Libyan oil: Prospects for stability and growth...US 58 Source: MEES 0 200 400 600 800 000 200 400...
Transcript of Libyan oil: Prospects for stability and growth...US 58 Source: MEES 0 200 400 600 800 000 200 400...
Vol. 03 No. 14 | November 2018
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Mustafa Ansari | Senior Economist
[email protected] | +966 (0) 13 859 7119
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. Libya’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 mean a
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
significance to global markets. A near-doubling of output
between July and October, to 1.28 million barrels per day (mb/d)
came just as Libya’s fellow OPEC members sought to lift
production to offset losses elsewhere and keep global supply
balanced. Yet Libyan oil-output volumes since 2011 have been
volatile. Output was almost 1.6mb/d on the eve of the revolution
that year. Since then, production has oscillated within a wide
band, dropping as low as 200kb/d and topping out at around
1.4mb/d. Having almost reached that level again now – an
achievement given significant headwinds facing the sector –
further growth is plausible by 2020. It depends on the kind of
political stability that will give investors confidence to carry out
work upstream and midstream, including replacing damaged
facilities and infrastructure.
Libyan oil’s advantages
Libya has four distinct advantages as an oil producer – the
reason why international oil companies (IOCs) have for decades
been so keen to invest in Libya’s upstream oil sector. First, its
reserves remain substantial: at more than 48 billion barrels, or
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.
National Oil Corporation (NOC), the state oil company, believes
further exploration will significantly expand the recoverable-
reserves base. Although the Sirte Basin has been extensively
explored, the Murzuq, Ghadames, Kufra, Cyrenaica Basins and
offshore Gulf of Sirte have been relatively under-exploited and
still hold huge potential.
Second, Libyan oil is relatively easy to extract, and the
installation of production and export infrastructure has
historically been straightforward, allowing the oil-rich hinterland
to be connected to several distinct export terminals on the more
populated coast (see map on page three). This pipeline network
is extensive, allowing for significant expansion of production
when it becomes available. By comparison with many other oil
basins, Libya offers few of the geographical obstacles to easy
exploration and development.
Third, except for some offshore oil production on the Pelagian
Shelf, offshore Tripoli, Libya’s oil streams offer sweet, high-
quality crude oil that can command a premium in international
crude oil markets. It is the sheer quality of this oil, and therefore
its direct influence on the top end of the crude-oil-market
complex, that makes the country’s supply so significant to the
world economy. It is no coincidence that the International
Energy Agency’s most recent emergency stock release
occurred during 2011, to replace oil lost as Libya’s energy
sector shut down during the civil war that year.
The fourth advantage, is that Libya’s oil is also close to major
consumer centres. Sailing times to European ports, which take
the bulk of Libyan crude-oil exports, range from two (Sardinia) to
11 (Rotterdam) days, compared with close to a month for Asian
destinations. Even so, Chinese, Taiwanese and other Asian
countries are now also significant importers of Libyan crude –
another example of the increasing importance, particularly in
recent months, of Libya’s oil to global markets. Significant
natural gas reserves, especially in the Ghadames Basin, have
also allowed Libya to become a major exporter of gas to Europe
through the Greenstream Pipeline to Italy.
Oil receipts dominate the economy: according to the IMF, oil
accounts for more than 90% of fiscal revenue, a share higher
than in any other Arab oil-exporting country. Non-oil exports of
goods and services are under 3% of total GDP, according to the
most recent data available. This is relevant in considering the
prospects of Libya’s oil output, for three reasons. First, it links
the Libyan real economy more closely to movements in
Libya crude oil - high quality
Key fields Quality Sulphur content
API degree (%)
Bu Attifel 43.3 0.06
Mabruk 35 0.26
Amal 36 0.17
Sarir 37.6 0.16
Waha 36.3 0.44
Zueitina 41.5 0.31
Bouri 26.3 1.91
Jurf 30 1.90
Shahara 43.1 0.07
Feel 43.1 0.07
Source: IEA
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international oil prices than many other oil exporters: this
exposes the post-2011 political landscape to exogenous
economic and oil price shocks. Second, oil’s significance to the
economy means the sector has been contested between local
rival groups. Prospects for further production growth will rely
therefore on a settlement between competing parties about how
best to handle Libya’s current and potential oil wealth. Third, as
Libyan parties and international partners seek a peace
settlement, the country’s energy sector could further thrive,
leading to higher flows of oil revenues.
