There is a Libya story that is worth noting that could be a negative on oil as we look into Q2/19. Yesterday, the Libya National Oil Corporation indicated a change in their position with respect to the Haftar armed forces that we believe points to the potential for the lifting of the Dec 10, 2018 force majeure of the 315,000 b/d Sharara oil field in a matter of weeks and not months. Up until yesterday, it seemed the force majeure would last unless the Haftar armed forces decided to, or were forced to leave southwest Libya and return to the east. Yesterday, Libya’s NOC brief announcement looks significant as the Libya NOC seems to have backed away from its initial requirements that all military forces withdraw from the oil facilities to a position to remove all members of the “Civilian” armed militia (the ones that led to the Dec 10 force majeure). Most importantly, there is no Libya NOC requirement for the Haftar armed forces to leave the facilities for any lifting of the force majeure. Rather yesterday, the Libya NOC said “Despite all concerned parties not being present at the meeting, NOC is seeking assurances from the General Command of the Libyan National Army that all outstanding arrest warrants will be served – and that wanted parties will be removed from the field.” Today, we also saw the first operational signs that the Libya NOC is comfortable with the security at Sharara oil field – the Daily Mail reported this morning that the first plane in more than two weeks has brought back oil field workers back to Sharara. Oil field workers are needed, Sharara can’t be brought back on stream until the oil field workers assess the field and then work to bring the oil field production back onstream. It isn’t clear when and how much oil will be returned if and when a Sharara force majeure is lifted. But with yesterday’s developments, we now think a force majeure isn’t like to last months, but more likely lifted in a mater of weeks.
Libya’s 315,000 b/d Sharara oil field has been shut in since the Libya NOC declared force majeure on Dec 10 due to security concerns. On Dec 9, the Libya National Oil Corporation (NOC) warned that it may be forced to shut down the Sharara oil field. On 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, 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 precedent for another future similar event at Sharara or any other Libya oil field.
At first, it appeared that the Libyan govt and NOC were working to a negotiated peaceful resolution to bring Sharara back on in early Q1. Post the Dec 10 force majeure, the Libya NOC and Libyan govt were 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. Within a couple days, the Libyan govt was declaring a deal and that Sharara oil field was re-opening. Unfortunately, that didn’t happen. However, the parties continued to work on a negotiated peaceful resolution in early Jan.
But the hope of a quick end to the force majeure ended in mid Jan when the eastern Libya based Haftar armed forces moved into southwest Libya to take over security at the Sharara oil field. This was the game changer and meant that the likelihood of a Sharara restart was not going to be days or weeks, but months. Sharara is in southwest Libya, but it was armed forces from Libya’s eastern leader Khalifa Haftar that moved into the region to gain military control of the oil facilities, including Sharara. The one thing that was clear was that it wasn’t the NOC who invited the Haftar group. And the Libya NOC was clear that there wouldn’t be a restart until they were comfortable with the security conditions and specifically stated “Oil facilities must remain out of the purview of military operations and not used for political or economic leverage”. Unless the Haftar forces just decided to go back home to eastern Libya, it looked like the force majeure was going to last for months and months. Its why we posted our Jan 22, 2019 blog “Lasting Change To Oil & Gas #5 – Libya Likely Stuck Around 1 mmb/d By Its Inability to Peacefully Resolve Sharara Shut In” [LINK].
Yesterday’s UAE hosted meeting in Abu Dhabi between the Libya NOC and Head of the Libya Presidential Council seems to have been a positive. Haftar did not attend the UAE hosted meeting as hoped by the Libya NOC. The meetings didn’t get much attention this yesterday and today because it seemed on the surface pointed to no significant change. The Libya NOC announced [LINK] “NOC to lift force majeure at Sharara once armed militia departs, says Sanalla”, wherein the NOC said “National Oil Corporation (NOC) chairman, Eng. Mustafa Sanalla met with the chairman of the Presidency Council (PC), Mr Fayez al-Sarraj, and representatives of the international community in Abu Dhabi today at their request to discuss measures necessary to lift force majeure at the Sharara oil field. All parties expressed a desire to swiftly resolve the crisis and restart production as soon as possible.” But the reason why it didn’t get attention was the title saying the NOC still needs to see the armed militia depart. It seemed, on the surface, that no significant change to the NOC position. There was a Libya Observer article [LINK] “From Abu Dhabi, Libyan officials announce lifting force majeure on Sharara oilfield” that caught our eye immediately, but then the story didn’t say what the title suggested. Rather the story reiterated the Libya NOC announcement that they want to restart, but need the security resolved. The Libya Observer wrote “In a meeting on Tuesday morning in the United Arab Emirates (UAE), the Head of the Presidential Council Fayez Al-Sirrja and the Chairman of the National Oil Corporation (NOC) Mustafa Sanallah agreed to lift force majeure on the biggest oilfield in Libya – Sharara. NOC said in a statement following the agreement that “all parties expressed a desire to swiftly resolve the crisis (at Sharara oilfield) and restart production as soon as possible.” “The NOC chairman reiterated his desire to resume production, and that force majeure will be lifted when all members of the ‘Civilian’ armed militia are removed from the field.” The state oil firm explained. Sanallah stressed NOC’s zero-tolerance policy towards extortion and insisted that all measures to resolve the crisis take place within the framework of national and international law.” Reading the story reinforced that the Libya NOC didn’t announce the lifting of the force majeure, just that they want to lift the force majeure at the earliest date once security was resolved to the Libya NOC satisfaction.
