NARCO Analysis September 2014 Part #1

Friday, September 5, 2014

If Libya continues on its current trajectory, it will find itself in a very strange situation indeed. The early phases of civil war have raised the levels of violence in Benghazi and Tripoli as high as they were during the peak of the conflict to overthrow Muammar Qadhafi’s government in 2011. At the same time, however, Libyan crude exports reached their highest levels in more than a year and appear to be steadily increasing. In short, political stability is decreasing but oil production is increasing. An odd circle to square.

The fact that Libya has headed toward civil war is no real surprise. Not only did Qadhafi leave behind dysfunctional state, but Libya also had one major structural factor handicapping its transition to a post-Qadhafi polity. Oil producing countries are predisposed to civil war. Various conditions such as production volumes, population size, and ethnic divisions increase or decrease the likelihood of civil war and the conditions in Libya ranked it right up among the top contenders.

One of the reasons that oil producers are prone to civil war is that unlike “lootable” resources (eg. gold, gemstones), in order to capture oil rent, it is necessary to capture the entirety of the sector, from the wellhead to the export terminal. This means seizing and holding territory. Partial control can disrupt the sector and deprive opponents of revenue, but it does not capture revenue for oneself – a lesson that the federalist Ibrahim al-Jadhran learned back in March. (There are some exceptions like the Niger Delta, due to the kind of crude, population density, and proximity of markets.)

However, as Libya is now demonstrating, civil war or acute political instability does not necessarily mean that oil production is disrupted. For example, Iraq and the Kurdish Regional Government continue to export oil despite secessionist tensions and an extremist insurgency. Onshore production continued in Angola throughout much of that country’s civil war as well.

What this means for Libya is that it is not entirely doom and gloom, at least as far as the oil sector is concerned. Yes, fighting is flaring in Benghazi and Tripoli’s international airport smolders. Yes, the former head of the General National Congress (GNC) that was supposed to have been replaced earlier this month by the House of Representatives (HoR) refuses to recognize the HoR’s legitimacy. And yes, the HoR is like a mime in an empty room – speechless and fervently gesturing to no one.

The disruption of Libya’s oil production over the last 18 months was driven primarily by local grievances – communities staged sit-ins, blockaded or otherwise interfered with sector activity in order to compel the GNC to address their complaints, often about jobs and money. Such disruptions are unlikely to be repeated. On the one hand, the GNC capitulated to the protestors’ past grievances and as long as those deals hold, there is little reason for communities to interfere anew. On the other hand, there is no government to speak of (or, alternatively, there are two governments), so whose attention would the protestors like to draw? Who is benefiting, if anyone, from oil receipts is another question. It is not entirely clear who has access to Libya’s oil accounts in Europe and to whom those funds are being transferred in Libya, if at all.

Nonetheless, risks remain. First, war is unpredictable. Unconfirmed reports circulated in the last several days that buildings belonging to one of Libya’s oil companies had been hit by rockets. Although fighting is currently far from Libya’s oil infrastructure (both upstream and downstream), were this to change, risk of an inadvertent disruption of production or exports would rise. Second, losers become desperate. The destruction of Tripoli International Airport and the persistent attacks on the Brega oil depot show that not all parties to the conflict value strategic assets the same way. While the predominant perception is that no one side in the current clashes would want to harm Libya’s goose that lays its golden eggs – not least because they would stand to inherit it if they won – the conflict may become so drawn that oil infrastructure in the upstream or downstream is targeted.

For the moment, though, Libya is living in a strange suspended state – civil war looms but exports boom. For how long? This will depend on the relative strengths and weaknesses of Libya’s warring factions.


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