Libyan crude was two per cent of global oil supplies and valued because it played a key role in Italy, France and Spain’s downstream energy markets.
Libya was one of the Arab world’s leading oil exporters after Colonel Gaddafi’s bloodless coup in 1969. Gaddafi played a major role in diluting the power of Western oil majors, who had traditionally dominated the postwar oil and gas exploration, producing, refining trading and retailing markets. The Libyan regime forced “independent” oil firms like Occidental Petroleum to hand over higher royalties and control over both production and pricing decisions.
Libyan crude was two per cent of global oil supplies and valued because it played a key role in Italy, France and Spain’s downstream energy markets. This was the reason that Brent crude spiked as high as $128 when Britain and France began Nato’s bombing mission after a popular uprising erupted against the Gaddafi regime in April 2011. In fact, Saudi Arabia increased its oil production to its highest level since the fall of the Shah of Iran to prevent a “supply shock” and compensate for the loss of Libyan crude oil.
However, a succession of political crises led to a fall in Libyan crude production from 1.5 million barrels a day in 2011 to as low as 200,000 barrels a day after rival militias blockaded Libyan oil ports. While oil exports have now resumed after an agreement between rival militias in July 2014, Libya now sells into a glutted market where Brent is barely above $80 a barrel. Most major oil and gas production and service firms who exited Libya in 2011-12 have no interest in returning there. Libya’s traditional export markets in Europe and Asia have been lost to Algeria, Saudi Arabia, Iraq and Kuwait. The oil minister is appointed by a self-declared militia government in Tripoli not recognised by the UN, the Arab league, the EU or US. The chairman of the LNOC, the state oil firm, appointed by the Tobruk government the world does recognise, has fled.
Libya now produces 800,000 barrels a day but, despite Africa’s largest oil reserves will find it impossible to attract foreign investment with two rival “governments”. In fact, since Libya is the rotating president of Opec, the world does not know which oil minister will come to Vienna at the November 27 meeting. The 340,000 barrel a day Shahara oilfield, Libya’s largest, has been shut down by rival warlords.
Libya’s political crisis is rooted in the arbitrary, autocratic 42-year rule of Colonel Gaddafi, who never allowed the viable judiciary, legislature or civil society to emerge. Moreover, Libyan society was divided by vast tribal, regional and ethnic differences that had been exploited by both the Gaddafi dictatorship and under Italian colonial rule.
Libya has two rival governments, one in Tripoli and a rival in Tobruk, with rival prime ministers, cabinets, parliaments and militias. Libya’s government in exile in Tobruk is financed by oil revenues, as is its rival in Tirpoli. The protracted political crisis in Libya has destabilised the Sahel and led to French military intervention in Mali, the Maghreb and even Egypt’s Western Desert.
A “proxy war” amid a militia civil war has led to calls for a UN or EU peacekeeping force to stabilise Libya, a scenario that seems remote on the eve of British elections and a French President with the lowest approval ratings since General Charles de Gaulle established the Fifth Republic. The world cannot afford a failed state in the heart of the Maghveb but the world is doing very little to help restore the Libyan state’s sovereign institutions.
Libya’s light sweet crude was hugely valued by refineries in France, Italy and Spain since transportation costs across the Mediterranean were far lower than, say, from the Gulf of Guinea or the Gulf ports. Unfortunately, Libya is also a classic victim of the “resource curse” since the Gaddafi regime squandered, hundreds of billions in petrodollars on Soviet military arsenals, failed interventions in Africa and the financing of international terrorist movements. However, Colonel Gaddafi’s regime ensured Libya produced 1.6 million barrels a day and guaranteed security for firms such as Italian state oil firm ENI, which produced 250,000 barrels a day from Libyan oilfields.
Foreign oil companies have exited Libya due to the breakdown in security and uncertain legal resources to the state’s hydrocarbon resources. Energy is 60 per cent of Libya’s GDP and a loss of investment or production declines will spell economic catastrophe.
By Sarie Khalid
The writer is a Dubai-based research analyst in energy and GCC economics.
