The performance of the Libyan oil sector has recovered over the past months, with the Libyan political parties making progress in the political process. The Government of National Unity was formed in February 2021, which was preceded by an agreement between the political forces to resume oil production and export after a siege of oil facilities and ports that lasted for months.
Additionally, political and security stability availed an opportunity to unify the competing oil institutions in Eastern and Western Libya, and, theoretically speaking, enhanced the chances of providing the necessary funds to reconstruct the Libyan oil sector. However, the stability of the Libyan oil sector may be impacted by new variables, including the outbreak of disputes between the National Oil Corporation and the newly formed Oil Ministry, in addition to the Libyan Parliament’s withdrawal of confidence from the government of Abdel Hamid Al-Dabaiba, and the dispute over the parliamentary and presidential elections law.
Recovery of Production
Libyan oil production has witnessed a strong recovery since late last year, supported by the improvement of the political and security situation in the country, which can be illustrated as follows:
1. Agreement over resuming production:
The actual recovery of oil production has started since the reopening of oil fields and export ports under an agreement made between the political parties in the East and West regions of the country in September 2020. Local and foreign companies have resumed production from the fields with the largest portion of their production capacity, with the recovery of some fields and the use of enhanced production techniques.
2. Supporting development plans:
The formation of the Government of National Unity has paved the way for stabilizing the process of managing the affairs of the Libyan oil sector. Last September, the National Oil Corporation in Tripoli appointed and merged the employees of its parallel corporation in the Eastern region within the main corporation. Meanwhile, the establishment of a new oil ministry allowed local companies to reinforce the demands to pump investments for developing the sector and increasing production in the medium term.
3. Production recovery:
Libya's oil production has stabilized at a level of 1.1 million barrels per day since the beginning of 2021, after reaching its lowest level at 390,000 barrels per day in 2020, due to the struggle amidst political parties over controlling oil resources. However, the current production level is still lower than what the Libyan oil sector achieved in 2010, when production reached about 1.7 million barrels per day. If the Libyan government avails the necessary funds for the oil sector development plan, the National Oil Corporation may be able to phase in raising the daily production rate to 2.1 million barrels by the end of 2025.
New Hindrances
Stabilizing the Libyan oil sector seems more likely now with the improvement of the political and security situation compared to previous years. However, there are institutional, political and social factors that may hinder the development of production in the medium term, which may be expounded as follows:
1. A struggle over power:
A dispute broke out quickly between the Libyan Oil Ministry, created with the formation of Government of National Unity, and the National Oil Corporation regarding the responsibilities of managing the oil sector, which also reflects major differences amidst the political parties in Libya.
Last August, the Libyan Oil Minister, Mohamed Aoun, issued a decision to suspend the work of the head of the National Oil Corporation, Mustafa Sanalla, claiming that he had violated the ministry’s policy by traveling abroad on a business trip without obtaining an official ministerial approval, which reflects the magnitude of the differences between the two sides.
Some views indicate that the dispute between the two parties is actually related to major issues in the management of the sector, most notably the objection of the Oil Minister to the National Oil Corporation concluding deals with foreign companies to develop oil fields without referring to the Ministry which believes that it has the primary right to approve and pass deals. This comes in addition to the objection to the mechanism of forming the corporation's Board of Directors.
In order to contain the dispute, the Libyan Oil Minister appointed a new head of the National Oil Corporation in September, a decision that did not last long, as the Prime Minister issued a decision to keep Sanalla in his position following weeks of tension between the two parties. The latter decision was also supported by Issa Al-Araibi, Head of the Energy and Natural Resources Committee in the Libyan Parliament. Nonetheless, the conflict of jurisdiction between the two institutions will continue, unless the re-drafting of the laws and regulations governing the oil sector is reconsidered, in order to determine the nature of the responsibilities of each side.
2. Labor and public protests:
The Central Bank of Libya estimated that the losses incurred due to the closure of facilities and oil export ports over the past years, because of public and labor protests or other security reasons, amounted to about $100 billion, which is equivalent to about 193% of the GDP for 2019.
Lately, the demands of oil sector workers have been renewed for the improvement of their financial and living conditions. Last February, the General Petroleum Syndicate demanded the implementation of Resolution No. 642 of 2013, which stipulates an increase in the salaries of the oil sector workers as well as applying medical and livelihood programs for them. The union threatened to take measures to disrupt production, should the ministry not respond to its demands. Faced with that, the Ministry of Oil only increased the wages of the highest administrative levels, and did not meet the demands of the other levels, which may portend the recurrence of labor protests and consequently also represents a grave danger to the production and export of Libyan oil.
The public sit-ins in the oil fields and export ports have also resurged recently. Last September, a group of young protesters staged a sit-in in the ports of Sidra and Ras Lanuf, demanding jobs. This disrupted transport and export operations for several days. In the same month, the Sidra and Zuwetina ports were closed after a threat by a group called ‘the Oil Crescent’ demanding the dismissal of Mustafa Sanalla, Head of the National Oil Corporation.
3. Providing for required funds:
The years of conflict in Libya have resulted in extensive damage to the infrastructure of the oil sector, including low pressure in the fields and erosion of pipelines and storage facilities. This requires huge funds for the maintenance and rehabilitation of the fields. The Libyan Oil Ministry demanded the allocation of 7 billion dinars ($1.5 billion) for this purpose, while the government allocated only 3 billion Libyan dinars ($655 million). Apart from this gap, the Libyan Parliament has not yet approved the current year's budget, which is a matter of contention between the Libyan political parties.
Furthermore, Libya needs large investments in order to raise the country's oil production to 2.1 million barrels per day. The National Oil Corporation has previously estimated that Libya needs investments of around $60 billion in order to reach the previous production level, along with increasing natural gas production.
Negative Political Developments
On September 21, the Libyan Parliament decided to withdraw confidence from the Government of National Unity led by Al-Dabaiba, a step that re-ignited political divisions in the country, in addition to the continuing dispute over the law for holding presidential and parliamentary elections. Consequently, this has direct repercussions on the management of the oil sector.
1. Disruption of the budget and sector allocations:
Withdrawing confidence from the Government of National Unity implies delaying the approval of the general budget for 2021, which means that the allocations for financing the infrastructure reform of the oil sector will not be released during this year. They will remain deferred until a new government is formed in case the elections are held on their new dates in December and next January.
2. Security instability:
Some political leaders, specifically the Supreme Council of State, which is affiliated with the Muslim Brotherhood, opposed to the Libyan Parliament passing a law to hold legislative and presidential elections, which paves the way for holding presidential elections next December, and parliamentary elections in January 2022. This may herald renewed conflicts between East and West Libya, or the attempts of Western Libyan forces to disrupt the course of the elections.
3. Disrupting the establishment of external partnerships:
Withdrawing confidence from the Government of National Unity creates an obstacle before concluding any future agreements or contracts with foreign countries or companies, since it lacks parliamentary support for such deals.
In conclusion, the oil sector, like all economic activities, is currently experiencing a degree of uncertainty regarding the soundness of the political process in light of the new changes, including the withdrawal of confidence from the Government of National Unity. However, this will not lead to a halt in Libyan production of oil, in light of the regional and international situation that supports the stability of the political scene in Libya. Nevertheless, these developments are likely to undermine the Libyan government's endeavors to raise and support production in the medium term.
