barrels a day in the last years of Gaddafi’s rule to less than 200,000 barrels a day now, a financial catastrophe for the Libyan state since Tripoli derives 95 per cent of government revenue from oil and gas exports. Libya’s central bank needs $3.5 billion a month just to pay for imports but the armed uprising in the eastern region has reduced  government oil revenue to only $1 billion a month, the reason for the accelerating fall in central bank reserves.

Major-General Khalifa Al Haftar has emerged as a significant new variable in Libya’s political equation. A member of the powerful Al Farjani tribe, Gen Al Haftar commanded Libyan troops during Gaddafi’s invasion of Chad in 1986, which was checkmated by French aerial support and military assistance. Gen Al Haftar was taken prisoner in Chad, accused of treason by the Gaddafi regime and formed a renegade Libyan National Army that launched a failed coup attempt against Gaddafi’s dictatorship. Gen Al Haftar and his Libyan “brigade” were later evacuated to the US and received paramilitary training near the CIA complex in Langley, Virginia, where he lived for almost 20 years.

Gen Al Haftar entered Benghazi from Egypt in March 2011 after the Nato began its ultimately successful air war against Gaddafi’s Jamariyah. The Libyan general is viewed in Washington, London and Paris as a political hedge against elements among the Libyan rebels as well as a future of a reorganised Libyan army after the assassination of General Younis, the chief of the anti-Gaddafi military force. Gen Al Haftar has attacked government-allied militias and demanded the suspension of parliament. Libya’s oil is valued by European refineries because of its low sulphur content and its low cost of tanker shipping across the Mediterranean.

Italy’s ENI, Spain’s Repsol and France’s Total had been particularly active in Libyan oil production and exploration, supported by their respective heads of state in Rome, Madrid and Paris. Libyan oil exports to Europe were never interrupted even though the Gaddafi regime survived a succession of military revolts and tribal insurrections, in contrast to the post-Gaddafi era. The Al Sharara oilfield in South Libya alone produced 350,000 barrels a day of light sweet crude for export to Italy, France and Spain. Al Sharara has been shut down six times since the killing of Colonel Gaddafi in October 2011 and now produces nothing. Kidnappings, assassinations, tribal blood feuds and militia violence has also forced the evacuation of foreign oil workers from Libya’s oilfields.

Foreign oil executives do not want to risk the lives of their employees in remote locations, after the horrific Al Qaeda assault on a BP and Statoil gas processing plant in the Algerian desert. In any case, foreign oil companies cannot produce crude oil as long as rival militias claim ownership of the oil and gas fields. Several US oil firms, notably Marathon Oil, have even tried to sell their shares in the Oasis oil drilling consortium but failed to find any buyers, even among the Chinese state-owned energy firms who acquired Apache’s stake in Egyptian assets.

A rebel warlord, Ibrahim Jadran, shut down the eastern Libyan oil export terminals on the Mediterranean coast, declared himself leader of the “government of Cyrenaica” (the ancient Roman province of eastern Libya) and formed his own oil export firm. A rival militia has shut down the Zawiya refinery while Berber/Amazigh tribesmen control the Melitah gas pipeline to Italy. The Sharara oilfield has been besieged by Taureg tribesmen, traditionally discriminated against by successive governments in Tripoli. North Africa’s largest oil and gas producer is now disintegrating under the law of the gun. The Libyan state is so weak it cannot protect its borders, control weapons trafficking and secure its oil and gas infrastructure or even its shipping lanes. Libya is pockmarked and ethnic and tribal hatreds that precede the rule of both Colonel Gaddafi and King Idriss Al Senussi. Arab tribal militias fight each other; Benghazi elites want to secede; and the Taureg, Tebu and Berber have their own militias. Libya’s descent into a Hobbesian chaos continues and is a primary source of supply risk in the international oil market.

By: Sarie Khalid 

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