Feature: Protests and political jostling threaten Libyan oil sector rejuvenation

Libyan oil and gas blockades could hinder an upstream revival just as opposing political factions are intensifying their struggle for power, after protesters closed the conflict-prone country's largest oil field this month.

The North African nation's crucial oil industry enjoyed a relatively calm 2023, with average production climbing to 1.13 million b/d, according to the Platts OPEC Survey from S&P Global, the second highest annual total since 2011.

However, as Libya's western and eastern factions prepare for a year of political wrangling, fueled by a UN-backed process to bring about long-delayed elections, plans to boost output by 75% in three to five years look increasingly under strain.

Shutdown risks

Libya has been engulfed by chaos since the NATO-backed uprising that toppled Muammar Gaddafi in 2011. Today oil underpins 95% of state spending, according to S&P Global estimates.

"The political and economic importance of the oil sector is unquestionable," said Tim Eaton, senior research fellow at Chatham House. "It is almost the entirety of the Libyan economy. It basically is what keeps everything running."

As a result, political factions and the powerful heads of the National Oil Company and Central Bank have long fought for control of oil revenues, fueling the animosity between Western-backed Tripoli government, and a rival administration in Benghazi dominated by Khalifa Haftar and his Libyan National Army.

"The former chairman, Mustafa Sanalla, fought hard to keep NOC above the fray," said Eaton. "Since his departure [in 2022], NOC has been dragged more directly into political negotiations."

On Jan. 7, NOC declared force majeure at the 300,000 b/d Sharara field, Libya's largest, after economic protesters shut it down. Austria's OMV, one of the Sharara partners, told S&P Global that its production had breen affected.

Two days later, locals in Maradah threatened to close 23 oil fields unless their demands -- including the dismissal of NOC chairman Farhat Bengdara -- were met. There were also plans for protests outside Eni's Mellitah complex, threats to close the 120,000 b/d Zawiya refinery, Libya's biggest, and demonstrations in the northwestern city of Zintan.

Any halt to Mellitah would disrupt the supply of gas to Italy through the Greenstream pipeline. Eni declined to comment.

"It appears the calls to oust Ben Guedara are politically-motivated," said a source. "It is clear that the demands of the protesters behind the closure of Sharara and El Feel oil fields have incited other youth movements across the country to push for similar demands by threatening to close oil and gas facilities within their respective areas."

Bengdara's appointment in July 2022 ended a weeks-long oil blockade by Haftar's forces, which cut production to 650,000 b/d. But the NOC chairman has faced corruption allegations and has been at loggerheads with Central Bank head Siddiq al-Kabir, sources said, due to his push for greater NOC autonomy.

Output target

Libya produced 1.14 million b/d of light sweet crude -- popular with European refiners -- in December, according to the Platts OPEC Survey from S&P Global, well below the 1.6 million b/d level reached prior to 2011. The country boasts 48 billion barrels in reserves.

It plans to spend $17 billion to boost capacity to 2 million b/d in three to five years, according to Bengdara, by laying new pipelines and boosting storage capacity. At a major conference in Tripoli on Jan. 14, NOC officials announced plans for a 2024 bid round, the first since 2007.

It follows the recent return of IOCs buoyed by the relative political stability since a 2020 truce that ended the fighting. Recent boosts include Eni's 750 MMcf/d A&E Structures offshore gas project and negotiations between with TotalEnergies, TEC and Adnoc over the Hamada project in block NC-7, although some political actors oppose the talks.

Eni, BP, Sonatrach and others have lifted force majeures for exploration, while new discoveries have been made by NOC and Russia's Tatneft in the Ghadames Basin.

"Supporting the [2 million b/d] target is the clear progress in re-engaging IOCs in recent months," said Catherine Hunter, an analyst with S&P Global. "Talks with TotalEnergies and others over the Waha renewal and NC7 will be an important indicator of NOC's ability to boost output in a meaningful way."

Hunter said IOCs would not be deterred by the Sharara shutdown as long as it is short-lived. "I think there's a certain tolerance for disruptions (that don't damage facilities) baked into most remaining investor plans," she said, warning that if protests "increase in frequency again and/or there's a threat to the integrity of facilities, that's a different risk proposition."

"The eastern and western based governments and the NOC are likely to be able to negotiate a resolution to the protests in the coming weeks," Jessica Leyland, senior MENA analyst at S&P Global, wrote in a note. She cautioned, however, that "enacting core demands of the protesters will be financially and administratively onerous, making continued sporadic shut-ins of Fezzan's oil fields likely in the six-month-one-year period."

Traders said the unrest had pushed Mediterranean buyers towards US and North Sea crude, fueling bidding activity for WTI Midland and Forties. Libya's Es Sider crude was last assessed on Jan. 12 by Platts, part of S&P Global Commodity Insights, at a $0.10 premium to Dated Brent, up slightly in 2024.

Political wrangling

The Sharara closure, and threats of further protests, mark a return to oil field disruption by political actors just as a UN process to bring about elections gathers steam.

However, Eaton said a transitional government was likely to be installed before elections can take place, with implications for crude production and the NOC leadership.

"What we may well see is that another government is attempted to be produced, which is subsequently contested, and that might be a source of conflict ...which would undoubtedly seep into the oil and gas sector," he said.

"I've come to see NOC as a bit of a microcosm of the Libyan state, so the problems that will be experienced by the state more broadly will be reflected pretty directly in battles within NOC."