NARCO Analysis: Lock, Stock and Two Hundred Thousand Barrels
On global commodities markets, oil is fungible. One barrel is worth the same as another. But where oil comes from, in some places it’s worth more than others.
In Libya, oil is worth a whole lot more than whatever a barrel is commanding on some faraway exchange (which as it happens to be these days is not all that much.) In Libya, oil is not just mucky old dinosaur bones. In Libya, a barrel of oil is a whole lot more than the crack spread: it’s not just feedstock for gasoline, diesel, lubes, and naphtha. In Libya, oil is power. Oil is leverage. In Libya, where everyone has weapons, oil is the biggest weapon of them all.
The reason oil in Libya has these awesome attributes that it doesn’t have, say in North Dakota or even next door in Algeria, is that unlike North Dakota or Algeria, Libya has no government, or rather the government it has is less than useless. Or then again, maybe Libya has two governments, or three governments. But despite this, Libya still needs oil and the local communities where oil comes from are very well aware of how badly it needs it.
Leave aside the four main Oil Crescent export terminals in the Sirte Basin that have been the site of contestation and clashes since 2014. Take the example of the Sharara field in the Murzuk Basin in southwestern Libya. Sharara is just one recent example among dozens of smaller ones. Sharara is a big field. At capacity, it can produce 216,000 barrels per day (216kbpd).
Sharara was shut-in for most of 2015 because of a dispute about which armed group was supposed to secure the field. The local militia had been displaced by a militia from elsewhere in Libya and they shut down the field. Another community further to the north in the area through which Sharara’s pipeline passes protested the militia’s seizure of the oil field and shut the pipeline down. And so it remained, both field and transport network inoperable. In mid-2016, the dispute about which militia was to control the wellhead was resolved and Sharara was restarted, but the pipeline remained closed. In late December, the National Oil Corp. (NOC) struck a deal to reopen the pipeline. But as soon as oil was flowing again, a local community traversed by the pipeline shut it down again. An empty pipeline doesn’t afford much leverage, but fill it with two hundred thousand barrels of light sweet crude and all the sudden there’s a big old stick that communities can start swinging around and making demands. Communities in Libya may not be able to bunker crude off a pipeline like they do in Nigeria, but they can sure as sugar shut it down.
But during the period during which the field had been restarted, the pipeline shut down, and then the pipeline reopened, conditions at the wellhead had deteriorated. Not significantly and not for everyone – and this is the point – but for a small group of guys. Guys with guns. And these guys with guns – reportedly fewer than a dozen of them – took it upon themselves to shut the valve leading from the wellhead to the pipeline, thereby forcing engineers to shut down the field lest they damage the reservoir. But then other gunmen reopened the valve and the engineers restarted the field. Then the first posse of gunmen closed the valve again. And it was reopened. And it was closed. And it was reopened. All within the span of a week. And all the while, Libyan production was seesawing up and down by +/-200kbpd. And in this current depressed state, 200kbpd is equivalent to a quarter of Libya’s daily production.
Before all this started, Libya was producing 1.45 million barrels per day (mbpd). Under the mercurial Col. Muammar Qadhafi, post-sanctions Libya in 2005 was where it was at. If you were an international oil company (IOC) and you were not in Libya, then you might as well have started donating half your profits to Greenpeace because you weren’t going to be in the oil business for much longer. Oil companies went to Libya a lot to make sure they got the access they wanted to Libya’s oil acreage. Occidental’s Ray Irani went to Libya seven times to meet with Col. Qadhafi. ExxonMobil’s CEO Rex Tillerson went to Libya. BP’s CEO Tony Hayward went to Libya. And their governments carried their bags. Condi went. Tony Blair went. Sarkozy est allée. Each and every one kotowed to the crazy colonel in his tent.
