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Libya: Capture of Export Terminals Adds To the Momentum for an Oil Production Boost

4 MINS READJun 14, 2018 | 22:25 GMT
The Big Picture

The seizure of two vital oil export terminals in Libya from Khalifa Hifter's Libyan National Army has brought militia leader Ibrahim Jadhran back into the spotlight. But the attention-grabbing incident may be short-lived as Hifter will almost certainly move quickly to retake control. No matter the outcome, the incident has taken a sizable portion of Libya’s oil production offline. The decrease throws another complication at oil markets ahead of next week’s meetings in Vienna, where the question of whether or not to lift oil production caps will be discussed.

Ahead of next week's oil producers meeting in Vienna, where the possibility of expanding production will be discussed, an attack on two Libyan oil terminals has highlighted the volatility of the North African country's output. Militants on June 14 assaulted the Ras Lanuf and As Sidra oil terminals in Libya's Oil Crescent region, wresting control of them from the Libyan National Army (LNA) and taking nearly a quarter of the country's oil production offline.

Remnants of the Benghazi Defense Brigades and the Petroleum Facilities Guards (PFG) under former PFG commander Ibrahim Jadhran conducted the assault, which resulted in two oil storage tanks catching fire and prompted the Libyan National Oil Corp. (NOC) to evacuate its personnel. Before the assault, exports through the ports had totaled about 240,000 barrels per day (bpd). Jadhran, whose PFG had held the same terminals from 2013 to 2016, prevented them from exporting oil during that period in an attempt to win a greater share of the revenue they generated. In September 2016, the LNA seized control of the terminals from Jadhran's forces, marking the beginning of a surge in Libyan production, which had reached about 950,000 bpd before the June 14 attack.

Jadhran, who claimed the assault was carried out to bring stability to the region, indicated that his forces would continue to push east toward the other two terminals in the Oil Crescent, Marsa al Brega and Zueitina. Even so, Jadhran is not likely to hold any of the terminals for long. While he commanded nearly 20,000 personnel at the height of his power, those numbers shrunk after the LNA defeat and likely now stand at less than 1,000.

LNA Field Marshal Khalifa Hifter, whose base of support rests in eastern Libya and who views control of the oil terminals as his own source of leverage in talks with his western Libyan rivals, is likely to quickly launch a counterassault to try to recapture them. Once his army regains control, he is expected to allow the NOC to return, unless there is clear evidence that the Tripoli government helped facilitate the assault — a suspicion that it has already denied. But even if a counterattack by Hifter is successful and workers return, any collateral damage from the battle could result in further delays in exports from the facilities. Hifter also faces a potential problem in mustering a sufficient force for a counteroffensive, considering that many of the LNA's troops are committed to an offensive against militants in the eastern city of Darnah. After all, the LNA's focus on Derma created the opening that Jadhran and his allies exploited to capture the terminals.

Jadhran's attack and the resulting drop in Libyan output come at a crucial time for Saudi Arabia, Russia and the other oil producers that tightened output beginning in January 2017 with the goal of erasing a global supply glut and raising the floor on prices. On June 22, those producers will meet to discuss boosting output and even potentially ending the production cut program. A continuation of the production cuts, which succeeded at stabilizing the oil market, now risks pushing oil markets too far in the other direction. Venezuela's political crisis and U.S. sanctions on Iran — which come into force in November — bode ill for global oil production, so a lengthy outage in Libya would only add to the momentum of those who advocate raising the production ceiling.

Among them is Russia, which has been eager to increase production and essentially has suggested that quotas be removed entirely for most oil producers. Saudi Arabia, under pressure from U.S. President Donald Trump to get a handle on rising oil prices, has also proposed boosting output, although it is likely to support a more measured increase. However, OPEC rivals Iran and Iraq, seeking to quickly cash in on production gains, have pushed against the more moderate Saudi plan. But because Saudi Arabia and its Gulf allies Kuwait and the United Arab Emirates control the bulk of OPEC’s spare oil production capacity, they can drive OPEC’s policy themselves if they choose to. Nonetheless, next week’s oil producers meeting will be a contentious one — and recent events in Libya have only further stirred the pot.

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