Libyan peace deal nurtures new hope for fractious oil sector

* Pact paves way for unified government
* Output currently around 400,000 b/d
* Militants still posing threat

A UN-brokered deal between Libya's two rival governments last week has increased optimism for greater political stability next year, which could see the return of more Libyan sweet crude oil to the Mediterranean market.

After more than a year of political deadlock, Libya's two opposing governments -- the internationally recognized House of Representatives in Tobruk and the Islamist-led General National Congress based in Tripoli -- reached a preliminary agreement December 4, aimed at solving the country's long-standing political paralysis.

Both are backed by the powerful and autonomous militias that have dominated Libya since the fall of Muammar Gaddafi. Not all have signed up to the agreement.

The long-awaited deal was supposed to bring about a new government, which could hold fresh elections within two years.

Both are convinced of their own legitimacy, and have been fighting to control Libya's key institutions, the Central Bank and National Oil Corp (NOC) in particular.

These remain under Tripoli's control, but the Tobruk government has also set up parallel institutions such as a new National Oil Company operating from the eastern town of Bayda.

The company was established in March, but so far most international partners have remained committed to the established institutions, in anticipation of a unity government.

Following a meeting with the head of Libya's original state oil company NOC this week, Italy's Eni said it remained committed to its relationship with the Tripoli-based NOC. Eni, which is the biggest foreign oil and gas producer in the country with 300,000 boe/d, said it believed the UN-brokered peace deal would facilitate "the process of stabilization in Libya."

RIVAL POWERS

But the longer talks on a unity government fail to bear fruit, the greater the risk of rival institutions gaining traction. Tobruk's own NOC, for example, this month said it was ready to sign crude export agreements with a number of companies, including Greece-based Netoil, to supply crude from the Mesla and Sarir oil fields from Hariga port.

The International Crisis Group warned in a December 3 report that Libya's economic conditions could "turn sharply for the worse, as rival authorities vie to control rapidly shrinking national wealth."

The struggle affects oil fields, pipelines and export terminals, as well as the boardrooms of national financial institutions.

"If living conditions plunge and militia members' government salaries are not paid, the two governments competing for legitimacy will both lose support, and mutiny, mob rule and chaos will take over," said the report.

The implications for the oil industry are significant. A government that unites the two rival administrations would theoretically see an end to the stand-offs that have closed the key oil ports of Ras Lanuf and Es Sider.

That could see Libyan production get a quick boost of an estimated 500,000 b/d as output ramps up from fields currently shut in.

Traders have grown wary of looking for positive signs from Libya's political scene. An accord between the Tripoli and Tobruk rivals was previously mooted in September in Morocco. Back then, it was thought to be closer than ever.

"Libya signing an agreement could lead to a wider, longer market with more volume exported. But it is a big, big mess. They are signing a piece of paper, but without a lot of popular support, so I don't expect a prompt solution," one Mediterranean crude trader told Platts.

OUTPUT VOLATILITY

Oil production over 2015 has been volatile, with a peak of more than 600,000 b/d in March, but averaging around 400,000 b/d as the various authorities solved some disruptions by negotiation or pay-offs.

In early November it reached 465,000 b/d, but then dropped to 375,000 b/d, as NOC declared force majeure on loadings out of the 70,000 b/d Zueitina crude terminal. Force majeure remains in place.

At the beginning of December, Libya was producing around 400,000 b/d, according to the chairman of state-owned NOC, Mustafa Sanalla.

This compares to average output of 460,000 b/d in 2014, and as much as 920,000 b/d in 2013.

In addition, the ports of Ras Lanuf and Es Sider remain closed as tribal leaders prevent flows from the giant Sharara and Elephant fields from reaching the northwestern Libya export terminals.

As a result, Libyan production is now only a quarter of its pre-civil war 1.5 million b/d capacity.

Intelligence provider Medley Global Advisors (MGA) estimates that Libya has only 195,000 b/d of export capacity currently open at Marsa el Hariga and the two offshore terminals of Bouri and Jourf, while another 655,000 b/d of capacity is closed by force majeure and 480,000 b/d shut in by protests and violence.

Only Libya's offshore facilities in the west have been without prolonged interruption. As a result, it is gas sales, rather than oil, from Mellitah through the underwater Greenstream pipeline to Italy that have provided the bulk of Libya's revenue.

ISLAMIC STATE THREAT

Instead, the violence continues, with the specter of so-called Islamic State-allied groups rising in power. Libya's oil sector has rarely looked so fragile.

These groups appear to be only loosely affiliated with militants headquartered in the Northern Iraqi city of Mosul, but still control a considerable stretch of the Libyan coastline around Sirte.

The IS-affiliated groups have taken advantage of Libya's ongoing chaos to capture oilfields in the Sirte basin over the past two months.

The key difference between the Libyan franchise of IS, and its Syrian/Iraqi counterpart, is one of ambition.

While the latter group is seeking to establish a functioning state and bureaucracy, in Libya the goal appears to be more to create chaos, says Mohammad Darwazah, Senior Analyst, Middle East and Africa at MGA.

Syrian and Iraqi oil fields for example have become well publicized sources of revenue, and critical to the group's survival. Libyan oil infrastructure, however, has been repeatedly and wantonly attacked and destroyed.

"That Libya has kept, against all odds, a minimum level of economic governance and even briefly increased oil exports shows that interim economic arrangements are possible," said the International Crisis Group.

--Adal Mirza, adal.mirza@platts.com
--Paula VanLaningham, paula.vanlaningham@platts.com
--Edited by Jonathan Loades-Carter, jonathan.carter@platts.com

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