One of the reasons that Libya was so hot was that it was underexploited. The sanctions that had been imposed on Libya because it sponsored and supported terrorism had made Libya’s oil fields off limits for more than two decades. They had been stuck in a time capsule. Another reason Libya was so popular was that it was cheap to get the oil out of the ground. Drive down into the desert, drill a hole in the sand, stick a pipe in it, and you’re pumping oil for a little more than US$7/bbl. Take whatever oil is trading at, subtract your operational costs and your capex, and the rest is gravy. Other places around the world that had oil were either dangerous (Nigeria) or expensive (offshore Brazil) or longshots (Morocco, Tanzania). Libya was a sure bet. And the cherry on top? The NOC knew what it was doing – a lot of its engineers and technicians had studied in the US (Texas A&M, Oklahoma University, Missouri State).
Fast forward to today. IOCs can’t get out of their Libya assets fast enough. In fact, most of them can’t get out of them at all. Marathon Oil Corporation has been trying to sell its Libya acreage since 2015 but can’t find a buyer. Occidental Petroleum managed to strike a deal with OMV, the Austrian company, but sold its assets at a loss. Total, Statoil, BP, Hess, and ConocoPhillips are all in holding patterns.
The reason these companies want to get out of Libya is because they can’t access their fields and are uncertain about when they will finally be able to return to Libya to restore reliable levels of production. Most IOCs are relying on Libyan nationals to manage their presence in country. Some IOCs are starting to send expatriate personnel back in to Tripoli, but only on a limited basis and still without access to the upstream. For publicly traded IOCs in a low oil price environment, their Libya assets no longer make financial sense.
IOCs are well aware that production has recently rebounded to roughly 760kbpd, which is still 50% below pre-revolution volumes. But IOCs are also well aware that these production levels are entirely dependent on Sharara continuing to pump, pipelines remaining open, and ports lifting. These are all far from sure things. Hence the IOC hesitancy.
The good news is that what is making Libyan production so spikey is not technical, it’s political. This was made evident at the end of 2016. First, a military offensive by the eastern military leader Khalifa Haftar ended a two-year blockade on Libya’s four main export terminals. This allowed for oil exports to resume. Then the Islamic State was ousted from its haven in Sirte, which restored a level of security in the upstream in the Sirte Basin. The reduced security threat from the Islamic State allowed engineers to get back to the fields for the first time in more than a year and permitted them to undertake repairs and do required maintenance that had been postponed. In August 2016, Libyan production was only 250kbpd. By December 2016, it was roughly 620kbpd.
But the production gains that Libya witnessed at the end of 2016 were only the result of a realigning of the political problem, not a resolution of it. The March 2017 battle over the Oil Crescent export terminals exposed just how vulnerable Libya’s hydrocarbons sector still was to political ambitions of this or that faction. The wild production swings in April that were a consequence of the Sharara shenanigans is another example.
If politics are the problem impacting production, then politics are also the answer, but the right political mix that will fix oil for good is not about the finding best balance of east and west and north and south. It’s about creating a national government that takes into account the concerns of local communities and convinces local communities that it is the responsible steward of Libya’s hydrocarbons wealth.
Neighboring Tunisia is a case in point. No one questions how many governments Tunisia has. There is no debate about eastern or western or northern or southern national oil companies. There’s just one government and just one oil company. And that oil company doesn’t even produce that much oil, only 45kbpd. But that hasn’t prevented local communities where the oil is pumped from leveraging it to force the government to acquiesce to their demands. Last week, protestors forced a foreign operator to shut down its facility – taking 10% of Tunisia’s production offline. The protestors want more jobs and a greater share of the revenue that the natural resources exploited in their community produce. The government is considering sending in the military to get production restarted.
The same is going to continue to happen Libya for a long time. Until a government in Tripoli or Tobruk is able to persuade the local communities where the oil comes from, through which the oil passes, and in which the oil is lifted that it has their interests at heart and that it is the best guarantor of their futures, then these local communities will continue to use oil to force the government to give them what they want. And because oil is worth more in Libya than whatever price it is getting on global markets, the higher the price goes, the more Libyan communities will bend their government over its barrels.