Libya’s oil industry teeters on verge of collapse

Libya’s oil industry teeters on verge of collapse
Attacks by gunmen on oil fields have prompted the National Oil Corporation to shut down operations at 11 oil fields, raising the spectre of the collapse of the Libyan oil industry, on which the country’s economy depends.
5 min read
06 March, 2015
Attacks by unknown gunmen have shut down 11 oil fields [AFP]

Libya has edged closer toward the economic abyss after the National Oil Corporation warned it might be forced to close all oil fields in the country if the security situation deteriorates.

This would starve the state of all revenues and result in the collapse of what is left of the Libyan economy.

The National Oil Corporation, which runs Libya’s oil fields and ports, declared it could no longer operate 11 oil fields in the country after four fields were attacked by unknown gunmen. The forces tasked with guarding oil fields were unable to protect them.

Force majeure

The forces tasked with guarding oil fields were unable to protect them.

The force majeure clause that has been invoked to suspend the operation of the oil fields and ports by the Libyan authorities means that they will not fulfill any of their contractual obligations.

Libya’s National Oil Corporation, which has been based in Tripoli since late 2014, invoked force majeure to suspend operations at Sidra’s port in east Libya and Ras Lanuf in north Libya, which serves as the country’s largest ports for exporting oil.

According to the statement published on the National Oil Corporation’s website Wednesday evening, a force majeure has been declared at 11 oil fields; Mabruk, Bahi, Dahra, Jofra, Tibisti, Al Ghani, En-naqa, al Samah, Beha, Waha and Defa. The majority of these oil fields are based in east Libya.

The statement said, “because of the dangerous security incidents that are increasing day by day and are affecting the lives of the Libyan people through theft, looting, sabotage and destruction of the oil fields, the corporation has been forced to announce urgently a force majeure at a number of oil fields.” The statement added, ““if the security situation continues to deteriorate, the corporation will be forced to close all fields and ports.”

Violence wracks the county

Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC), is witnessing violent clashes in several cities, especially in Tripoli (west Libya) and Benghazi (east Libya) between armed groups that are fighting to extend their control. Furthermore, the country is suffering from a political crisis between a group affiliated to the liberals on one side and another group allied to the Islamists on the other side. The political crisis intensified recently, which resulted in two rival authorities in the country, each with its own institutions. On the one hand there is the government of Abdullah al-Thani and the Tobruk-based parliament (in east Libya). On the other hand, there is the General National Congress (the former parliament, which has resumed its sessions), which appointed Omar al-Hasi as Prime Minister.

Fathallah al-Obaidi, head of a military unit for guarding the oil installations in the Arada area of Tripoli, said that the guards protecting the oil fields regained control late on Wednesday night of a number of oil fields that were attacked by gunmen. Obaidi told al-Araby al-Jadeed that there are another 20 oil fields in Marada (central Libya) that are also under threat due to the lack of sufficient forces to protect them from armed men.

Oil production in Libya has dropped sharply over the past two years because of the deteriorating security situation, the escalation of violence and severe political divisions.

Mashallah al-Zawi, the oil minister of the Tripoli-based GNC government, stated in comments to the press on Wednesday evening that oil production currently stands at approximately 500,000 barrels per day.

According to observers, the latest attacks have targeted several oil fields, almost two days after Mashallah al-Zawi’s statement in which he expressed that he expected oil exports from the Hilal oil region in east Libya, which exports more than half of the country's oil, to resume after rival groups sign an agreement to end the fighting under the supervision of the United Nations this week.

The Hilal oil region includes several cities between Benghazi and Sirte. It is also home to the largest oil reserves in addition to the oil ports of Sidra, Ras Lanuf and Brega, the biggest ports in Libya.

Libya has recently resorted to austerity measures.

Libya’s National Oil Corporation invoked force majeure at the oil ports of Sidra in the east and Ras Lanuf in the north following violent clashes between Libya Dawn, which is affiliated to the GNC Tripoli-based government and forces of Operation Dignity, which is affiliated to the retired military general Khalifa Haftar, who is backed by the Tobruk-based government. Both sides fought for control over the ports.

Before the decrease in oil production as a result of escalating violence and a deteriorating security situation, the Hilal oil region exported around 800,000 barrels per day out of the country’s total 1.5 million barrels per day.

A looming economic crisis

There have been warnings of a severe deficit in Libya’s state revenues and disruption to people’s lives as a result of successive attacks on oil fields, upon which the country is almost fully dependent in terms of its revenues.

In a recent report, the Central Bank of Libya confirmed that state expenses in 2014 amounted to 49 billion Libyan dinars ($36.5 billion) while its revenues amounted to 20.9 billion Libyan dinars ($15.5 billion). The deficit in the state budget reached 25.1 billion Libyan dinars ($18.7 billion).

In a statement, an official at the Central Bank of Libya predicted that the deficit this year will reach $15.3 billion.

Living conditions in Libya have worsened over the recent period after the deterioration in the security and economic situation led to a halt in development projects and several economic sectors have suffered heavy losses.

In a previous statement to al-Araby al-Jadeed, the director of the Research and Statistic department of the Central Bank of Libya, Ali Shanibish, said that 2014 was one of the worst years for Libya in 50 years.

Libya has a population of six million people, and 1.25 million Libyans work within the administrative apparatus of the state. According to economists, they are now threatened by the instability caused by the sharp decline in state revenues.

Libya has recently resorted to taking several austerity measures. According to the annual report of the Libyan Audit Bureau the country has spent 11.35 billion Libyan dinars ($9.08 billion) over three years from money that has been set aside (as part of the fiscal reserves for times of crises). The total amount set aside at the end of 2014 amounted to approximately $12.6 billion.

This is an edited translation from our Arabic edition.