Libya faces crisis as oil production ‘hijacked’
LIBYA is facing an oil production crisis which is having a devastating effect on the country's economy. Onshore oil fields, installations, and port facilities have been hit by strikes, sabotage and cuts, which have nearly halted both production and exports.Months of disruption by protesters, armed industrial action, and political rivalries between different groups vying for control of local oil and gas resources have seen a significant fall in both oil production and exports. This has come two years after Libya's former leader Muammar Gaddafi was killed in 2011 after falling into rebel hands.
In October 2013, militias in eastern Libya seized control of key oil infrastructure as they demanded the centres of oil power move east from the central government in Tripoli to Benghazi, home of the civil war that ultimately brought an end to the Gaddafi era.
Oil is the main source of revenue for the North African country and the disruptions have cost the government and economy billions of dollars.
Only offshore fields remained largely out of the militia’s reach and have been supporting Libya’s production. However, offshore volumes tend to be small.
In the east, where most of the country’s oil reserves are located, five terminals - accounting for at least 740,000 b/d of export capacity and including Libya’s largest terminal, Es Sider - remain shut.
The government is hoping to reach a deal with rebel groups in this area but most observers do not share this optimism. They argue that various factions are taking advantage of the weakness of the current government to extract various demands by using a most powerful tool: hijacking the oil sector - Libya’s sole substantial source of income.
After the 2011 civil war, Libya exceeded expectations and rapidly ramped up its oil production by more than one million barrels per day and doubled its real GDP. That recovery, however, was short lived. Since early 2013, production has suffered badly.
In August 2013, oil production fell to 407,000 b/d – a meagre 24 per cent of the pre-war level, even less than the country produced during the war, and significantly lower than the government target of 1.7 Mb/d.
Even during the military coup which brought Colonel Muammar Gaddafi to power in September 1969, oil operations did not suffer disruptions. In 1969, Libya’s oil output was much higher than today (3.1 Mb/d) and reached a peak a few years later, exceeding 3.3 Mb/d in 1971.
The north African country has no shortage of oil resources – both conventional and unconventional. Libya holds Africa’s largest proven oil reserves. Its potential may be much bigger as only about 20 per cent of the country has been explored.
The recent loss in production has no precedent in Libya’s history. Existing oil companies have scaled down their activities. And the main victim of this situation is the Libyan economy, which is poorly diversified and heavily reliant on hydrocarbon revenues. Oil and gas account for nearly 96 per cent of government revenues and 98 per cent of export revenues. During the civil war, the drop in oil and gas production led to a contraction of real GDP by 62 per cent.
The International Monetary Fund (IMF) recently warned that current levels of government expenditures are unsustainable if oil production does not return to pre-2011 levels, putting the country at risk and further fuelling already heightened socio-economic tensions.
Libya suffers from a high unemployment rate especially among its young population, while much-needed private investment has remained anaemic.
Libyan officials announced in May 2013 plans to review and draw up a new Petroleum Law for a 2014 licensing round which would offer more attractive fiscal terms in an attempt to entice international oil companies.
Libya should be on the radar of every international oil company when considering the size and quality of the country’s oil and gas reserves. But the latest developments have distorted the risk-reward balance that investors aim to achieve.
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