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TRIPOLI (Reuters) - An autonomy movement in eastern Libya said on Sunday it had formed a regional oil firm to start selling crude after seizing several ports, mounting a challenge to the government in Tripoli as it struggles to gain control of oil facilities.
The announcement, along with a plan to set up an eastern central bank, is a blow to efforts by Prime Minister Ali Zeidan to reopen oil ports and fields seized by a mix of militias, tribes and civil servants seeking political rights or higher pay.
Output is at a fraction of its capacity of 1.25 million barrels a day and Zeidan said Libya may find it difficult to cover its budget expenditure from next month.
Zeidan's government is struggling to rein in militias who helped topple Muammar Gaddafi in 2011 but kept their weapons.
In the east, known as Cyrenaica, tribes and militias have been pushing for a federal system of government, sharing power with the west and southern Fezzan.
The prime minister of the self-declared Cyrenaica government, Abd-Rabbo al-Barassi, said the eastern oil firm would be based for now in Tobruk, home to the Hariga port where protesters on Friday prevented a government-chartered tanker from loading 600,000 barrels of crude bound for Italy.
"We have formed a firm called Libya Oil and Gas Corp," Barassi told Reuters by phone from the movement's headquarters in the town of Ajdabiya near the oil port of Brega.
"We will wait for a response from Tripoli and Fezzan and hope for an understanding with them. Then the firm will sell oil and we will keep the regional share of Tripoli and Fezzan without using it," he said. The firm would later move to Benghazi, the regional capital, he said.
The announcement was made live on a nationwide television station. Oil insiders say it will be difficult to find buyers for crude belonging to the central government.
Hours earlier, Zeidan set a deadline of a week to 10 days for protesters to clear the oil facilities. "Otherwise we will take measures," he said, declining to be more specific.
Zeidan told reporters the government may find it difficult to cover budget expenditure from next month unless the oil protests end.
"The budget is based on the assumption that oil revenues flow for the (full) year," he said. "From next or the following month, there could be a problem covering expenditure. Due to the oil (export) delays the state is ... facing a deficit."
He said the blockage of the Mellitah terminal, owned by Italy's ENI and Libya's state-owned National Oil Corp (NOC), might force Italy to buy gas and oil elsewhere.
Protesters from the Amazigh minority group have stopped oil exports from Mellitah, 100 km (60 miles) west of Tripoli, and have threatened to halt gas exports from there too. The Amazigh, or Berbers, are demanding more political rights.
"Italy is now (Libya's) biggest partner. It would be a grave matter if gas exports got blocked because they import between 23 and 25 percent of their oil needs and also import gas. If now gas gets stopped, they might look for other sources and leave us," Zeidan said.
On Thursday, Italy's Foreign Minister Emma Bonino told Repubblica TV that ENI was "weighing closing wells". ENI declined to comment when contacted by Reuters.
Zeidan also said the government would give militias until December 31 to join the regular army or police or their government payments would be stopped. The government has tried to rein in the militias by putting them on the payroll of the interior or defense ministries. In practice they report to their commanders.
Last week, Tripoli saw street battles between rival groups, raising fears violence and assassinations common in Benghazi would spread to the capital.
Finance Minister Kailani Abdulkarim al-Jazi said there was a delay in preparing the 2014 budget because the government was struggling to gather information from a rising number of authorities with separate budgets.
Additional reporting by Feras Boslum in Tripoli and Stephen Jewkes in Milan; Writing by Ulf Laessing; Editing by Janet Lawrence