By Cyril Widdershoven
In addition to the negative repercussions of hurricane Harvey, which heavily impacted the Gulf of Mexico oil and gas production and petrochemical plants, global oil markets are facing disruptions from the Middle East.
The market has not been focusing on geopolitical security issues lately, but over the coming months geopolitics is sure to become an increasingly important factor. Political instability and civil wars, particularly those involving OPEC member states, are far from reaching a conclusion. The market’s optimism about the heavily reported production increases of Libya, Iraq and Nigeria may be misplaced. Libya’s return to the market, with production reportedly breaking 1 million bpd while targeting 1.3 million bpd, could already be a thing of the past due to growing instability on the ground.
Libya’s production increases, which have been questioned by insiders, have proven to be unsustainable due to fighting between militias and government forces in oil producing regions. After the shutdown of the Sharara oilfield last week, two other main producing fields have now been hit by armed militias in Libya’s western region. Sources reported that an armed militia from Zintan, directly linked to the heavily armed Petroleum Facilities Guard, which was set up to protect the country’s oil and gas infrastructure, has closed the El Feel and Hamada fields by blocking their respective pipelines. The Petroleum Facilities Guard is also slated to be involved in the Sharara oilfield shutdown. Officially, the militia claims it is fighting for better living conditions and the pay of salaries and services. However, it seems the current developments are not linked solely to social issues, but rather to the growing instability and tensions between the main military power factions in the country. The Zintan militia has already threatened to shut down the Wafa oilfield if their demands are not met.
A military conflict appears to be brewing between the Libyan National Army of General Haftar and the western militias. Egyptian sources have reported that a new military confrontation is expected soon between armed militias and the LNA in the so-called Oil Crescent Area. The Oil Crescent Area has been in the hands of Haftar’s LNA since 2016 and is a bone of contention for Libya’s main political parties. Severe clashes have already been reported in and around the Tripoli area, where militias are fighting each other in Suq al Khamis and Al Hira. Libyan sources claim that the militias are supported by the GNA, which is headed by Libyan leader Fayez Sarraj. Since the end of 2016 two attempts have been made by anti-Haftar groups to remove the LNA from the region. Major mobilization efforts are currently ongoing in and around the city of Sirte in preparation for a military assault on the LNA strongholds. Haftar’s advisors expect that the militias will try to attack the Gulf of Sidra area in an attempt to gain control of the ports and oil installations up there. A possible onslaught is also expected to reach Benghazi and Derna. Derna is currently in the hands of anti-Haftar militias, perceived to be Al Qaeda supporters.
At present, the LNA is also confronted by internal splits and confrontations with affiliated militias. In recent days, a political rift has emerged between the Awaqir tribe in Benghazi and Haftar following the election of tribesman Faraj Egaim as Deputy Minister of Interior in the government of the Tripoli-based Presidential Council. Haftar, until now, has openly rejected the Presidential Council, which is led by Fayaz Serraj – who chose Egaim as Deputy Minister of Interior at the request of the tribe. Awaqir reportedly decided to join Sirraj’s government in Tripoli because Abdullah Al-Thanni’s government in east Libya is powerless. The Awaqir tribe also has Mihdi Al Barghati as minister of defense in the Council. The son of Haftar, Saddam, has already threatened to remove the council or arrest its members in response. The position of the LNA, and especially its Dignity Operation to remove opposition, Daesh and Al Qaeda in the eastern regions, is now under threat. Egaim was chief of the so-called “Special Tasks Force” in Benghazi, a tribal militia group that used to work under Dignity Operation.
The LNA is also continuing its siege of the city of Derna. Haftar stated on TV that he would reject any mediation that targets the lifting of the siege on Derna. For the last four weeks a military force has been trying to remove the opposition from Derna. The instability in this part of Libya has increased immensely. In addition to the ongoing internal power battles and military operations against armed militias, the LNA is also still having to fight pockets of Daesh/IS groups. While the optimism about the fight against IS has been high, the fundamentalist group is not dead and still fighting. The recent massacre and beheadings of several LNA fighters by Daesh is a prime example of this.
Libya’s oil and gas future is at risk. Increased insecurity has already shutdown several of its oil fields and the Al Zawiya oil refinery. A total military clash in the region would bring the whole sector to a standstill. The removal of almost 300,000 bpd of crude oil will have its impact on the market. The current oil price scenarios appear to have not calculated this in however, as all media is focused on the effects of hurricane Harvey and the Gulf of Mexico. Once Hurricane Harvey passes, the market will have to refocus on the long-term (and continuing) effects of the loss of Libyan production. Taking out 300,000 bpd or more at this crucial point in time will have its effects. Prices will go up, as supply disruptions force markets into balance. Libya’s future is still very bleak, while Nigeria’s and Iraq’s production increases are far from certainties.
By Cyril Widdershoven for Oilprice.com