Financial, security woes put Libyan oil recovery on shaky ground

TUNIS/TRIPOLI (Reuters) - Libya’s oil production revival is being undermined by the same financial, economic and security problems that threaten the promise of stability and a better life for the divided North African nation.

Libya surprised many observers when it managed to raise its output fourfold to around one million barrels per day (bpd), boosting its only significant source of income.

Continued disruptions by a range of local groups demanding a share of the revenues, as well as a lack of funds for maintenance and investment, are preventing the National Oil Corporation (NOC) from consolidating those gains, oil officials, engineers at the major fields and analysts say.

NOC Chairman Mustafa Sanalla said last week that the corporation had only received a quarter of its 2017 budget, making a previously announced target of 1.25 million bpd by the end of the year “very difficult” to achieve.

Without sufficient investment, output would dip, he warned. “You can lose production at any time.”

One problem is that many of the gains made over the past year were relatively easy and cheap, said Riccardo Fabiani, a senior analyst at Eurasia Group.

“Now the problem in the east and other parts of the oil infrastructure is that you need more serious work to repair some of the facilities, so it’s more expensive, it’s technically more challenging ... and the additional volumes that will come out of that repair work are going to be more limited,” he said.

Fabiani predicted production is likely to hover between 700,000 and one million bpd in the short term.

Shutdowns have been caused mainly by armed groups making demands for their members, sometimes claiming to act on behalf of local communities seeking jobs and public services, but also by peaceful civic groups protesting economic hardships since the 2011 overthrow of Muammar Gaddafi.

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Sanalla has said repeatedly he will not negotiate with or make concessions to blockaders and has threatened to prosecute them, although the NOC also tries to support communities near oil facilities and develop relationships with them.

Limited resources and persistent lawlessness in a country split between rival political factions mean the NOC struggles to meet expectations, however.

“The National Oil Corporation is keen to preserve production but at the same time it’s a part of the problem,” said Ghaith Salem al-Rooq, a negotiator from Zintan who took part in talks to reopen blockaded pipelines near the western town.

“They have been making promises to those who shut down the fields, but never fulfilled their promises.”

In a statement to Reuters, the NOC said Rooq was not involved in the final negotiations that led to reopening the Zintan pipelines and maintained that no promises were made.

“All blockades have been lifted unconditionally,” it said.

Production at the southwestern Sharara field, which can pump up to 280,000 bpd, or more than a quarter of the country’s total output, is a frequent target of blockades.

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In the most recent incident, an armed group forced a two-day shutdown at Sharara in early October to demand salary payments, fuel supplies and the release of members that it said had been detained.

A new group called “Enough Silence”, made up of young people from six districts in southern Libya, has said it will peacefully blockade supply roads to Sharara to lobby for oil revenues to be spent on the neglected south.

“The problems are endless,” a spokesman for the movement, Mohamed Hamouzi, told Reuters by phone.

“We are talking about severe lack of medical, educational, and security services. There’s no liquidity at all,” he said, referring to severe cash shortages in banks across Libya.

“If our demands for solving these problems are not met we are going to shut down Sharara within two weeks.”

On Wednesday, a group of Gaddafi loyalists posted a video of four men standing over a pipeline at an unnamed desert location, threatening to cut supplies of oil and gas to terminals in the Zawiya refinery and Mellitus complex on Libya’s northern coast within 72 hours if one of their leaders was not released from jail in Tripoli.


With the largest proven oil reserves in Africa, pumping more than 1.6 million bpd before 2011, Libya’s production is closely watched. Along with Nigeria, it has been exempted from OPEC-led production cuts.

Adding to uncertainty are political divisions that the United Nations is trying to mend.

A current U.N.-backed government in Tripoli has been eroded by internal splits, lack of technical capacity and rejection by factions that control the eastern part of the country. It has also not been able to reverse a sharp decline in living standards or disband the many locally-rooted armed groups that hold sway in western Libya.

The World Bank projects a budget deficit this year of 22 percent, despite oil exports rising to an average of 0.62 million bpd from January to July.

Almost all public spending goes on state salaries and subsidizing basic products including imported fuel, more than 30 percent of which is smuggled back out of the country, according to NOC estimates.

Even without the disruptions, oil revenues would still not be high enough to resolve the economic troubles that many blockaders say they are protesting over.

“I think the fundamental dynamic, which is if you want your voice to be heard politically stage one is to have an armed group and stage two is to control critical infrastructure, doesn’t appear to be going away,” said Richard Mallinson, an analyst for Energy Aspects consultancy.

Additional reporting by Ayman al-Warfalli in Benghazi; Editing by Sonya Hepinstall