Could the large-scale shutdown of oil supplies in Libya continue for several months?

The episodes of the cult soap opera 'Soap' from the late 1970s to the early 1980s began with a reenactment of a series of bizarre events, followed by the line 'Confused? You won't be after this week's episode.' Since the removal of longtime leader Muammar Gaddafi in 2011, the events behind each oil shutdown in Libya vividly resemble the introductory part of 'Soap' like a crystal. The reasons behind the latest oil field closure are similarly complex and may take a long time to resolve until the current major stakeholders reach a resolution.

Before Gaddafi was ousted as leader, Libya was easily producing about 1.65 million barrels per day (bpd) of high-quality light sweet crude oil. Production had also been increasing from about 1.4 million b/d in 2000. While this production level was far below the peak of 3 million b/d achieved in the late 1960s, the National Oil Corporation (NOC) had plans to introduce enhanced oil recovery (EOR) techniques to increase crude oil production in maturing fields before 2011. Many international oil companies (IOCs) were also interested in expanding production in existing fields and exploring new opportunities for oil and gas. Ultimately, Libya still has confirmed reserves of 48 billion barrels, making it the largest in Africa.

After Gaddafi was ousted from power, a power vacuum emerged, leading to multiple factions vying for the largest share of this vast petroleum wealth. By 2020, two spheres of influence had emerged: the Libyan National Army (LNA) led by General Khalifa Haftar and the Government of National Accord (GNA), which was recognized by the UN at the time. Until an agreement to end the conflict was reached between both parties, Libya's oil fields were almost completely blocked from January 18 to September 18 of the same year (modest estimates put the loss of petroleum revenue at USD 9.8 billion). However, Haftar clearly stated that the agreement would be conditional upon certain measures being taken to fairly distribute income from petroleum sales among the major warring factions. Shortly after this demand by Haftar, Ahmed Maiteeq, the then Vice Prime Minister of the GNA, stated that a committee would be formed to decide on the method of distribution of petroleum revenue by the end of 2020.

In order to address the fact that the Government of National Accord (GNA) effectively controls the NOC and, consequently, the Central Bank of Libya (where petroleum revenue is physically stored), the same committee was tasked with creating a unified budget to meet the needs of all parties... The committee was also responsible for reconciling conflicts over budget allocations and requiring the Central Bank (in Tripoli) to promptly cover the monthly or quarterly approved payments as requested by the Joint Technical Committee. According to Washington legal sources closely involved in energy matters, as interviewed by OilPrice.com, the NOC was working on an alternative banking transaction agreement regarding the ultimate distribution of petroleum revenue involving more players than Haftar and his LNA or elements of the UN-recognized GNA, but the details were never finalized and no alternative proposal was subsequently put forward.

As a result, Libya has repeatedly halted some or all of its oil fields under various false pretenses that only disguised attempts at asset grabbing by various factions involved. For example, just before this large-scale shutdown, a minor shutdown occurred in early August, seemingly triggered by the arrest of Haftar's son, Saddam Haftar, on suspicion of arms smuggling, leading to his temporary detention at Naples Airport after being listed in the European Union's (EU) database. This incident followed comments by former UN Libya Special Envoy Abdul Razak al-Beatel, who stated that Libya was becoming a mafia state dominated by gangs involved in weapon smuggling. In fact, in September of last year, General Haftar visited Moscow and met with Russian President Putin. Putin's Wagner mercenaries are supporting the LNA forces in Libya. Furthermore, in early July, Italian authorities seized two Chinese-made military drones disguised as wind turbine equipment destined for Libya.

The attempt to dismiss the current Governor of the Central Bank of Libya, Sadik Al-Kabir, is the current cause of the blockade. General Haftar and the LNA forces in the eastern region (where most of Libya's major oil fields are located) oppose Al-Kabir's dismissal. On the other hand, Prime Minister Abdul Hamid Dbeibah, based in the capital of western Libya, Tripoli, along with his internationally recognized Government of National Unity (GNU), wishes to see Al-Kabir removed from office. In a televised broadcast on August 26, the separate Government of National Stability (GNS), based in Benghazi, and supported by General Haftar, stated that "force majeure" would apply to all oil fields, terminals, and facilities in the Oil Crescent, the south, and the southeast, effectively halting the country's oil production. The following day, several major oil fields in Libya, including the El Feel oil field with a capacity of 70,000 barrels per day, ceased operations. Meanwhile, the oil companies in Sirte and Waha announced a gradual reduction in their joint production of around 200,000 barrels per day. As of last weekend, Libya's crude oil production has fallen by over 60% from the average of 1.15 million barrels per day in July. The previous strict application of such production shutdowns was in 2020, and it lasted for 8 months.