But yesterday’s Libya NOC announcement created the momentum for a deal by backing away from the need for the Haftar armed forces to leave Sharara. However for anyone knowing the various players involved in the Sharara security or military situation, yesterday’s Libya NOC brief announcement looks significant as the Libya NOC seems to have backed away from its initial requirements that the Haftar forces withdraw from the oil facilities. Initially, the Libya NOC wasn’t calling out the Haftar led forces separately, but it was including them in the need for any military to vacate the oil fields before the lifting of the force majeure. The Libya NOC Chairman initially said “Oil facilities must remain out of the purview of military operations and not used for political or economic leverage. Armed forces in an area where there are oil facilities earn legitimacy through ensuring NOC staff can carry out their work unobstructed and free from harm”. The NOC was directing this at all military forces including the Haftar armed forces. Yesterday, the Libya NOC [LINK] expressed their desire to “swiftly resolve the crisis and restart production as soon as possible”. But there was a changed position in that the Libya NOC no longer says the Haftar forces have to leave or relinquish security. Rather the NOC said “The NOC chairman reiterated his desire to resume production, and that force majeure will be lifted when all members of the ‘Civilian’ armed militia are removed from the field.” The “Civilian” armed militia are the PFG forces that first took over the Sharara facilities in Dec that led to the Dec 10 force majeure. It is important to note that General Khalifa Hafta is Command General of the Libyan armed forces. Yesterday, the Libya NOC said “Sanalla stressed NOC’s zero-tolerance policy towards extortion and insisted that all measures to resolve the crisis take place within the framework of national and international law. Despite all concerned parties not being present at the meeting, NOC is seeking assurances from the General Command of the Libyan National Army that all outstanding arrest warrants will be served – and that wanted parties will be removed from the field.” The wanted parties referring to the PFG that caused the Dec 10 force majeure. Yesterday’s changed view seems to be the set up for the potential for a removal of the Sharara oil field in a matter of weeks, not months ie. It was no longer necessary for the Haftar forces to leave Sharara.
And we may have seen the first operational indication to support an earlier restart potential at Sharara. Perhaps the best sign that the NOC is working to the potential of a Sharara restart at an earlier time was the Daily Mail (UK) story today “Libya’s top oilfield could restart at 80,000 bpd -engineer” [LINK]. The interesting part of the story is “In a possible sign that work might resume soon, a plane landed on Tuesday at the nearby El Feel oilfield to bring workers for this and the El Sharara field, an engineer said. It was this first flight in more than two weeks when eastern military forces controlling the area had imposed a no-fly zone for any plane without its permission. “No permission has been given yet by NOC to restart El Sharara,” one field worker said, adding this could happen in next days.” If this is report is right, it signals that the NOC must believe the security situation is resolved to their satisfaction such that they believe it is safe to send workers back to the oil field. There won’t be a restart without the NOC oil workers in charge. Getting oil workers back to the field even if first to assess is a needed first step towards a restart and one that hasn’t happened in the past 2 and ½ months.
The return of Libya NOC oil workers is the needed first step to determine when and how much oil can come back on stream when force majeure is lifted. Libya oil production was reported at 1.2 mmb/d in Oct 2018, and was down to 0.9 mmb/d in Jan 2019 following the force majeure of the Sharara oil field. The force majeure has been on for 2 and ½ months and it isn’t clear how the field has been maintained and by whom. But if the Libya NOC lifts the force majeure, it will mark the start to return of Libya oil production to higher levels in the near term unless there has been significant damage in the last 2 and ½ months. The return of Libya NOC workers is needed to first assess the status of the field, and then to restart the Sharara oil field. The force majeure at Sharara shut in its 315,000 b/d. Its not clear of the status of the nearby 75,000 b/d El Feel field.
Libya Oil Production
We would be remiss if we didn’t remind that Libya has had a history of production interruptions. We wrote this blog because of what seems to be a significant change in the Libya NOC position and one that points to the potential for the lifting of the Sharara oil field force majeure in a matter of weeks and not months. But one of the reminders of the above graph is that in the post Gaddafi fall in 2011, Libya has had production interruptions regularly over the past several years. It will be a positive for Libya oil production if and once the Sharara force majeure is lifted. But we don’t think it changes the underlying dynamics of Libya and that the likelihood is that, just like in the past, there will be supply interruptions.