This is Blog #5 in our series of blogs to mid Feb on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and that are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas. Libya had become a negative to oil prices in H2/18 as it was only 3 to 4 months ago that there was big positive momentum to Libya’s oil production returning to May 2013 levels of 1.2 mmb/d. We may not have agreed with the Libya NOC target to get to 2 mmb/d, but its oil outlook looked strong as Libya was also announcing the return of IOCs in Oct with the resolution of the security situation in Libya. This strong momentum was interrupted when Libya NOC declared force majeure on Dec 10 on the shut in of its 315,000 b/d Sharara oil field in southwest Libya due to security concerns. But we now see the risk that its outlook for an expected increase in oil production in 2019, 2020 and 2021 is now at risk with Libya moving away from negotiating a peaceful resolution at Sharara to bringing in armed forces from Libya’s eastern leader Khalifa Haftar to regain control of security. The loss of Sharara oil production is, by itself, significant at 315,000 b/d, but the bigger impact to global oil markets is that it sets up ongoing military clashes in southwest Libya region around the Sharara oil field and means that Libya isn’t likely to move toward the NOC target of 2 mmb/d, but rather be stuck in the same situation as the past few years with production around 1 mmb/d plus or minus with interruptions like Sharara taking production down on some sort of regular basis ie. the same old story.
Libya had become a negative to oil prices as it was only 3 months ago that there was big positive momentum to Libya’s oil production. One of the negatives to oil prices going into Q4/18 and also one the big oil stories last summer was that Libya had resolved its domestic security situation, was in a period of relative calm and oil production growth was being delivered as promised to well over 1 mmb/d. Libya oil production reached 970,000 b/d in Aug, increased to 1.05 mmb/d in Sept and then up to 1.2 mmb/d in Oct and Nov still strong at 1.11 mmb/d. The last time Libya had been 1.2 mmb/d was in May 2013. Libya’s increasing oil production was a negative going into the OPEC/non-OPEC meetings in early Dec, but Libya was still allowed to be exempt from the Jan 1, 2019 quota cuts.
Libya Oil Production
Source: Bloomberg
And the outlook looked strong with the return/resumption of IOCs with the better security situation. In addition to higher production, there was also the increasing view that Libya might be able to make good progress to the Libya National Oil Corporation Chairman’s view that Libya could get back to 2 mmb/d. This was only fueled by the fact that IOCs (international oil companies) were coming back to Libya now that security was being resolved with new investment or to resume operations. (i) On Oct 8, Eni announced [LINK] that it was acquiring a 42.5% interest in “BP’s Exploration and Production Sharing Agreement (EPSA) in Libya, with an aim to boost in-country exploration and development activities”. Upon the announcement, Libya NOC Chairman said “this initiative will hopefully drive further inward investment and facilitate higher production levels.” (ii) On Oct 4, Libya NOC met with Russia’s Gazprom. The NOC reported [LINK] “Mr Tumanov provided an update on Gazprom’s planned exploration activities in Libya; to be reactivated via its 2007 exploration and production sharing agreement (EPSA), following a suspension of in-country activity in 2011 related to the country’s security environment.” (iii) On Oct 4, Libya NOC met with Russian oil company Tatneft. The NOC noted [LINK] “Tatneft’s forthcoming resumption of its 2007 exploration and production sharing agreement (EPSA)”.
The momentum was interrupted when Libya NOC declared force majeure on its 315,000 b/d Sharara oil field on Dec 10 due to security concerns. On Dec 9, the Libya NOC warned that it may be forced to shut down the Sharara oil field. Od Dec 10, the NOC declared force majeure at Sharara oil field [LINK] due to security concerns resulting in a “production loss of 315,000 barrels a day, with an additional loss of 73,000 barrels at El Feel due to its dependence on Sharara for electricity supply”. At that time (see our Dec 9 and Dec 16, 2018 Energy Tidbits memos [LINK]), the group taking control of Sharara (the Petroleum Facilities Guard “PFG”) reportedly asked for a ransom in return for relinquishing control. The NOC has consistently advised against paying any ransoms to avoid setting a precedentd keep the Sharara shut down as the ransom would set a bad precedent. But the Libyan govt publicly continued to try to negotiate a peaceful resolution.