Oil sector more resilient to instability
Competition for oil assets in Libya has been a theme in Libya
since the events of 2011. Three distinct phases since then have
been visible and are reflected in the changes in Libya’s oil output
– the fourth is yet to come. First, between mid-2011 and mid-
2013, a period of relative stability allowed the swift recovery of
almost all oil output lost during the civil war. These years
included elections to form a new government (after the war-time
National Transitional Council handed over power) and efforts to
draft a new constitution. The events of 2011 had inflicted little
damage to energy infrastructure and production growth back to
more than 1.4mb/d was achieved in little more than six months.
It was an astonishing recovery and testament to the wealth of
professional expertise within the Libyan oil sector. This was not
the last time that the resilience of the country's energy industry
would surprise outside analysts.
Events in Tripoli laid the ground for the next phase, from
September 2013 to September 2016. A political split in the
country manifest itself in several ways. First, in mid-2013, the
Petroleum Facilities Guard (PFG), entrusted with securing key
oil-export infrastructure, shut down the ports of the Sirte Basin’s
oil crescent. The closure lasted until September 2016. Libya’s
economy struggled in these years, making efforts to build a new
post-revolutionary landscape more difficult. Partly because of
this, oil-output disruptions grew more frequent, as armed militias
established a pattern of shutting fields and infrastructure to
demand higher salaries and improvements in conditions.
Another manifestation was the advent of two rival parliaments
and governments and the emergence of two broad alliances
fighting on their behalf. In Tripoli, the General National Congress
(GNC) held power. A second parliament, elected in 2014 to
replace it, eventually based itself in Tobruk. In the east, tensions
between the two drove instability that continued until late 2015
and affected the Sirte Basin, Libya’s most prolific oil province.
Insecurity at the two export terminals of Ras Lanuf and Sidra
reduced throughput so that oil production between mid-2013 and
September 2016 averaged 390kb/d, less than a quarter the
output of 2010.
The third phase, still underway, began in September 2016, when
NOC regained operational control of the Sirte Basin and output
began to rise, cresting 1mb/d in April 2017. Production has
dipped periodically since then due to disruptions but has also
rebounded strongly so that in October 2018, NOC said output
was at 1.25mb/d. Once again, the resilience of Libya’s oil sector
defied outside sceptics – and revived hopes that a period of
sustained stability would underpin a fourth phase to come: one
in which NOC can deliver on plans to regain 2011 output levels
of 1.6mb/d in 2019 and push towards 2mb/d by 2022.
Libyan output since 2010 (kb/d)
Source: IEA
This phase also enhanced the ability of NOC to capture a higher
price for their crude. Despite the higher quality, Libyan crude
prices have been depressed relative to other types of similar
crudes as delays in deliveries due to disruption in production and
unplanned maintenance meant that traders shied away from
buying Libyan crude. However, such issues have largely been
reduced as traders are gaining more confidence in the ability of
NOC to deliver. Moreover, buying interest from new players,
including Chinese refineries, has increased. For the last few
months, loadings have remained largely on track and deliveries
have been very much on schedule. The NOC agreement with
Shell to provide oil for the rest of 2018 helped stimulate trust
from other participants.
Rapid oil-output growth
The third phase has set up the fourth by already delivering some
notable positive developments for Libya’s oil sector in the past
year. Some oilfield service activity has resumed, including the
return of Schlumberger to work with Sirte Oil and Gas, a unit of
NOC. Wintershall and Gazprom have restarted production from
the As-Sarah field, in the Sirte Basin. Drilling activity in the
country has increased. More rigs are now operating than at any
time since 2014. Offshore, ENI has brought new wells online at
its Bahr Essalam development. Some international oil
companies are pledging onshore investment, including
exploration.
