Wood Mackenzie: Libya hits production landmark but political divisions overshadow outlook
In August 2016, blockades of key export terminals and pipelines saw production fall below 300,000 barrels per day (bpd). Output has since rebounded. Credit is due to NOC and its indefatigable boss, Mustafa Sanalla. The company has been integral to the country’s production recovery, resisting demands by militia and tribes and methodically calling out how much "spoilers" have cost the country. Campaigns to keep oil flowing have reduced and shortened the length of disruptions, and attempts by the eastern House of Representatives (HOR) administration to market crude independently have receded. NOC remains one of the last functioning institutions of the state, able to act independently of Libya's competing administrations with the goal of depoliticising oil restoring output.
Other events, including repairs to infrastructure damaged by insurgents, field restarts and blockades on major pipelines being lifted, all contributed to growing production.
But doubts remain that these increases can be sustained. Fighting and blockades continue to cause output to fluctuate, and Libya's myriad of tribes and militias continue to target infrastructure as a means to leverage their demands. NOC previously announced that it had hoped to reach 1.25 million bpd by the end of this year, ramping up to 1.5 million bpd by the end of 2018. This now looks ambitious, even by NOC's own admission.
In the near term, we consider that Libya may now be approaching its production limits. There are a number of reasons for this. Export ports are key to incremental growth. Crucially, capacity at As Sidrah, the country’s largest port, was reduced by rocket attacks in 2016. Reinstating Sidrah's capacity to its pre-war level of 450,000 bpd will take several years. It is uncertain how much of this capacity has been destroyed, but we estimate it to be operating at less than 100,000 bpd. Effective export capacity is thus estimated to be restricted to around 1.25 million bpd.
Realising available capacity will require remedial efforts upstream. Near- to medium-term incremental gains will be more modest, as the easiest gains have been made. In the east, in particular, greater investment will be required to address years of under-investment in ageing facilities and leaky pipelines.
Looting and sabotage have also taken a toll: up to 100,000 bpd of production is understood to have been lost due to attacks on facilities. Many of these projects, including Mabruk and Ghani, will require complete rebuilds. This will not occur until the security and the investment climate has improved markedly.
IOCs will be reluctant to return capital so long as insecurity and competing administrations persist.
Accessing equipment, already harder with port closures, and undertaking basic maintenance compound the challenge. The exodus of service companies and hefty risk premiums will drive up costs significantly, once companies judge the environment safe enough to resume operations.
The most readily accessible upside barrels may be in the west where El Sharara and Elephant (El Feel) could perhaps yield an additional 100,000 bpd with some investment. Infrastructure in the west is also newer and has not been subject to sabotage.
We do not see Libyan production returning to pre-war levels until well into next decade and think that, without IOC involvement, maintaining and realising modest gains on a baseline of 1 million bpd could be considered a success in itself.
Conversely, greater downside exists. Production remains highly susceptible to disruptions. A deteriorating political situation or further shut-ins of key infrastructure could limit production to offshore fields and NOC fields in the east which have remained consistent throughout.
For investors seeking steady barrels and predictable cash flows, Libya has long since lost its lustre. North American companies have demonstrated less risk tolerance than their peers. We consider further divestments from companies holding mature, non-core positions plausible. European incumbents and Asian NOCs looking for long-term barrels are the likely buyers, but would-be sellers may wait for greater stability to capture price upside, rather than selling at a discount.
For others, Libya still holds appeal. Billion-barrel brownfield developments, lifting costs below $5 per barrel and proximity to European markets make the conflict worth sitting out. European IOCs have come to view the risks as manageable; whilst a reticence to invest will continue, some are beginning to return gradually. Volumes present a large upside and, when oil flows, cash flow is good. Prolonged stability could yet see operators in the west, where an outlet for production upside exists, and recommence development drilling in 2018.
The return of Libyan oil to the market has come as other OPEC and non-OPEC parties have agreed to extend production cuts in a bid to boost oil prices. Libya was exempt from recent OPEC accords as it struggled to rebuild production lost due to internal fighting and instability. How long OPEC continues to exempt Libya from quotas will ultimately depend on how the political situation unfolds.