Up until last week, the Libyan govt and NOC were working to a negotiated peaceful resolution to bring Sharara back on, albeit slowly. The forced shut in of 315,000 b/d is never a positive, but a negotiated peaceful resolution would have provided oil markets and IOCs some reassurance that any interruption would be temporary, could be resolved peacefully, and not have lasting impact. Post the force majeure, the Libya NOC and Libyan govt was taking a negotiated peaceful approach to resolving the security situation at Sharara. In fact by Dec 19, there was some optimism (at least from the Libyan govt perspective) that the Libya govt was moving to get a deal done with protestors. Libya Prime Minister Fayez al-Sarraj traveled to Sharara that week to try to broker a deal (at that time he said he had been successful) amid reports that Libya was allocating $1 billion Libyan dinars ($0.72 million US$) in development aid to this southern region. By Wed night, the Libyan govt was declaring a deal and that Sharara oil field was re-opening. Unfortunately that didn’t happen. That approach for a negotiated peaceful resolution seemed to carry thru Dec and early Jan, but did not result in any success.
But our view had to change with the introduction of Haftar led armed forces as the lead to re-establish security at Sharara. We thought that last week’s Sharara’s developments were significant because it seems to introduce a significant added risk element to stable ongoing production at Sharara. Its no longer a negotiated peaceful situation whereby the Sharara issues were being resolved within the region. Rather, the big development was an escalation to an armed situation with armed forces from Libya’s eastern leader Khalifa Haftar moving into the southwest region to gain military control of the oil facilities, including Sharara. It still isn’t 100% clear who invited them in to do so. The NOC was driving the need to re-establish security, but we haven’t seen any confirmation that they invited or asked the Haftar led group to take the lead. However, it sounds like the Haftar led group should be able to re-establish security in and around Sharara, but there isn’t any expected timeframe. Our concern for the longer term is that it’s the Haftar led group from eastern Libya moving into this security role in the southwest. Its partly that, if they are successful, they will essentially be in control of almost all of Libya’s major oil production. Our more significant concern is that we have to believe the southwest Libyans can’t be happy to have northeastern Libyan armed forces come in and take military control of the key southwest Libya oil asset, kind of like how we would see an added risk if Iraq oil supply if the central Iraq government or forces went into and too control over Kurdistan oil production.
Libyans also share this added risk of armed conflict in southwest Libya. The other reason for our concern on this added risk is that we saw concerns being raised in Libya on the Haftar led group coming into resolve the security situation. On Jan 19, the Tripoli based Libyan Observer reported “Armed groups in Sabha, Murziq reject joining Haftar’s forces” [LINK], “Armed groups in southern Libyan cities of Murziq and Sabha have rejected joining the operation forces of the self-styled army of Khalifa Haftar after arriving in Taminhint to control the southern region”, and “”This could lead to clashes between forces of the National Army and the rejecting brigades.” Our concern isn’t just for clashes today, but what happens in the future once the Haftar led group takes over security/control of Sharara.
We expect it will also have an impact on the IOCs and how quickly they get back to resuming work. The Libyan NOC releases noted above on Gazprom and Tatneft both highlighted how these IOCs were about to resume work on their existing 2007 exploration and production share agreements. The Gazprom release also highlighted how Gazprom suspended their work in “2011 related to the country’s security environment”. We believe that a negotiated peaceful resolution to the Sharara security would have sent a better signal that disputes can be resolved peacefully without lasting impact and likely would not deter the return of capital (like Gazprom) on their just announced move to resume work due to the resolution of the security situation. Whereas the bringing in of northeastern Libya armed forces to take military control of the southwestern Libya Sharara oil field has to at least put security concerns back on the radar for Gazprom and others.
This looks like more than a speed bump on a consistent move to growth beyond 1 mmb/d. Libya had strong momentum in Aug/Sept/Oct in production growth and, more importantly, the return of IOC capital. We may not have agreed with the NOC view that 2 mmb/d was attainable, it was certainly looking like the NOC was on a growth path well above 1 mmb/d and perhaps to 1.4 to 1.5 mmb/d. Libya was looking like it would be a negative to oil prices for 2019, 2020 and 2021. But we believe its inability to peacefully resolve Sharara security returns the same Libya risk as seen over the past few years – its unlikely to have a consistent growth in oil production, rather security and conflict is likely to keep it ~1 mmb/d with regular interruptions like Sharara that send oil production back below 1 mmb/d. Its looks like the same old story.