Libyan Oil Held Hostage By Politics

In 2011, when Libya’s rebellion raged and Qaddafi was on the run, the conflict completely shut down the country’s oil production. State oil companies halted work, international oil companies fled, and production of 1.6 million b/d was suspended. While some facilities were damaged, the industry was largely spared. It bounced back with miraculous speed in 2012. By the end of last year production had returned to 1.5 million b/d.

Now, however, Libyan oil—the beating heart of the economy—may be more vulnerable than it was during the civil war. In recent months it has become a hostage to politics and public grievances. Demonstrations and protests have shut down refineries and ports for days; labor strikes have closed some facilities; and militias have threatened other terminals in protest of Tripoli’s hold on power.

The steady rise in the frequency of these incidents forced Prime Minister Ali Zeidan to respond harshly this week. On January 9, he told AFP, “We will be compelled to use force to protect the state… Oil is our only source of revenue.” With urgency he added, “We cannot be patient when violence results in the disruption of oil supplies and the loss of life.” The prime minister’s comments followed the closure of Zueitina in late December. The oil terminal and port exported 60,000-70,000 b/d before being forced offline by protesters two weeks ago. (Over that period, the European benchmark oil price stood at $111, meaning losses at Zueitina have probably eclipsed the $100 million mark.)

Whether or not the central government can act decisively—to address grievances or break up protests—is an open question. Judging by most reports, though, it seems that the scale of demonstrations should be manageable. For the government, the sudden uptick in protests is a major test of both its power and prudence. Can it secure its most vital industry without shedding blood? And can it calm the nerves of foreign investors and oil companies?

Activists have taken to sit-ins on major roads. Some prevent staff from entering facilities. In April, state-run AGOCO (Arabian Gulf Oil Company) closed its offices for two weeks and cut oil production by 100,000 b/d. Each protest is different but certain complaints have become more common. Chief among these are jobs and wages. Many believe it is their right to a higher standard of living and that the state-owned oil companies should be more generous. This demand would have been unthinkable under the old regime. Last year, activists also demanded that the government be more transparent and address youth unemployment.

Another group of protesters has made headlines repeatedly. Composed of hundreds of veterans demanding compensation and medical care abroad, they closed down the Zawiya Refinery at least once in November (capacity: 120,000 b/d). Protests at other facilities that feed Zawiya prompted a group of Libyan oil officials—including the oil minister—to visit the site in mid-December as the situation grew worse. Production was eventually suspended.

Perhaps most worrisome of all was an episode in July that, to my knowledge, we have not seen a repeat of. On July 6, gunmen forced two oil terminals offline ahead of Libya’s first free election. Their complaint: Libya’s eastern province—so long neglected by Qaddafi—was not granted enough seats in the new National Congress, to be elected the next day. The men arrived in pick-up trucks with anti-aircraft cannons and demanded that crews shut down operations. With that, Ras Lanuf was closed for days and exports were temporarily slashed in half (at mid-2012 levels).

Since then, other offices in the east have been targeted by citizens who fear Qaddafi’s favoritism of western Libya will only continue under the new government. The National Oil Company may ultimately split its offices and personnel so that Tripoli (in the west) controls oil exploration and production while Benghazi (in the east) manages the refining and petrochemical industries. There’s no telling if the move could really soak up venom and mistrust, however.

Any discussion of this topic would be incomplete without measuring the impact. If we judge by export volumes, so far, these disruptions haven’t added up to much, probably because they only last a few days each and affect anywhere from tens of thousands to just over a hundred thousand barrels on a given day. In the fourth quarter of 2012, when protests grew more frequent, oil production climbed to 1.5 million b/d and remained steady through December.

Estimates by oil ministry officials suggest losses can be calculated in millions or tens of millions of dollars. As noted above, the real costs are now approaching 9-figures. With its ample funds, however, Libya’s government still has some breathing room. Domestic consumers are feeling the brunt of these losses: refinery shutdowns inspired petrol station rushes and shortages in major cities supplied by those facilities. Real dangers still linger and there remains the threat of escalation, deterioration of public opinion, and the challenge posed to a fragile government.

Regarding escalation, we should keep in mind that militias have not systematically targeted the country’s most vital industry—yet. But it remains vulnerable and the situation could change overnight. Public perception is also essential. Libya’s government is representative but weak. An overly aggressive response to protesters, including veterans, would be counterproductive for leaders seeking a mandate. Right now, Libya plans to expand oil production with the help of international companies. Repeated closures may force these companies to think twice about their commitment.

One hopes force is not the solution, although Prime Minister Zeidan’s frustration it totally understandable. Instead, the state should persuade while projecting force, although it should be careful not to use it. Additional security is clearly needed at these facilities. Authorities announced this week that the army will be deployed to protect critical infrastructure. At the same time, the government has moved to negotiate with protesters. It must do so in a discreet way so that other groups do not rely on the same tactics and target the oil industry anew.

Maintaining a sustained dialogue with the east should be the highest priority because this division defines the country’s post-revolutionary politics. Healing the divide will take a generation or more, but splitting up the National Oil Company may be worthwhile. It will not be sufficient though. Leaders might also want to consider substantive and symbolic moves that elevate the east’s concerns. Calling an emergency committee to address underdevelopment in the east is a start. Perhaps a special budgetary supplement is in order.

Libya’s oil industry will only be secure if authorities tackle today’s complaints and Qaddafi’s legacy.

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