ANALYSIS: Why Libya’s lifeblood needs a transfusion

The jetties of the Es Sidra oil port on Libya’s glittering Mediterranean coast should be crowded with shipping. Tankers should be loading, or waiting to load, from the busiest oil port of the country with Africa’s biggest oil reserves. Instead they are empty, victims of an oil blockade now into its 11th month that is strangling Libya’s finances.

The blockade of Libya’s oil ports looms over every other crisis the new parliament, elected last week, will face. Oil is Libya’s lifeblood. Ninety percent of government income comes through oil and gas revenues, and in turn most of Libya’s population depends on this largesse to survive. Fully 70 percent of the government budget is spent on payments, transfers, pensions and subsidies, and that budget is now deep in the red.

Crude games

Oil and politics began their combustive mix in July last year when Ibrahim Jadran, the charismatic head of Libya’s Oil Facilities Guard, tasked with protecting Libya’s oil installations, announced a strike. Es Sidra and three more eastern ports, together accounting for two thirds of Libya’s exports, were shut down overnight.

The protest began about wages and working conditions, but quickly swelled into political demands for central government to spend more on rejuvenating the oil-rich eastern province of Cyrenaica. Jadran formed his own self-declared Cyrenaica government, the Barqa Council, named after the Arabic name for the province, complete with a full cabinet, and demanded regional autonomy.

Disputes then spread to Libya’s second oil and gas-bearing region, in western Libya close to the borders of Algeria and Tunisia. In the south-west, ethnic Tobu militias blockaded oil fields. Further north, Zintani and ethnic Amazigh brigades closed pipelines, and Amazigh forces twice closed the Melitah pipeline that exports gas to Europe.

The strikes, sometimes coordinated, sometimes random, have seen production plummet over the past year from 1.44 million barrels a day to 200,000, and government revenues with it.

For the moment the budget shortfall is being made good from foreign exchange reserves, but the Central Bank has refused to burrow deeper and liquidate portions of Libya’s massive overseas investment portfolio, estimated to exceed $US100bn, without specific instructions from parliament.

On paper, the new parliament can keep the country afloat for several years simply by selling its rich collection of assets, but at the price of eroding the country’s only nest egg. “They’ve probably got three or four years of reserves when they don’t have to sell a drop of oil, but when the money is gone, what then? It took decades to build up these reserves,” said John Hamilton, an oil expert with British business consultancy Cross Border Information.

In March, Jadran went a step further, trying to sell oil independently of the government, in a move that many feared would see Cyrenaica break away from Libya and trigger civil war. He chartered a North Korean tanker, the Morning Glory, loaded it with 300,000 barrels of crude from Es Sidre and sent it out to the high seas. Libya’s small navy and air force, in open revolt against an Islamist-led congress, refused orders to intercept, and the Morning Glory headed for Cyprus. There, it was boarded by US navy Seals commandos who arrested the crew and sailed the ship back to Libya, handing it back to government control. The United Nations followed up with a pledge that member states would not buy oil from the rebels. By then pro-congress militias had tried and failed to capture the oil ports, meeting resistance from both Libya’s small army and eastern tribal militias. The result is a continuing stalemate, with the rebels unable to sell the oil and the government unable to capture the ports. It is a stalemate that is top of the agenda for whatever new administration emerges from national elections.

Decay and deadlock

At its simplest, the oil blockade was a political standoff between an Islamist-led congress in Tripoli and tribal groups in the east and west. Unhappy with how congress spent its money, and the lack of accountability, the rebels decided to cut the main source of income. In the dying days of that congress, caretaker prime minister Abdullah al Thini secured a deal with Jadran, under which the oil ports would reopen in return for more investment in the east, and transparency for Libya’s oil income. The deal had yet to begin when a former general, Khalifa Hiftar, backed by army and air force units, launched ongoing attacks against Islamist militias in the east, and in the chaos, the ports stayed closed.

Executives in the shiny glass headquarters of Libya’s National Oil Corporation (NOC), the holding company for all government oil assets, hope the new parliament can break the deadlock. The al Thinni deal, they insist, remains on the table, and they have a raft of measures ready to reform Libya’s disorganised oil sector, beginning with a draft oil law. The law will not only bring transparency to Libya’s oil sector, but will also set up a much-needed regulator, and set out the presently cloudy division of power between the NOC and the government’s oil ministry. With the rules in place, and everyone free to see where the oil cash is spent, executives hope the blockade will melt away.

If it does, officials say it will be a boom time for the oil industry. The infrastructure of ports, pipelines and pumps in the oil fields was already deteriorating in the final years of the regime of Muammar Gaddafi, in part because the NOC had no investment capital to plough back into the industry. Work was desperately needed to revamp the creaking electricity grid that takes current hundreds of miles into the desert to power the pumps. Also needed are new refineries. Gaddafi’s reluctance to encourage an educated workforce saw him sell most oil unrefined, so much so that Libya has to import a portion of the petrol it uses.

This decay has become advanced through nearly a year’s worth of neglect, especially of the pumps and pumping stations that have been abandoned in the desert fields.

“They can’t just end the blockade and switch production on like a tap,” said Hamilton. “It’s bad for these facilities to be turned off, it’s bad for pumps, for valves, for the whole infrastructure.”

Also abandoned are most of the ambitious exploration projects Gaddafi signed with more than 40 foreign oil companies over the last decade. In March, BP joined Shell and America’s Marathon Oil in stopping exploration, worried about worsening militia violence and a chaotic government. This is despite test results showing promising reserves under the desert sand, and out at sea. BP has already surveyed four massive blocks, off the coast of Es Sidre and stretching across the Gulf of Sirte, using expensive 3D seismic surveys in what industry insiders say is a goldmine. All that oil must be brought onshore, meaning a mini boom for whatever town BP selects as its depot.

Add in the fact that Libya’s oil is designated as both light and sweet, putting it in the top four percent of world production, and oil executives, Libyan and foreign, are excited.

“You can speak of a potential bonanza,” said an executive of one middle-ranking financing company investing in Libya. “There is work in exploration, in renovating existing facilities, in upgrading the electrical grid that supplies the pumps, in the ports.”

Quite apart from the income it would generate, getting Libya’s production and exploration operations restarted would provide a jobs bonanza too, a ready answer to a chronic unemployment problem in a country where half the population is under 30. But Libya’s security is a chicken and egg situation. Only jobs are likely to tempt bored young men away from the militias, but those jobs will not arrive until the militias have been tamed.  Squaring that circle, and achieving national consensus, is the most important job for the new parliament, expected to assemble in early August with the end of Ramadan.