Vol. 03 No. 14 | November 2018

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. ’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 meana 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 crude oil markets. It is the sheer quality of this oil, and therefore significance to global markets. A near-doubling of output its direct influence on the top end of the crude-oil-market between July and October, to 1.28 million barrels per day (mb/d) complex, that makes the country’s supply so significant to the came just as Libya’s fellow OPEC members sought to lift world economy. It is no coincidence that the International production to offset losses elsewhere and keep global supply Energy Agency’s most recent emergency stock release balanced. Yet Libyan oil-output volumes since 2011 have been occurred during 2011, to replace oil lost as Libya’s energy volatile. Output was almost 1.6mb/d on the eve of the revolution sector shut down during the civil war that year. that year. Since then, production has oscillated within a wide Libya crude oil - high quality band, dropping as low as 200kb/d and topping out at around 1.4mb/d. Having almost reached that level again now – an Key fields Quality Sulphur content achievement given significant headwinds facing the sector – API degree (%) further growth is plausible by 2020. It depends on the kind of Bu Attifel 43.3 0.06 political stability that will give investors confidence to carry out Mabruk 35 0.26 work upstream and midstream, including replacing damaged Amal 36 0.17 facilities and infrastructure. Sarir 37.6 0.16 Libyan oil’s advantages Waha 36.3 0.44 Zueitina 41.5 0.31 Libya has four distinct advantages as an oil producer – the Bouri 26.3 1.91 reason why international oil companies (IOCs) have for decades Jurf 30 1.90 been so keen to invest in Libya’s upstream oil sector. First, its Shahara 43.1 0.07 reserves remain substantial: at more than 48 billion barrels, or Feel 43.1 0.07 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. Source: IEA (NOC), the state oil company, believes The fourth advantage, is that Libya’s oil is also close to major further exploration will significantly expand the recoverable- consumer centres. Sailing times to European ports, which take reserves base. Although the Sirte Basin has been extensively the bulk of Libyan crude-oil exports, range from two (Sardinia) to explored, the Murzuq, Ghadames, Kufra, Cyrenaica Basins and 11 (Rotterdam) days, compared with close to a month for Asian offshore Gulf of Sirte have been relatively under-exploited and destinations. Even so, Chinese, Taiwanese and other Asian still hold huge potential. countries are now also significant importers of Libyan crude –

Second, Libyan oil is relatively easy to extract, and the another example of the increasing importance, particularly in installation of production and export infrastructure has recent months, of Libya’s oil to global markets. Significant historically been straightforward, allowing the oil-rich hinterland natural gas reserves, especially in the Ghadames Basin, have to be connected to several distinct export terminals on the more also allowed Libya to become a major exporter of gas to Europe

populated coast (see map on page three). This pipeline network through the Greenstream Pipeline to .

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| is extensive, allowing for significant expansion of production Oil receipts dominate the economy: according to the IMF, oil when it becomes available. By comparison with many other oil accounts for more than 90% of fiscal revenue, a share higher basins, Libya offers few of the geographical obstacles to easy than in any other Arab oil-exporting country. Non-oil exports of exploration and development. goods and services are under 3% of total GDP, according to the most recent data available. This is relevant in considering the Vol. 03 Vol. 14 No. Third, except for some offshore oil production on the Pelagian Shelf, offshore Tripoli, Libya’s oil streams offer sweet, high- prospects of Libya’s oil output, for three reasons. First, it links quality crude oil that can command a premium in international the Libyan real economy more closely to movements in

