Vol. 03 No. 14 | November 2018

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Mustafa Ansari | Senior Economist

mansari@apicorp-arabia.com | +966 (0) 13 859 7119

Libyan oil: Prospects for stability and growth

Libyan oil, long a major component of the world’s supply of high-quality crude, has shown its importance

in recent months. The output recovery from June to October 2018 – almost a doubling of production –

arrived at a critical juncture for the global market. Libya’s output rise came at a useful moment for OPEC

too, as it sought to keep control of spiralling prices in recent months. Libya has resumed its participation in

the group and its efforts to stabilise the global market. Libyan oil can continue to provide this kind of

stabilising effect for global balances. Its proximity to key markets and huge upstream potential mean a

geologically prolific oil province awaits investors. The promise of Libya’s upstream must also be matched

by political progress too.

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% 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% of fiscal revenue, a share higher

than in any other Arab oil-exporting country. Non-oil exports of

goods and services are under 3% 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

Libya crude oil - high quality

Key fields Quality Sulphur content

API degree (%)

Bu Attifel 43.3 0.06

Mabruk 35 0.26

Amal 36 0.17

Sarir 37.6 0.16

Waha 36.3 0.44

Zueitina 41.5 0.31

Bouri 26.3 1.91

Jurf 30 1.90

Shahara 43.1 0.07

Feel 43.1 0.07

Source: IEA

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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.

Libyan output since 2010 (kb/d)

Source: IEA

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.

Exports by destination (kb/d)

Country Volume

China 134

Croatia/Hungary 25

France 113

Germany/Austria 70

Greece 24

Italy 168

Malaysia 32

Netherlands 47

Spain 159

Taiwan 24

UAE 16

US 58

Source: MEES

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Map of Libya’s Oil Crescent

Source: International Crisis Group

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 $3bn with a further $350m 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, $16bn worth of

projects awarded since 2008 have been put on hold, amongst

them, the $3bn renovation of the Marsa LNG project, the $5bn

Zuwarah refinery and the $2.5bn 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, Mr

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 $13bn, 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% 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. Mr 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.

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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.

Conclusion

Libya’s current output of 1.25mb/d is a testament to the

resilience of NOC and its oil sector. NOC’s leadership and cadre

of engineers and geologists deserve credit. Libyan oil, long a

major component of the world’s supply of high-quality crude, has

shown its importance in recent months too. The output recovery

from June to October 2018 – almost a doubling of production –

arrived at a critical juncture for the global market.

Libya’s output rise came at a useful moment for OPEC too, as it

sought to keep control of spiralling prices in recent months. Libya

has resumed its participation in the group and its efforts to

stabilise the global market.

Libyan oil can continue to provide this kind of stabilising effect for

global balances. Its proximity to key markets and huge upstream

potential mean a geologically prolific oil province awaits

investors. The promise of Libya’s upstream must also be

matched by political progress too. Recent discussions between

groups in the country offer the chance for momentum to build

towards a lasting settlement in the country. The summit in Sicily

should bring commitments of support from Libya’s friends in the

international community. Libya remains one of the crucial global

suppliers, with a significance to the world’s oil market far beyond

its Mediterranean shores. A better investment climate, is

however, needed for the country to fulfil its substantial upstream

promise.

© Arab Petroleum Investments Corporation

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