Exports by destination (kb/d)
Country Volume
China 134
Croatia/Hungary 25
France 113
Germany/Austria 70
Greece 24
Italy 168
Malaysia 32
Netherlands 47
Spain 159
Taiwan 24
UAE 16
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Map of Libya’s Oil Crescent
Source: International Crisis Group
Earlier this year, Total announced its plan to buy Marathon’s
stake in Waha, operating in the Sirte Basin – a demonstration of
the French firm’s commitment to the country. BP and ENI
announced plans to begin exploration in the Ghadames Basin, in
Libya’s west, as part of a transaction that transfers some of BP’s
interest in the concession to ENI. AGOCO, the largest producing
company in NOC’s stable, has issued tenders for surface work.
NOC exudes optimism – chairman Sanalla has become a tireless
advocate for both Libya’s upstream and the state company’s
political independence and reliability.
The next step requires a conducive environment for these
announcements to materialise into projects under execution. To
date a handful of oil and gas projects are commissioned, namely
on the gas side, totalling $3bn with a further $350m in the
planning phase. This is compared with the $4.5bn worth of
projects that were due for completion between 2011 and 2017
that have been cancelled. More significantly, $16bn worth of
projects awarded since 2008 have been put on hold, amongst
them, the $3bn renovation of the Marsa LNG project, the $5bn
Zuwarah refinery and the $2.5bn Wafa field development.
NOC faces some challenges ahead. Insecurity has left some
infrastructure damaged, which will force NOC to undertake
remedial and repair work. New storage tanks are needed at Es-
Sider and Ras Lanuf in order to facilitate higher loading rates for
tankers. Higher production, if sustained, should however create a
virtuous circle, allowing for more funding of the oil sector to
repair facilities and therefore expand capacity.
Prospects for lasting peace
In a statement to the UN security council earlier this month, Mr
Ghassan Salame – the UN envoy to Libya – highlighted that the
Libyan conflict is in large part “a conflict over resources”, and
that stability is conditional on its resolution.
In the first half of 2018, oil revenues reached $13bn, in turn due
to higher oil production and a recovery in prices. But it is also
true that the citizens are not seeing these revenues translated
efficiently into public services or benefits. Recent reforms have
been launched, aimed at improving living conditions and
reducing opportunities for militias. For instance, the introduction
of fees on foreign currency transactions reduced the black
market rate by 25% and helped close the gap between the black
market and the official rate. Whilst further reforms on phasing out
fuel subsidies, should also curb the arbitrage that has stimulated
cross- border smuggling. The country is beginning to see a
surplus, reducing the liquidity crisis. The conference in Palermo
held earlier this month could provide an opportunity to gain the
support needed to establish a system for redistribution of
national wealth for the whole population. Mr Salame praised a
“much higher level of conviviality among Libyan stakeholders”
and considered the conference a success and a "first step in the
right direction". However, at the end of the conference, there has
been no written agreement and no clear timetable as to when to
hold the national conference or the election process.
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Stability in the country is conditional on security, a healthy
economy, and a functioning political environment. This is critical
to NOC’s efforts to increase oil production and secure the
necessary inward investment in the upstream. After years of
under-investment, several fields, including AGOCO’s Sarir, need
improvements to electricity supply and replacement of some
infrastructure. Providing a stable environment in which this kind
of work – as well as well-workovers, pigging operations, in-fill
drilling, enhanced recovery, and so on – can be carried out
unhindered, will be a key part of NOC’s plan to lift oil output to
2mb/d by 2022. If achieved, this too, will create another virtuous
circle, allowing greater oil income not only to sustain NOC’s
expansion plans, but to support much-needed investment in the
non-oil economy and improvements to social infrastructure.
Conclusion
Libya’s current output of 1.25mb/d is a testament to the
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 –
arrived at a critical juncture for the global market.
Libya’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 mean a geologically prolific oil province awaits
investors. The promise of Libya’s upstream must also be
matched by political progress too. Recent discussions between
groups in the country offer the chance for momentum to build
towards a lasting settlement in the country. The summit in Sicily
should bring commitments of support from Libya’s friends in the
international community. Libya remains one of the crucial global
suppliers, with a significance to the world’s oil market far beyond
its Mediterranean shores. A better investment climate, is
however, needed for the country to fulfil its substantial upstream
promise.
© Arab Petroleum Investments Corporation
Comments or feedback to [email protected]