Mustafa Ansari | Senior Economist [email protected] | +966 (0) 13 859 7119

international oil prices than many other oil exporters: this between the two drove instability that continued until late 2015 exposes the post-2011 political landscape to exogenous and affected the Sirte Basin, Libya’s most prolific oil province. economic and oil price shocks. Second, oil’s significance to the Insecurity at the two export terminals of Ras Lanuf and Sidra economy means the sector has been contested between local reduced throughput so that oil production between mid-2013 and rival groups. Prospects for further production growth will rely September 2016 averaged 390kb/d, less than a quarter the therefore on a settlement between competing parties about how output of 2010. best to handle Libya’s current and potential oil wealth. Third, as The third phase, still underway, began in September 2016, when Libyan parties and international partners seek a peace NOC regained operational control of the Sirte Basin and output settlement, the country’s energy sector could further thrive, began to rise, cresting 1mb/d in April 2017. Production has leading to higher flows of oil revenues. dipped periodically since then due to disruptions but has also Exports by destination (kb/d) rebounded strongly so that in October 2018, NOC said output was at 1.25mb/d. Once again, the resilience of Libya’s oil sector Country Volume defied outside sceptics – and revived hopes that a period of China 134 sustained stability would underpin a fourth phase to come: one Croatia/Hungary 25 in which NOC can deliver on plans to regain 2011 output levels France 113 of 1.6mb/d in 2019 and push towards 2mb/d by 2022. Germany/Austria 70 Libyan output since 2010 (kb/d) Greece 24

Italy 168 1,800 Malaysia 32 1,600 Netherlands 47 Spain 159 1,400 Taiwan 24 1,200

UAE 16 1,000 US 58 800 Source: MEES 600

Oil sector more resilient to instability 400

Competition for oil assets in Libya has been a theme in Libya 200

since the events of 2011. Three distinct phases since then have 0

been visible and are reflected in the changes in Libya’s oil output

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Jan-16 Jan-17 – the fourth is yet to come. First, between mid-2011 and mid- Jan-18 2013, a period of relative stability allowed the swift recovery of almost all oil output lost during the civil war. These years Source: IEA included elections to form a new government (after the war-time This phase also enhanced the ability of NOC to capture a higher National Transitional Council handed over power) and efforts to price for their crude. Despite the higher quality, Libyan crude draft a new constitution. The events of 2011 had inflicted little prices have been depressed relative to other types of similar damage to energy infrastructure and production growth back to crudes as delays in deliveries due to disruption in production and more than 1.4mb/d was achieved in little more than six months. unplanned maintenance meant that traders shied away from It was an astonishing recovery and testament to the wealth of buying Libyan crude. However, such issues have largely been professional expertise within the Libyan oil sector. This was not reduced as traders are gaining more confidence in the ability of the last time that the resilience of the country's energy industry NOC to deliver. Moreover, buying interest from new players, would surprise outside analysts. including Chinese refineries, has increased. For the last few months, loadings have remained largely on track and deliveries Events in Tripoli laid the ground for the next phase, from have been very much on schedule. The NOC agreement with September 2013 to September 2016. A political split in the Shell to provide oil for the rest of 2018 helped stimulate trust country manifest itself in several ways. First, in mid-2013, the

from other participants. Petroleum Facilities Guard (PFG), entrusted with securing key oil-export infrastructure, shut down the ports of the Sirte Basin’s Rapid oil-output growth

oil crescent. The closure lasted until September 2016. Libya’s ber2018 economy struggled in these years, making efforts to build a new The third phase has set up the fourth by already delivering some post-revolutionary landscape more difficult. Partly because of notable positive developments for Libya’s oil sector in the past

Novem year. Some oilfield service activity has resumed, including the

| this, oil-output disruptions grew more frequent, as armed militias established a pattern of shutting fields and infrastructure to return of Schlumberger to work with Sirte Oil and Gas, a unit of demand higher salaries and improvements in conditions. NOC. Wintershall and Gazprom have restarted production from the As-Sarah field, in the Sirte Basin. Drilling activity in the Another manifestation was the advent of two rival parliaments country has increased. More rigs are now operating than at any and governments and the emergence of two broad alliances

Vol. 03 Vol. 14 No. time since 2014. Offshore, has brought new wells online at fighting on their behalf. In Tripoli, the General National Congress its Bahr Essalam development. Some international oil (GNC) held power. A second parliament, elected in 2014 to companies are pledging onshore investment, including replace it, eventually based itself in Tobruk. In the east, tensions exploration. 2

