Libyan oil can continue to provide a stabilising effect for global oil balances but the promise of its upstream must also be matched by political progress too, APICORP says in a new report.
Libyan oil production in recent months showed, once again, its significance to global markets. A near-doubling of output between July and October, to 1.28 million barrels per day (mb/d) came just as Libya’s fellow OPEC members sought to lift production to offset losses elsewhere and keep global supply balanced. Yet Libyan oil-output volumes since 2011 have been volatile. Output was almost 1.6mb/d on the eve of the revolution that year. Since then, production has oscillated within a wide band, dropping as low as 200kb/d and topping out at around 1.4mb/d. Having almost reached that level again now – an achievement given significant headwinds facing the sector – further growth is plausible by 2020. It depends on the kind of political stability that will give investors confidence to carry out work upstream and midstream, including replacing damaged facilities and infrastructure.
Libyan oil’s advantages
Libya has four distinct advantages as an oil producer – the reason why international oil companies (IOCs) have for decades been so keen to invest in Libya’s upstream oil sector. First, its reserves remain substantial: at more than 48 billion barrels, or just under 3 per cent of the world’s total, the deposit is Africa’s largest, and Libya enjoys a reserves-to-replacement ratio of 153 years. National Oil Corporation (NOC), the state oil company, believes further exploration will significantly expand the recoverable-reserves base. Although the Sirte Basin has been extensively explored, the Murzuq, Ghadames, Kufra, Cyrenaica Basins and offshore Gulf of Sirte have been relatively under-exploited and still hold huge potential.
Second, Libyan oil is relatively easy to extract, and the installation of production and export infrastructure has historically been straightforward, allowing the oil-rich hinterland to be connected to several distinct export terminals on the more populated coast (see map on page three). This pipeline network is extensive, allowing for significant expansion of production when it becomes available. By comparison with many other oil basins, Libya offers few of the geographical obstacles to easy exploration and development.
Third, except for some offshore oil production on the Pelagian Shelf, offshore Tripoli, Libya’s oil streams offer sweet, high-quality crude oil that can command a premium in international crude oil markets. It is the sheer quality of this oil, and therefore its direct influence on the top end of the crude-oil-market complex, that makes the country’s supply so significant to the world economy. It is no coincidence that the International Energy Agency’s most recent emergency stock release occurred during 2011, to replace oil lost as Libya’s energy sector shut down during the civil war that year.
The fourth advantage, is that Libya’s oil is also close to major consumer centres. Sailing times to European ports, which take the bulk of Libyan crude-oil exports, range from two (Sardinia) to 11 (Rotterdam) days, compared with close to a month for Asian destinations. Even so, Chinese, Taiwanese and other Asian countries are now also significant importers of Libyan crude – another example of the increasing importance, particularly in recent months, of Libya’s oil to global markets. Significant natural gas reserves, especially in the Ghadames Basin, have also allowed Libya to become a major exporter of gas to Europe through the Greenstream Pipeline to Italy.
Oil receipts dominate the economy: according to the IMF, oil accounts for more than 90 per cent of fiscal revenue, a share higher than in any other Arab oil-exporting country. Non-oil exports of goods and services are under 3 per cent of total GDP, according to the most recent data available. This is relevant in considering the prospects of Libya’s oil output, for three reasons.
First, it links the Libyan real economy more closely to movements in international oil prices than many other oil exporters: this exposes the post-2011 political landscape to exogenous economic and oil price shocks. Second, oil’s significance to the economy means the sector has been contested between local rival groups. Prospects for further production growth will rely therefore on a settlement between competing parties about how best to handle Libya’s current and potential oil wealth. Third, as Libyan parties and international partners seek a peace settlement, the country’s energy sector could further thrive, leading to higher flows of oil revenues.
Oil sector more resilient to instability
Competition for oil assets in Libya has been a theme in Libya since the events of 2011. Three distinct phases since then have been visible and are reflected in the changes in Libya’s oil output – the fourth is yet to come. First, between mid-2011 and mid-2013, a period of relative stability allowed the swift recovery of almost all oil output lost during the civil war. These years included elections to form a new government (after the war-time National Transitional Council handed over power) and efforts to draft a new constitution. The events of 2011 had inflicted little damage to energy infrastructure and production growth back to more than 1.4mb/d was achieved in little more than six months. It was an astonishing recovery and testament to the wealth of professional expertise within the Libyan oil sector. This was not the last time that the resilience of the country's energy industry would surprise outside analysts.
Events in Tripoli laid the ground for the next phase, from September 2013 to September 2016. A political split in the country manifest itself in several ways. First, in mid-2013, the Petroleum Facilities Guard (PFG), entrusted with securing key oil-export infrastructure, shut down the ports of the Sirte Basin’s oil crescent. The closure lasted until September 2016. Libya’s economy struggled in these years, making efforts to build a new post-revolutionary landscape more difficult. Partly because of this, oil-output disruptions grew more frequent, as armed militias established a pattern of shutting fields and infrastructure to demand higher salaries and improvements in conditions.
Another manifestation was the advent of two rival parliaments and governments and the emergence of two broad alliances fighting on their behalf. In Tripoli, the General National Congress (GNC) held power. A second parliament, elected in 2014 to replace it, eventually based itself in Tobruk.
