Every great heist movie has a twist or two. The recent takeover of Libya’s Central Bank has proven to be no exception. After being installed by the Tripoli-based western government, the new interim Deputy Governor, Abdel-Fattah Ghaffar, made a surprising move by appearing on television to request the previous leadership to hand over the passwords. A more significant and alarming twist, however, has been the shutdown of the country’s oil production.
The previous governor of the Central Bank, Sadiq Al Kabir, had aligned himself with the eastern, Benghazi-based government, which is dominated by General Khalifa Haftar. Al Kabir’s removal followed a dispute with Prime Minister Abdul Hamid Dbeibah over the distribution of funds, primarily derived from oil revenues. While Benghazi has experienced a construction boom, redevelopment efforts in the west have largely stalled.
Libya is currently grappling with not just two governments and two central bank governors but also two oil ministers. There might even be a need for a third oil minister, as acting minister Khalifa Abdelsadiq, who has been in the role for less than a month, faces arrest on corruption charges.
General Haftar’s forces maintain control over most of Libya’s crucial oil ports and significant oil fields located in the far southwest, which export through terminals west of Tripoli. In early August, Libya’s largest oil field, Sharara, was nearly shut down. Officially, local protests were blamed, but it appears that General Haftar’s son, Saddam, ordered the shutdown in response to a Spanish arrest warrant issued against him for alleged arms smuggling. Sharara’s operating consortium includes Spanish oil giant Repsol.
Both General Haftar and his son have voiced concerns regarding the control over national oil revenue. Following the Central Bank takeover, the Benghazi administration announced the closure of all the country’s oil fields last Monday. Before these disruptions, Libya’s oil production stood at 1.17 million barrels per day in July. The National Oil Corporation (NOC) issued and then deleted statements but later reported that output had dropped to 591,000 barrels per day.
Despite the widespread shutdown, some oil ports continued to operate late last week, and reports on Saturday indicated that three major fields in the east might resume production, along with the Hariga port near Tobruk. However, this production might only serve local needs, supporting the eastern economy and possibly facilitating some private crude exports.
A History of Volatility
This turmoil comes after the longest period of stability in Libya’s oil sector since the revolution. The most significant disruption occurred in 2020 when national production nearly ceased during General Haftar’s unsuccessful campaign to capture Tripoli. Since then, Libyan oil output had remained relatively stable, ranging between 1 and 1.1 million barrels per day. The only notable exception was a brief episode in May-June 2022 when Haftar’s forces blockaded fields, reducing national output by half.
The standoff ended with the replacement of long-standing NOC chairman Mustafa Sanallah by Farhat Bengdara, an ally of General Haftar. Since Bengdara’s appointment, Libya had been gradually making progress toward more investment in the oil sector and increasing production.
Oil Market Reaction and the Road Ahead
The news of the oil shutdown has caused only a moderate reaction in oil prices. Brent crude rose by more than $5 per barrel between August 21 and 26 but has since given up about half of those gains. Given the mixed signals from the various Libyan factions and international pressure on the new central bank leadership, there is a possibility that this crisis could be resolved swiftly.
The U.S. administration, in particular, wields considerable influence over Libyan financial transactions and is likely keen to end the oil blockade quickly to avoid a rise in oil prices ahead of the November presidential election. Similarly, Europe has a vested interest in maintaining Libya as a crucial oil supplier to the Mediterranean, particularly after being impacted by the ban on Russian crude imports and the significant reduction of Middle Eastern supplies through the Red Sea.
However, these short-term solutions will not bring lasting stability without a renewed political agreement in Libya. Even the previous status quo was precariously balanced on the steady flow of funds to both the west and east, sourced directly from oil exports and indirectly through redirected smuggled fuel. A prolonged halt in petroleum exports or a sharp decline in oil prices could undermine any tentative compromise, potentially leading to a repeat of the near-total halt in production seen in 2020.
Implications for OPEC+
The renewed volatility in Libya’s oil output presents a complex challenge for OPEC+. The group faces a decision on whether to pause its planned phased increase in production, which was set to add 180,000 barrels per day each month starting in October. A sustained drop in Libyan output could negate the planned production increase from all other members by the end of the year. Yet, if the issues in Libya are temporarily patched up, market conditions may appear less favorable.