Map of Libya’s Oil Crescent

Source: International Crisis Group Earlier this year, Total announced its plan to buy Marathon’s Prospects for lasting peace stake in Waha, operating in the Sirte Basin – a demonstration of In a statement to the UN security council earlier this month, Mr the French firm’s commitment to the country. BP and ENI Ghassan Salame – the UN envoy to Libya – highlighted that the announced plans to begin exploration in the Ghadames Basin, in Libyan conflict is in large part “a conflict over resources”, and Libya’s west, as part of a transaction that transfers some of BP’s that stability is conditional on its resolution. interest in the concession to ENI. AGOCO, the largest producing company in NOC’s stable, has issued tenders for surface work. In the first half of 2018, oil revenues reached $13bn, in turn due NOC exudes optimism – chairman Sanalla has become a tireless to higher oil production and a recovery in prices. But it is also advocate for both Libya’s upstream and the state company’s true that the citizens are not seeing these revenues translated political independence and reliability. efficiently into public services or benefits. Recent reforms have been launched, aimed at improving living conditions and The next step requires a conducive environment for these reducing opportunities for militias. For instance, the introduction announcements to materialise into projects under execution. To of fees on foreign currency transactions reduced the black date a handful of oil and gas projects are commissioned, namely market rate by 25% and helped close the gap between the black

on the gas side, totalling $3bn with a further $350m in the market and the official rate. Whilst further reforms on phasing out planning phase. This is compared with the $4.5bn worth of fuel subsidies, should also curb the arbitrage that has stimulated projects that were due for completion between 2011 and 2017 cross- border smuggling. The country is beginning to see a ber2018 that have been cancelled. More significantly, $16bn worth of surplus, reducing the liquidity crisis. The conference in Palermo projects awarded since 2008 have been put on hold, amongst held earlier this month could provide an opportunity to gain the

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

support needed to establish a system for redistribution of | Zuwarah refinery and the $2.5bn Wafa field development. national wealth for the whole population. Mr Salame praised a NOC faces some challenges ahead. Insecurity has left some “much higher level of conviviality among Libyan stakeholders” infrastructure damaged, which will force NOC to undertake and considered the conference a success and a "first step in the remedial and repair work. New storage tanks are needed at Es- right direction". However, at the end of the conference, there has

Vol. 03 Vol. 14 No. Sider and Ras Lanuf in order to facilitate higher loading rates for been no written agreement and no clear timetable as to when to tankers. Higher production, if sustained, should however create a hold the national conference or the election process. virtuous circle, allowing for more funding of the oil sector to repair facilities and therefore expand capacity. 3

Stability in the country is conditional on security, a healthy Libya’s output rise came at a useful moment for OPEC too, as it economy, and a functioning political environment. This is critical sought to keep control of spiralling prices in recent months. Libya to NOC’s efforts to increase oil production and secure the has resumed its participation in the group and its efforts to necessary inward investment in the upstream. After years of stabilise the global market. under-investment, several fields, including AGOCO’s Sarir, need Libyan oil can continue to provide this kind of stabilising effect for improvements to electricity supply and replacement of some global balances. Its proximity to key markets and huge upstream infrastructure. Providing a stable environment in which this kind potential mean a geologically prolific oil province awaits of work – as well as well-workovers, pigging operations, in-fill investors. The promise of Libya’s upstream must also be drilling, enhanced recovery, and so on – can be carried out matched by political progress too. Recent discussions between unhindered, will be a key part of NOC’s plan to lift oil output to groups in the country offer the chance for momentum to build 2mb/d by 2022. If achieved, this too, will create another virtuous towards a lasting settlement in the country. The summit in Sicily circle, allowing greater oil income not only to sustain NOC’s should bring commitments of support from Libya’s friends in the expansion plans, but to support much-needed investment in the international community. Libya remains one of the crucial global non-oil economy and improvements to social infrastructure. suppliers, with a significance to the world’s oil market far beyond Conclusion its Mediterranean shores. A better investment climate, is however, needed for the country to fulfil its substantial upstream Libya’s current output of 1.25mb/d is a testament to the promise. 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 – © Arab Petroleum Investments Corporation

arrived at a critical juncture for the global market. Comments or feedback to [email protected]

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