In the east, tensions between the two drove instability that continued until late 2015 and affected the Sirte Basin, Libya’s most prolific oil province. Insecurity at the two export terminals of Ras Lanuf and Sidra reduced throughput so that oil production between mid-2013 and September 2016 averaged 390kb/d, less than a quarter the output of 2010.
The third phase, still underway, began in September 2016, when NOC regained operational control of the Sirte Basin and output began to rise, cresting 1mb/d in April 2017. Production has dipped periodically since then due to disruptions but has also rebounded strongly so that in October 2018, NOC said output was at 1.25mb/d. Once again, the resilience of Libya’s oil sector defied outside sceptics – and revived hopes that a period of sustained stability would underpin a fourth phase to come: one in which NOC can deliver on plans to regain 2011 output levels of 1.6mb/d in 2019 and push towards 2mb/d by 2022.
This phase also enhanced the ability of NOC to capture a higher price for their crude. Despite the higher quality, Libyan crude prices have been depressed relative to other types of similar crudes as delays in deliveries due to disruption in production and unplanned maintenance meant that traders shied away from buying Libyan crude. However, such issues have largely been reduced as traders are gaining more confidence in the ability of NOC to deliver. Moreover, buying interest from new players, including Chinese refineries, has increased. For the last few months, loadings have remained largely on track and deliveries have been very much on schedule. The NOC agreement with Shell to provide oil for the rest of 2018 helped stimulate trust from other participants.
Rapid oil-output growth
The third phase has set up the fourth by already delivering some notable positive developments for Libya’s oil sector in the past year. Some oilfield service activity has resumed, including the return of Schlumberger to work with Sirte Oil and Gas, a unit of NOC. Wintershall and Gazprom have restarted production from the As-Sarah field, in the Sirte Basin. Drilling activity in the country has increased. More rigs are now operating than at any time since 2014. Offshore, ENI has brought new wells online at its Bahr Essalam development. Some international oil companies are pledging onshore investment, including exploration.
Earlier this year, Total announced its plan to buy Marathon’s stake in Waha, operating in the Sirte Basin – a demonstration of the French firm’s commitment to the country. BP and ENI announced plans to begin exploration in the Ghadames Basin, in Libya’s west, as part of a transaction that transfers some of BP’s interest in the concession to ENI. AGOCO, the largest producing company in NOC’s stable, has issued tenders for surface work. NOC exudes optimism – chairman Sanalla has become a tireless advocate for both Libya’s upstream and the state company’s political independence and reliability.
The next step requires a conducive environment for these announcements to materialise into projects under execution. To date a handful of oil and gas projects are commissioned, namely on the gas side, totalling $3 billion with a further $350 million in the planning phase. This is compared with the $4.5bn worth of projects that were due for completion between 2011 and 2017 that have been cancelled. More significantly, $16 billion worth of projects awarded since 2008 have been put on hold, amongst them, the $3bn renovation of the Marsa LNG project, the $5 billion Zuwarah refinery and the $2.5 billion Wafa field development.
NOC faces some challenges ahead. Insecurity has left some infrastructure damaged, which will force NOC to undertake remedial and repair work. New storage tanks are needed at Es-Sider and Ras Lanuf in order to facilitate higher loading rates for tankers. Higher production, if sustained, should however create a virtuous circle, allowing for more funding of the oil sector to repair facilities and therefore expand capacity.
Prospects for lasting peace
In a statement to the UN security council earlier this month, Ghassan Salame – the UN envoy to Libya – highlighted that the Libyan conflict is in large part “a conflict over resources”, and that stability is conditional on its resolution.
In the first half of 2018, oil revenues reached $13 billion, in turn due to higher oil production and a recovery in prices. But it is also true that the citizens are not seeing these revenues translated efficiently into public services or benefits. Recent reforms have been launched, aimed at improving living conditions and reducing opportunities for militias. For instance, the introduction of fees on foreign currency transactions reduced the black market rate by 25 per cent and helped close the gap between the black market and the official rate.
Whilst further reforms on phasing out fuel subsidies, should also curb the arbitrage that has stimulated cross- border smuggling. The country is beginning to see a surplus, reducing the liquidity crisis. The conference in Palermo held earlier this month could provide an opportunity to gain the support needed to establish a system for redistribution of national wealth for the whole population.
Salame praised a “much higher level of conviviality among Libyan stakeholders” and considered the conference a success and a "first step in the right direction".
However, at the end of the conference, there has been no written agreement and no clear timetable as to when to hold the national conference or the election process.
Stability in the country is conditional on security, a healthy economy, and a functioning political environment. This is critical to NOC’s efforts to increase oil production and secure the necessary inward investment in the upstream. After years of under-investment, several fields, including AGOCO’s Sarir, need improvements to electricity supply and replacement of some infrastructure. Providing a stable environment in which this kind of work – as well as well-workovers, pigging operations, in-fill drilling, enhanced recovery, and so on – can be carried out unhindered, will be a key part of NOC’s plan to lift oil output to 2mb/d by 2022. If achieved, this too, will create another virtuous circle, allowing greater oil income not only to sustain NOC’s expansion plans, but to support much-needed investment in the non-oil economy and improvements to social infrastructure.