Analysis provided by Samuel Ciszuk, IHS Senior Middle East Energy analyst
Libya’s oil industry is showing further signs of breaking up along the lines of territory controlled by opposition forces and the old regime, with state-owned National Oil Corporation (NOC) continuing to claim it has full control over the country’s oil production capacity. There are increasing signs, however, that some of the country’s largest fields in the east have been pried away from the NOC umbrella by the groups controlling them, in order to provide a revenue-earning base for the opposition-controlled areas.
For IOCs with assets in either part of Libya, navigating the emerging landscape is becoming urgently necessary, although it is still fraught with massive peril, given the uncertain power situation and the potential cost of tying up with the wrong partner at this early stage.
Continued Deterioration
Two oil tankers were reported to have left Libya’s largest oil export terminal in Es Sider, Tuesday March 1 after successfully loading around 1.2 million barrels of Italy-bound crude between them, according to a Reuters report, demonstrating that Libyan oil exports are not at a complete standstill, although they are nowhere near their normal, pre-unrest levels.
News of the Es Sider loadings follow reports commented on Tuesday by IHS Energy, that one tanker bound for China had loaded crude at one of Libya’s eastern opposition-controlled oil terminals at Marsa al-Harigh, situated outside Tobruk, and that at least one more tanker, due to ship a cargo to Europe for Austria’s OMV, was about to lift crude under a pre-existing contract.
While Es Sider is likely to still be under the control of forces loyal to long-term Libyan leader Colonel Muammar al-Gaddfi and his regime, the Marsa al-Harigh terminal is well within the large eastern area of Libya that has been liberated in the recent popular uprising centring on Libya’s second city of Benghazi and the large eastern region of Cyrenaica, but also including much of the country’s main oil producing Sirte Basin.
This has put a large number of Libya’s main producing oil and gas assets in the hands of forces that have declared their loyalty to the opposition, with one of the NOCs three main fully owned production companies, the Arabian Gulf Oil Co. (AGOCO), headquartered in opposition-controlled Benghazi, now starting to break free from NOC control.
It is, however, highly unlikely that payment for any of the oil shipped from AGOCO’s Marsa al-Harigh terminal will have benefited the interim government being set up in Benghazi, as it reportedly was shipped under pre-existing term contracts signed with the NOC’s marketing arm and as AGOCO currently lacks its own marketing establishment. The intended setting-up of facilities to receive payment and market the crude will take some time for AGOCO, but will also open a whole can of worms on the legal side for its existing as well as prospective buyers, as the same crude will already have been sold by the NOC, for potentially quite some time ahead.
AGOCO should, in theory, have sufficient export capacity through the opposition’s control of the Marsa el-Harigh, Zueitina and Marsa el-Brega export terminals, to be able to export its full pre-unrest production capacity of between 420,000 bpd and 450,000 bpd, however, part of the oilfields under the opposition’s apparent territorial control, and also nominally outside of AGOCO’s pre-conflict control, normally feed into a trunk pipeline which takes their output to the regime-controlled Ras Lanuf, raising questions about AGOCO’s ability to take charge of those fields and reroute production to export facilities under opposition control.
It might also be some time before tankers dare to enter ports such as Zueitina and especially Marsa el-Brega on the Gulf of Sirte, where regime-loyal naval and ground force units appear to remain operational in nearby areas and in the latter location, as of Wednesday March 2, might have retaken control over at least some installations and suburbs.
The Empire Strikes Back?
While it is hard to say anything certain about the outcome of the Libyan unrest before the full hand of the regime has been played, the increasing preparations to autonomise the AGOCO organisation, and potentially other upstream and downstream assets under opposition control in eastern Libya, from the NOC’s control, point to the deepening of a rift in Libya that easily could become permanent.
Officially, opposition forces in the east are only taking such measures as establishing autonomous crude marketing arms and severing ties with the mother company in Libya’s regime-controlled capital Tripoli on a temporary basis, until the regime finally falls. Given the deep underlying historic east-west divide that is latent in Libya, however, and the tribal nature of territorial control, especially in the remote oil-producing desert areas, such divisions could prove hard to roll back.
The remnants of the regime have been expected over the past days to mount some form of counter-offensive after seemingly having stemmed the decline of territory under their control in the last four days. Attacks on western cities that escaped the regime clutches recently were mounted early this week, notably on the strategic Zawiyah export terminal and refining hub city, although as of this morning the regime forces seemed to have been successfully repelled by popular militia liberating the city.
Nearby Zuwarah, close to the Tunisian border, faced attacks that it too was able to repulse. Much points to this not yet being the full force of the Gaddafi-led regime’s pushback, especially in the west, with Zawiyah -together with nearby Mellitah- in particular, seen as strategic for the regime to retake as they are the sole export terminals serving production in the south-west and west of the country, areas which are otherwise at a safe distance from the opposition-held territory.
Clashes around the rebel-held Marsa el-Brega refining and export facility in the centre of the country and on the border to the eastern opposition-held areas have instead seen a harder government offensive on Wednesday March 2, with unclear results this morning pointing to the oil facilities potentially having been retaken by government forces, yet the city itself remaining under opposition control.
That might indicate that the Gaddafi regime will prioritise moving eastwards in order to make sure that as much as possible of the Sirte Basin oil facilities are retaken, in order to deny the emergence of a self-sufficient authority in Benghazi, before more isolated opposition-controlled enclaves in the west are dealt with. Given the number of tribes that have deserted the Gaddafi regime over recent weeks, however, the outcome of a large push into the oilfields area, where tribal groupings have got the taste of potential control of large revenue earning facilities, might be very difficult and so far the relatively meagre force mustered by the government points to it struggling to re-establish its authority over Libyan tribes and emerging opposition groups.
Outlook and Implications: Navigating Uncharted Waters
International oil companies must now start to navigate the changing political and organisational environment, which in several cases they appear to be doing. In a report by the Financial Times on Wednesday March 1, an oil industry executive requesting anonymity conceded that their company had started to build relations with the new stakeholders in the east, saying that “the people we are talking to oppose Gaddafi”.
No doubt, IOCs with upstream assets in rebel-held areas need to start building contacts directly with the tribal leadership and professional and/or political groups taking over control. At the same time, open contact with opposition groups could come at a high price later should the borders of actual control shift again in the favour of the old regime, while continued success for the very loosely organised opposition forces also is likely to create some form of post-conflict jostling for position, power and influence among the groups, in which physical control of upstream or downstream facilities is likely to be a key asset. For an IOC to ally with a particular group at this early and still very fluid stage would therefore be outright dangerous, even if completely within the oppositional setting.
There will also be very significant legal hurdles for IOCs and oil traders with regard to the eventual self-proclaimed new entities, especially considering that some of that oil has already been contracted under term agreements. While opposition-controlled entities might want to start marketing crude operations, and to a lesser extent refined products, buyers might risk finding themselves facing claims from other traders and IOCs, further complicating the situation.
Most pressing at this point is, nevertheless, the uncertainty over territorial control and the fate of oilfields under IOC operatorship, or where IOCs are partners in a joint venture outside of AGOCO control, but in areas nominally held by forces loyal to the opposition. Careful diplomacy with the new stake holders on a tribal and technocratic workforce basis will need to be upheld, in order to protect and nurture good future relations, without companies tying themselves too closely to any single actor at this stage given the likely changes ahead.
