The point is to keep production from falling prey to theft and corruption.
Theft, corruption and injustice are getting dangerously close to strangling the newly reborn Libyan oil industry in its cradle.
Should anyone outside Libya care? Yes — OPEC, Europe and the U.S., to name a few.
On the face of it, National Oil Corp. had a good year in 2017, building on its successes of late 2016. The country’s production tripled between the third quarter of 2016 and the last three months of 2017 — a feat few thought possible.
But it still has a long way to go to get back to where it was before Muammar Qaddafi was toppled in 2011. And the recovery is at risk.
Libya’s oil production is halfway back to its pre-revolution level, but future output growth is at risk NOC Chairman Mustafa Sanalla, speaking at a conference in London last week, told a story that sums it all up. He described how at the end of last year, he sent a small team to investigate fuel smuggling in the west of the country, and found that 83 percent of fuel stations were non-operational, despite receiving deliveries. Nearly all of these “ghost stations” had been built after 2010, and he ordered fuel deliveries to them to be stopped. It didn’t work. Four days after he issued his order, he got a letter from the Prime Minister’s office telling him it was illegal.
Clearly the smugglers are very well connected.
But while such actions may not directly affect the NOC, which presumably got paid for the fuel it delivered, they risk causing local fuel shortages, leaving residents resentful. Those feelings do directly affect the company, which is the backbone of the Libyan economy and therefore a target in a country where salaries are often not paid for months and the population feels disenfranchised. Theft of company property is rife, while communities seeking employment or payoffs resort to blockading oil fields, pipelines and export terminals. The closure of the Sara group of fields from November to mid-January, started by the local municipality, halted the flow of 55,000 barrels of oil a day and cost the state more than $280 million.
And that loss of revenue also has a direct impact on the oil company. Like every other branch of the state, it has to compete for funds whose allocation is, at best, opaque. NOC received only half its capital investment budget in 2017, Sanalla says. That shortfall not only undermines prospects for output growth, it also puts at risk current production if maintenance programs are cut.
On the face of it, this unhappy situation should nevertheless help OPEC achieve its goal of depleting the world’s surplus stockpile. After all, rising Libyan oil production has undermined the cuts made by other members of the group, so shrinking it would help speed the market’s return to balance.
But Saudi oil minster Khalid Al-Falih should perhaps reconsider the comment he made last month, when OPEC and its friends met in Muscat. He said that Libya should focus on increasing revenue rather than output. The first takes advantage of higher prices, and the second requires volume gains that undermine the price. Relying on higher prices to boost revenue is fine in the short term, but as Al-Falih knows well, to benefit from the rebalancing of the oil market in the longer term producers need the capacity to boost production. And Libya doesn’t have it.
The light, sweet crudes produced in Libya are much closer in quality to the liquids produced from U.S. shale rocks than the oil that comes from the Middle East. More Libyan oil means less demand for U.S. exports. That ought to be some comfort OPEC.
Despite the competition for sales, the U.S. can also directly benefit from supporting Libya. The NOC wants to invest $20 billion dollars over the next three years to restore oil output capacity and is planning to locate its only overseas office in Houston. As Sanalla said in November, this would put
America’s world-class equipment manufacturers and oil field service providers at the center of our procurement strategy.
Yes, that may be a cynical attempt to get the attention of a U.S. president who thinks in terms of what benefits the nation, but it also sends a clear message to American oilfield service companies and operators, who have long historical ties to Libya. And it’s not just the sheer size of the NOC investment — the U.S. also imports about 70,000 barrels a day of its oil. Canadian refiners and European buyers would also feel the sting of disruption.
Libyan Crude Flows
European buyers dominate, but Libya’s crude oil exports span the globe. So when Sanalla calls on the rest of the oil world to support his company, it should do as he asks. Focusing policies towards Libya on what the country needs — including inward investment, stable communities and an accountable government — is a good place to start.