By Salma El Wardany on 9/10/2021
(Bloomberg) –Libya’s oil production is in danger of slumping again, as a political power struggle threatens to end a period of relative stability.
The standoff comes at an unfortunate time for the North African country, potentially depriving it of substantial revenue as crude trades above $70 a barrel. It could also prove tricky for the global oil market, shutting some Libyan production right after Hurricane Ida halted a record amount of U.S. output.
Here’s how Libya found itself in this situation, and what could happen next:
What triggered the crisis?
It all started in March, when the government in Tripoli set out to restore the Ministry of Oil. The department had been a weak for several years, with Oil Minister Mohamed Oun having little influence over the country’s industry.
Instead, Libya’s large production and export facilities had been controlled by Mustafa Sanalla, chairman of the National Oil Corp. He had effectively run the energy sector, signed agreements with international oil companies and represented Libya at meetings of the Organization of Petroleum Exporting Countries.
The ministry’s attempt to assert greater control sparked an internal crisis. Oun asked the government to dismiss Sanalla and reshuffle the NOC’s board, saying the chairman had violated policy by traveling on a business trip overseas without prior approval. Sanalla refused to implement the order, resulting in a deadlock.
How is this affecting the oil industry?
After a long period disruptive conflict, Libya has been being able to stabilize oil production above 1.2 million barrels a day for most of this year, three times the average level in 2020.
Protesters — some of them calling for Sanalla’s removal, others demanding jobs — halted oil exports from three key terminals: Es Sider, Hariga and Ras Lanuf in the country’s east. Others have also threatened to shut down production in other areas including Sharara, the nation’s biggest oilfield.
On Sept. 8, a Libyan official said the disruptions risk cutting production by 800,000 barrels a day, within days. The situation has improved somewhat since then, with loading resuming at Es Sider and Ras Lanuf after differences with protesters were resolved.
The row adds another layer of uncertainty for international oil companies working in Libya, said Illiasse Sdiqui, an associate director at Whispering Bell, a risk-management company covering North Africa.
What’s the political context to the dispute?
A transitional government is leading Libya until elections in December. If that vote happens peacefully, it could concluded a United Nations-led process to reconcile rival factions and formally end hostilities in the country.
Prime Minister Abdul Hamid Dbeibah has sought to portray himself as a mediator between two sides. This week he met with both Sanalla and Oun, effectively keeping the NOC chief in his post and urging “wisdom” to maintain the stability of the sector.
Nevertheless, after his meeting the oil minister issued a statement saying his order to suspend Sanalla was still in place. For the prime minister, Oun’s appointment was a calculated moved intended to put greater checks on the NOC, said Jalel Harchaoui, a senior fellow at the Switzerland-based Global Initiative Against Transnational Organized Crime.
Over the past seven years, Sanalla has accumulated power that sometimes exceeds his remit as the NOC chairman. Late last year, he refused to deposit money from crude sales with the central bank until it demonstrated “clear transparency” about how it spends the funds.
“Dbeibah certainly has not regretted his decision to revive the Oil Ministry, nor has he regretted picking Oun for the job,” said Harchaoui. “If he hadn’t done so, Dbeibah would have had zero influence on the NOC and its financial flows.”
Who is in the stronger position?
Sanalla is respected internationally as the man who was able to maintain Libya’s production capacity through many years in which various armed groups or protesters periodically shut down oil facilities to press political or economic demands. He has kept the NOC largely neutral amid the deep political and tribal divisions present in the country.
“Many within the NOC view Oun as a disruptive figure who consumed them in a political and technical crisis & broke decades of neutrality,” said Anas El-Gomati, director of the Sadeq Institute, a Libyan think tank said.
Yet the Oil Minister also has significant leverage. “Whilst Oun does not have the political authority to remove Sanalla, he is able to coordinate with allies in the east to use tribal forces for plausible deniability and force closures of oil terminals,” El-Gomati said.
People in the south and the east of the Libya who have long complained that oil revenue was being distributed unfairly, to the disadvantage of the historically marginalized region. Now some of these protesters are now tying their grievances to Sanalla’s chairmanship of the NOC, placing significant new pressure on the company, said Sdiqui of Whispering Bell.
Is there a way out of the standoff?
Interruption to the flow oil exports, which provide nearly all Libya’s foreign revenue, could derail the relative peace in and be devastating for efforts to rebuild the North African nation. Yet there is no obvious way to defuse from the crisis.
“There is a clear administrative overlap between the Ministry and NOC and it is unclear how this can be resolved before the 24 December, when the interim government’s mandate will technically expire.” Sdiqui said.
The dispute between Oun and Sanalla isn’t just political, said El-Gomati. It has become so personal that mediation may be impossible, he said.
Much will depend on how far the situation escalates, said Harchaoui. If the current protests transform “into a full-blown blockade, it will not necessarily be easy to resolve it.” he said.