Oil companies divided over Libya’s future

As government control over key national infrastructure in Libya deteriorates, oil companies are beginning to ask serious questions about their future in the country

Two days before an armed group surrounded the Corinthia hotel in Tripoli and kidnapped the Libyan prime minister – only to then release him six hours later – Ali Zeidan had called on Western powers to help secure what was left of the state’s control of the country.

On October 10, Mr Zeidan was taken by a militia that accused him of corruption and collusion with a United States Special Forces raid that resulted in the capture of Abu Anas al-Liby, a man wanted by the US on suspicion of involvement in the 1998 embassy bombings.

“This was an attempted coup. My political opponents are behind my abduction and they wanted to force me into resigning after failing to unseat me,” said Mr Zeidan, likely alluding to Libya’s Muslim Brotherhood, in a speech following his release.

The kidnapping was not the first assault on a top-level official this year. In March, Mohammed Magarief, the then-president of the country’s National Congress and de facto head of state, survived an armed attack on his car. He resigned two months later.

The Tripoli-based administration’s tenuous grip on power has been further undermined in recent months by the growing strength of regional militias and a spate of senior government resignations.

Interior minister Mohammed Khalifa al-Sheikh and deputy prime minister Awadh al-Barassi both resigned in August. Mr Al-Sheikh had spent just three months in the post and blamed a lack of support from Mr Zeidan for his departure.

Government instability has caused secessionist groups to grow bolder. The armed Barqa Youth Movement, supported by regional militias and former deputy defence minister Saddiq al-Ghaithi, is openly declaring the autonomy of Libya’s oil rich Eastern Cyrenaica region.

“What we’re seeing in Libya is a descent into lawlessness and political chaos that is making life very difficult for oil companies,” Valerie Marcel, Chatham House petroleum sector specialist, tellsThis is Africa.

“On the one hand there are labour concerns, which the government has gone some way toward mitigating, but then there is also a seemingly intractable problem of militias trying to establish oil fiefdoms and then using that power politically.”

Falling production

The lack of government control over resources is causing international oil companies to become more cautious about committing to long-term production plans. In October the International Monetary Fund warned that “uncertainty is keeping investors away and prompting those who are active to scale down their activities”.

An European oil company with significant investment in Libya indicated that IOCs were particularly concerned by signs of smaller militias coalescing into larger more powerful entities.

Wintershall, Germany’s largest oil and gas company which holds a concession in Eastern Libya, tellsThis is Africathat the country’s security situation is having an adverse effect on its production levels.

“We would like to reach the pre-crisis production level of 100,000 barrels per day again as quickly as possible, but it is not currently possible to say when this will happen,” says the group’s Verena Sattel. Wintershall has invested more than $2bn in oil production in Libya.

“The return of some of the necessary expertise and services to Libya is being delayed because of security concerns. In addition, we are continuing to see limits to the Libyan export infrastructure despite the availability of a new replacement pipeline – owing to protests and strikes,” she explains.

Canadian oil company Suncor, which produces oil in Eastern Libya through a 49 percent stake in a joint venture called Harouge, says militia activity have affected its operations. “Since the export terminals have been shut down we have cut back to minimal operations and are keeping in close contact with the NOC about events on the ground,” explains Kelli Stevens, a spokesperson for the group.

“We’re confident that we have the ability to weather this storm, and I believe we’d be in pretty good shape if the terminals were to reopen, but we also do need a safe environment for our staff to operate in,” she says.

OMV, an Austrian oil producer with 30 years experience in Libya and ongoing operations in the west of the country said it was committed to staying the course. “The situation in Libya is clearly very fragile, but we understand the importance of international oil to the country’s economy and we are not considering abandoning our operations there,” Johannes Vetter, a spokesperson for OMV, tellsThis is Africa.

Italian oil company ENI SpA, which has a large percentage of its portfolio in Libya, has publicly stated that “extraordinary events” in Libya have affected the company’s performance. “First half results were affected by a difficult economic situation across Italy and Europe, production interruption in Libya and Nigeria and by the fall in Saipem’s results,” chief executive Paolo Scaroni said in a second quarter statement.

British Petroleum said that security concerns had led to the postponement of some of its oil exploration plans, but that it was going ahead with offshore exploration in Libyan waters in 2014.

