FEATURE: Libyan political feud shatters hard-won oil sector stability

For almost two years Libya enjoyed a newfound oil sector stability, with exports reaching a 22-month high in April.

Now, a blistering row over the leadership of the central bank — which handles Libya's lifeblood oil revenues — has shattered that fragile peace, pitting rival governments in the east and west against each other.

On Aug. 26, the eastern faction in Benghazi — dominated by warlord Khalifa Haftar — launched a total oil shutdown in response efforts by the Tripoli-based Government of National Unity to replace central bank governor Siddiq al-Kabir.

By Aug. 28, output had fallen to 591,000 b/d, the National Oil Company said, roughly half the 1.15 million b/d Libya pumped in July, according to the monthly Platts OPEC Survey from S&P Global Commodity Insights. On Aug. 30, it said 63% of production had been lost.

The closures will be felt in the Mediterranean oil market — whose refineries prize Libya's light, sweet crude grades — the domestic fuel market, and on Libya's fragile economy. It represents the country's worst oil crisis since the summer of 2022, when Haftar's blockades reduced production to 600,000 b/d.

"The tactic of shutting down oil production to achieve political aims is tried and tested," said Hamish Kinnear, senior MENA analyst at Verisk Maplecroft, a risk intelligence firm. "Cutting off what is effectively Libya's sole source of income typically forces opposing political forces into compromise."

Fragile power balance

The health of Libya's oil sector, which contributes 93% of government revenue, hinges on relationships between key actors, including Haftar, Kabir, NOC chair Farhat Bengdara and Abdul Hamid al-Dbeiba, prime minister of the internationally recognized GNU.

The country has seen little peace since the fall of Moammar Qadhafi in 2011, but violence largely ended with a 2020 ceasefire.

Two years later, the appointment of Bengdara ushered in a period of political stability, anchored around the NOC chair, Dbeiba and Haftar, who has tightened his grip on key institutions, analysts say.

"A new balance of power took hold in Libya after the deal that ended the 2022 blockade, enabling stable oil and gas production," said Kinnear. "That balance of power was always fragile."

It eventually collapsed Aug. 18, when the GNU attempted to unilaterally replace Kabir at the unified central bank, which disperses funds to both Tripoli and Benghazi, prompting a rebuke from Haftar and the eastern administration.

Kabir and Dbeiba are former allies, but ties between the two have soured in recent months, according to sources familiar with their relationship.

As a new board arrived at the central bank to assume control Aug. 27, demanding access passwords, the eastern government began shutting key fields. By Aug. 30, Kabir had fled the country fearing militia violence, the Financial Times reported.

In an update on social media, the NOC said production had fallen(opens in a new tab) from 1.27 million b/d on July 20 to 959,000 b/d on Aug. 26 — when the blockade began — 783,000 b/d on Aug. 27 and 591,000 b/d on Aug. 28. Commodity Insights analysts estimated a production loss of 600,000-800,000 b/d and rising.

The NOC said key subsidiaries and joint ventures with IOCs had cut production, including AGOCO by 150,000 b/d, Waha by 50,000 b/d and Akakus by 246,000 b/d.

Italian energy group Eni confirmed to Commodity Insights that the 70,000 b/d El-Feel field was offline. Key ports and facilities were also instructed to close.

The 300,000 b/d Sharara field, Libya's largest, has been offline since Aug. 7, when the NOC declared force majeure. What started as a retaliation against a European arrest warrant for one of Haftar's sons morphed into an effort to exert pressure on Dbeiba's government, sources said.

"That disruptions occurred in Libya is not a surprise," said Jim Burkhard, Commodity Insights vice president of oil markets, energy and mobility. "The timing and magnitude are, of course, not predictable, but a country with two competing and armed governments is going to have instability."

Representatives of Haftar and Kabir could not be reached for comment. The NOC did not respond to requests for comment, but in its Aug. 30 statement, the state firm called for a speedy end to the crisis for the sake of the Libyan people and economy, adding that it had played no role in the shutdowns.

Market impact

Data from S&P Global Commodities at Sea(opens in a new tab) showed exports plummeting in the week commencing Aug. 26, with 3.4 million barrels of crude set to leave Libyan ports, down from 7 million the previous week.

"It is going to be bullish [for prices], that is for sure," a Mediterranean crude trader said. Another said demand had picked up for prompt barrels(opens in a new tab) into the region.

European refiners have increased their reliance on Libyan crude in 2024 as production has stabilized, CAS showed, with buyers shying away from Middle East cargoes because of increased transport risk through the Red Sea related to the Israel-Hamas war and longer journey times around the Cape of Good Hope.

And Mediterranean sweets have begun to rally since the Libya shutdowns. Azeri Light CIF Augusta premiums to Platts Dated Brent jumped $1.85/b to $3.80/b on Aug. 29. Saharan Blend FOB Algeria rose as well, up 50 cents/b to a $1/b premium.

"Price reactions could become more apparent the longer, and more substantial, the disruptions last," Commodity Insights analysts said in a note. "Likely backfill options include WTI [Midland], perhaps by redirecting WTI volumes that otherwise would have gone into Northwest Europe."

The shutdown has come as the OPEC+ alliance — of which Libya is a member — is walking a tightrope as it looks to slowly unwind 2.2 million b/d of voluntary cuts from October while maintaining stability in the oil market following months of price weakness.

Platts-assessed Dated Brent rose $2.80/b in seven days to $82.43/b on Aug. 29, in part on Libya supply fears.