False dawn for Libya after NOC slams oil export deal

* NOC's Sanalla warns of 'terrible' precedent
* Analysts remain skeptical of output recovery

Libya's plans to increase oil output suffered a setback after the state-owned National Oil Corporation took a stand against a proposed deal between the government and the Petroleum Facilities Guards that aimed to pave the way for the reopening of the country's key oil terminals.

Efforts to raise Libyan production remain extremely susceptible to the complex web of rival factions in the country and the latest turn of events highlights the NOC's distrust of the PFG, a security force that looks after the key oil ports, and the fragility of any peace deal in the country.

Last week, reports said the PFG was close to signing an agreement with the UN-backed Government of National Accord, that would involve the resumption of crude exports from the country's two largest oil terminals -- 340,000 b/d Es-Sider and 220,000 b/d Ras Lanuf.

This was preceded by a visit by the UN Libya envoy Martin Kobler with Ibrahim al-Jathran, an anti-Qadhafi rebel who fought for control of the eastern oil ports during the 2011 revolution and who is in charge of the PFG.

Disagreements between the PFG and the NOC at oil terminals have been common and have had a significant impact on Libya's oil output.

TERRIBLE PRECEDENT

Mustafa Sanalla, the chairman of NOC wrote a letter to the UN Special Mission of Libya criticizing the meeting between Kobler and al-Jathran. Sanalla said he was dismayed over the potential agreement to open the ports al-Jathran has "blockaded for close to three years at a cost to Libya of over $100 billion in lost revenue."

Sanalla wrote that an agreement with al-Jathran to reopen the key ports of Es Sider and Ras Lanuf was a "mistake" and would set a "terrible" precedent.

He said this news "will encourage anybody who can muster a militia to shut down a pipeline, an oil field, or a port, to see what they can extort."

Sanalla also explained that serious damage has been done to the infrastructure in these two ports due to attack carried out by Islamic State earlier this year, which means that exports from these ports would not rise by 100,000 b/d any time soon.

The optimism earlier this year that a new national unity government would provide a much-needed boost to the country's oil export industry has been short-lived.

"Because there are so many groups with their own agendas all wrestling for control of Libya's oil sector it is hard to see any rapid recovery in production levels," said Richard Mallinson, geopolitical risk analyst at Energy Aspects.

Mallinson said that Sanalla and the NOC view al-Jathran as a threat to Libya's oil sector, even though both groups have pledged allegiance to the UN-backed Presidency Council.

"A further problem is that factions that control many of the fields that would supply oil to the Ras Lanuf and Es Sider terminals have stated they are not part of the rumored deal with al-Jathran and warned that they may not allow the fields to restart even if the terminals reopen," said Mallinson.

"Different factions in Libya remain oceans apart and as the time goes by, it is becoming harder and harder to bring them together," Ehsan ul-Haq, an analyst at KBC Advanced Technologies said.

"PFG's power remains limited to ports and without some political resolve, it will be difficult to increase their influence," he added.

NOC UNIFICATION

Libya recently saw a tussle between the two factions of NOC.

NOC was the sole operator of Libya's oil sector before the Qadhafi regime was toppled. With the country effectively divided by two rival political groups in 2014, NOC was also split with the established management still based in Tripoli while an eastern NOC operated independently from the eastern city of Benghazi.

Last month NOC agreed to unify its rival administrations under one management structure, a much needed step for the country's beleaguered oil sector.

But analysts said that despite this, any increases in the country's oil output was unlikely to be sustained.

"There will need to be a major improvement in the political stability of the country before we see any sustained pick-up in oil exports," said Mallinson.

Issues around oil production, port strikes and the rise of the Islamic State along the country's Gulf of Sidra -- home to two of Libya's largest export terminals and its largest refinery at Ras Lanuf -- has made progress slow in terms of returning the country to its 1.5 million-1.6 million b/d pre-crisis oil output.

Oil production rose as high as 380,000 b/d in early 2016 -- still a fraction of the country's previous output -- but it has fluctuated significantly due to issues such as electricity generation outages at oil fields and stoppages of pipeline output due to militia activity.

The North African country's oil production was at 310,000 b/d in June, according to S&P Global Platts data.

Oil output levels in 2015 were also volatile, with a peak of more than 600,000 b/d in March and an overall average of around 400,000 b/d -- compared with output of 460,000 b/d in 2014 and 920,000 b/d in 2013.

--Eklavya Gupte, eklavya.gupte@spglobal.com
--Paul Hickin, paul.hickin@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal.com