“We are planning to start our first offshore exploration well during late 2014, in the Sirte basin. Our exploration plans for the onshore acreage in the Ghadames region are on hold at the moment given the security situation across the region,” a spokesperson says.

Libyan oil minister Abdelbari Al-Arusi has disclosed that US company Marathon Oil is considering selling its 16.3 percent stake in the Waha Oil consortium and exiting the country. “For companies like Suncor, Marathon, and ConocoPhillips which work in the East of Libya, and have had production shut down, the situation is very bad,” says Femi Oso, North Africa analyst at energy consulting firm Wood Mackenzie. “It’s becoming more and more difficult for those companies to make the case for staying in Libya.”

Oil dependence

Libya, a member of the Organisation of the Petroleum Exporting Countries, has around 48bn barrels of proven crude oil reserves, the fifth largest in the world, and 38 percent of the total reserves for the whole of Africa.

Following the discovery of oil in Libya in 1959, US, British, and Italian oil companies led foreign exploration of the country’s reserves. The industry was nationalised after Muammar Gaddafi’s 1969 coup against the British-backed king Idris, but US and European companies kept tabs on the oil, which was judged to be of very high quality.

Libya’s National Oil Company is now responsible for around half of production, with another half falling to international producers. The export market is primarily European, with 23 percent of oil exported to Italy, 12.5 percent to Germany, 9.7 percent to France, and 4.7 percent to the UK. Around 10 percent of Libya’s oil is exported to China.

The successful production and export of petroleum products is critical to Libya’s export-led economy, representing 98 percent of total exports and 99 percent of government revenue.

But in the last two months militia activity has caused oil exports to fall as low as 150,000 barrels per day, just over a tenth of 2012 levels. At the time of publication production levels are at 30-40 percent of capacity.

Chatham House’s Ms Marcel argues that the latest security concerns are so serious that there is a very real chance of European oil companies substantially shrinking operations in Libya.

Growing militancy

Much of Libya’s oil and petrochemical infrastructure has fallen under the control of armed militias like Mr al-Ghaithi’s, which once fought against Mr Gaddafi and have fluid relationships with plant security guards and workers.

Those militias are now locked in a standoff with a government which, they claim, is funnelling the fruits of the East’s oil fields to Tripoli. Just two of Libya’s six largest terminals are currently operating. A force majeure has been declared by the National Oil Company on the remaining four.

Most of Libya’s major ports and refineries are located around the lucrative Sirte basin. The eastern coastal ports of Es Sider, Ras Lanuf, and Zueitina, which lie between Sirte and Benghazi, and Marsa al-Hariga near Tobruk, have all experienced shut-down by armed groups and strikes by loading workers and local port security personnel within the last two months.

In mid-August striking security guards at the Es Sider terminal threatened to start selling the oil themselves if the government refused to acquiesce to demands for higher wages. The workers were backed by the influential leader Ibrahim al-Jathran, then regional head of the government organisation responsible for securing oil installations, the Petroleum Facilities Guard.

Mr al-Jathran used contacts he built during the rebellion against Mr Gaddafi to form a powerful militia that shut down both Es Sider and Ras Lanuf, the country’s largest refinery. After being fired from the PFG he renamed his group the Cyrenaica Defence Force, emphasising regional tensions between Tripoli and the East.

Similar militias, formed partly by local workers and disgruntled PFG members, staged shut-downs in Zueitina and Marsa al-Hariga. The Libyan prime minister has claimed the shut-downs cost the country $130m a day.

One Eastern facility, Marsa al Brega, has re-opened full production. Authorities claim to have received assurances from Brega workers that they do not support the militias and are happy to work under government jurisdiction.

The western refinery of Zawiya is controlled by the PFG but a Zintan militia managed to seize the two Murzuq basin oil fields that supply it, the el-Feel and el-Sharara, and halted the flow of oil to the plant by closing pipeline valves. The fields remained closed until mid-September when the militia agreed to reopen the pipeline. Libya’s offshore Bouri and Farwah terminals are currently unaffected.

“We would like to assure all companies and employees in the oil sector that we have always been dedicated to securing all petroleum facilities on Libya’s soil around the clock under any circumstances to ensure the stability and success of our county,” the PFG said in a public statement following the kidnapping of Prime Minister Zeidan.

 

This article was originally published with Financial Times, This is Africa on October 17th.

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About Tom Stevenson
Tom Stevenson is an Independent North Africa reporter

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