While OPEC+ members may sympathize with Libya’s difficulties, the broader group would benefit from proceeding with easing production cuts without seeing a sharp drop in prices. This approach would allow OPEC+ to begin the long-overdue process of regaining market share and enable members like Iraq, Kazakhstan, and Russia to make up for past overproduction with minimal adjustments.
The roots of Libya’s oil crisis are deeply embedded in the nation’s political instability. Following Gaddafi’s overthrow, the country was left without a strong central government, resulting in a power vacuum that various factions sought to fill. The most prominent of these are the internationally recognized Government of National Unity (GNU) in Tripoli and the rival administration based in the east, supported by the Libyan National Army (LNA) led by General Khalifa Haftar. Each faction, backed by different international players, has fought for control over Libya’s oil fields, ports, and revenues.
The Impact on Oil Production
Libya’s oil crisis has led to fluctuating production levels, often swinging between a high of 1.6 million barrels per day (bpd) in times of relative stability and dropping below 300,000 bpd during peak conflict periods. The country’s oil infrastructure has been targeted by armed groups, blockades have been imposed, and key oil fields have been shut down repeatedly. This unpredictable production has not only affected global oil prices but also severely limited Libya’s revenue generation, which is crucial for rebuilding and stabilizing the country.
Recent Developments: Signs of Hope?
In recent months, there have been some signs of progress that suggest a potential easing of the oil crisis:
- Ceasefire Agreements and Political Dialogue: The ceasefire agreement signed in October 2020, followed by a UN-led peace process, brought a glimmer of hope for stability. The formation of the GNU in March 2021 aimed to unify the country’s governance and oversee a transitional period leading to elections. While challenges remain, the dialogue between rival factions has reduced hostilities, allowing for a more consistent flow of oil production.
- International Involvement: International stakeholders, including the UN, the United States, and the European Union, have intensified their diplomatic efforts to stabilize Libya. These efforts have included imposing sanctions on those obstructing peace and providing support to the transitional government. A more engaged international community has the potential to mediate conflicts and ensure that Libya’s oil wealth is managed in a way that benefits its people.
- Oil Infrastructure Investments: Libya’s National Oil Corporation (NOC) has been actively seeking investments to repair and upgrade the country’s aging oil infrastructure. With foreign companies expressing renewed interest in the Libyan oil sector, there is hope that increased investment will lead to more stable and efficient oil production. The NOC has also worked on increasing transparency in oil revenues, which is crucial for rebuilding trust among the Libyan population and international partners.
Challenges Ahead
Despite these positive developments, significant challenges remain:
- Political Instability and Factional Fighting: The ceasefire and political agreements are fragile. Sporadic fighting and power struggles continue to threaten the peace process. The failure to hold elections as planned or the emergence of new conflicts could easily derail progress, leading to renewed disruptions in oil production.
- Economic Issues and Corruption: Libya’s economy is heavily dependent on oil, making it vulnerable to production disruptions. Corruption and mismanagement of oil revenues have also been major issues, with accusations of funds being siphoned off by rival factions. Establishing a fair and transparent system for distributing oil revenues is critical for the country’s stability.
- External Influence: Libya’s oil crisis is not only a domestic issue; it has been exacerbated by external interference. Countries with vested interests in Libya’s oil, such as Russia, Turkey, and the United Arab Emirates, have supported different factions, further complicating the situation. A resolution to the crisis will require these countries to play a constructive role in Libya’s future.
The Path Forward
Ending Libya’s oil crisis requires a multifaceted approach. A sustainable peace agreement, the unification of military forces under a single command, and the establishment of a transparent revenue-sharing mechanism are critical steps toward stability. International support must continue, with a focus on diplomatic efforts to mediate conflicts and promote dialogue. Moreover, investments in Libya’s oil infrastructure should be prioritized to boost production capacity and reliability.
For now, the oil stoppage may be just another one of Libya’s recurring yet temporary crises. However, the realignment of political forces indicates a more fragile situation than in the past four years. Neither local factions nor key international mediators seem to have a viable long-term solution, leaving the oil market vulnerable to renewed turbulence along the southern Mediterranean shore. The question remains whether the Libyan oil crisis will find a resolution or continue to cast a shadow over the country’s future and global oil markets.
