In Libya, A New Offensive Could Disrupt the Oil Industry's Status Quo

10 MINS READApr 12, 2019 | 05:15 GMT
A Libyan fighter loyal to the Government of National Accord mans a heavy weapon mounted on a pickup truck during clashes with Libyan National Army forces south of Tripoli's suburb of Ain Zara on April 10, 2019.

A Libyan fighter loyal to the Government of National Accord mans a heavy weapon mounted on a pickup truck during clashes with Libyan National Army (LNA) forces south of Tripoli's suburb of Ain Zara on April 10. After a two-year cease-fire in Libya, LNA Field Marshal Khalifa Hifter launched an offensive on Tripoli on April 4.

  • Over the last three years, Khalifa Hifter and his Libyan National Army have gained a stranglehold over Libya's oil infrastructure.
  • However, Hifter does not control the flow of oil revenue, which is managed through the Central Bank of Libya in Tripoli. Hifter will take steps to try to gain that control.
  • Much of the central bank's oil revenue is distributed in the form of civil salaries throughout the country, which sometimes pay militias fighting Hifter.
  • The longer the Libyan civil war continues, the more likely it is that Hifter's forces will consider cutting off oil production to limit financial support for his adversaries.

The decision by Libyan National Army (LNA) Field Marshal Khalifa Hifter to launch an offensive on Tripoli has sent shockwaves through the Libyan political system. The operation started just a week before a scheduled UN-backed National Conference that aimed to facilitate national elections in the divided country, which had previously been under a nearly two-year cease-fire. Already, militias supporting the Tripoli-based Government of National Accord (GNA) have stopped Hifter's offensive. But the LNA's continued efforts may evolve into a prolonged conflict and a renewed civil war.

The Big Picture

Currently, control of Libya is divided between two rival governments: the House of Representatives, which is functionally based in Tobruk but also controls Benghazi, and the Government of National Accord, based in Tripoli. Remarkably, despite these divisions, the country's oil production has recovered over the last two years amid a nationwide cease-fire and political negotiations. The decision by the Libyan National Army (aligned with the House of Representatives) to launch an offensive on Tripoli, however, risks completely changing the conditions that led to that recovery.

For now, the latest fighting has not resulted in any parties preventing oil production or exports in Libya, and that may remain the case if the situation quickly ends in a new cease-fire. But the longer fighting goes on, the more likely it is that the Libyan oil industry will be used as leverage in some way. And even if there is a cease-fire, Hifter's offensive has short-circuited any attempts at a political resolution in the near term. Either outcome could halt the recovery of Libya's oil sector, and the pragmatism shown by Libya's sparring governments could run dry.

The Expansion of Hifter's Oil Holdings

To say that Libya's oil sector has been a pawn in the country's political crisis since the fall of Moammar Gadhafi in 2011 would be an understatement. Libya's oil production, which sat at 1.1 million barrels per day (bpd) in March, has consistently been taken offline as factions fight for political and financial leverage over one another. And the swings in production have been dramatic: In August 2016, oil production fell to just 270,000 bpd when Ibrahim Jadhran, commander of the Petroleum Facilities Guard that was protecting the export terminals in Libya's east, withheld exports in hopes of securing more local revenue and better salaries for his clan.

This map shows the territory controlled by Libya's three major factions

Hifter, whose LNA aligns with the House of Representatives (which currently rejects the authority of the GNA), has certainly taken notes. His power consolidation strategy since the start of 2016 has been to prioritize gaining a stranglehold on the country's oil industry. In September 2016, his forces seized three oil terminals in the so-called Oil Crescent — Zueitina, Ras Lanuf and Es Sider — and restarted oil exports in hopes of building up his image as a liberator and gaining support among Libyans. He even allowed the oil exports to be managed by the National Oil Corporation (NOC), which is based in Tripoli. Since that operation's conclusion, Hifter's forces have controlled all of the oil terminals and oil fields in Eastern Libya, which account for roughly two-thirds of Libya's total production. The only exceptions to this have been brief periods when former guards launched attacks on the facilities.

In January, Hifter launched an offensive on the Fezzan region ostensibly to bring stability to one of Libya's most remote areas, which is rife with smuggling, human trafficking and jihadist activity. But the real prize was Libya's largest oil field, El Sharara. That field had been offline for several months as local guards demanded local investment. But Hifter's offensive kicked the guards out and he once again allowed the NOC to export oil from the terminals.

By controlling Fezzan in the southwest and Cyrenaica in the east, Hifter now controls virtually all of Libya's onshore oil production, giving him economic and political leverage.

The Fezzan offensive could arguably be considered the last piece of Hifter's oil puzzle. By controlling Fezzan in the southwest and Cyrenaica in the east, Hifter now controls virtually all of Libya's onshore oil production, providing economic and political leverage. The only meaningful oil fields out of his grasp are a couple of small offshore fields in Western Libya in the Mediterranean. And beyond oil fields, only one major refinery and one major oil export terminal — in Zawiya, which is to the west of Tripoli — is outside of his control. (A few small export terminals are also beyond his reach). By and large, despite working with the Tripoli-based NOC, Hifter controls virtually the only economic resource of value in Libya.

Zawiya is a key prize that Hifter likely wants to secure as a part of his Tripoli offensive. The question now is: Will he continue to pragmatically allow the Tripoli-based NOC to access the oil under his control while fighting pro-GNA militias in Tripoli? The head of the NOC, Mustafa Sanalla, has called upon his institution to remain apolitical despite its location. But the NOC's previous pragmatism in deftly navigating the dispute between Hifter and his Tripoli-based rivals occurred during a cease-fire, not during active hostilities. The breakdown of that cease-fire demands a new way of thinking.

The Battle for the Central Bank and the National Oil Corporation

A key cause of Libya's broader ongoing geopolitical dilemma is the division between the regions of Cyrenaica in the east, where the House of Representatives is located, and Tripolitania in the west, where the GNA is based. This divide has become more pronounced over the last century: Before then, neither region belonged in any meaningful way to the same political entity. During his rule from 1969-2011, Gadhafi tried to paper over the regions' differences by centralizing control of Libya's oil sector. His policies allowed a handful of key institutions to control oil revenue, none of which became more important than the Central Bank of Libya (CBL) and the NOC. Functionally, the NOC oversaw oil production and oil sales under Gadhafi, but revenue flowed through the central bank, which worked with Libya's finance ministry to help pay salaries for public workers. That system remains in place today.

It should be no surprise that behind the scenes, the Eastern and Western Libyan rivals have fought for control over both the CBL and the NOC. Both are technically based in Tripoli, making it difficult for the House of Representatives and Hifter to exert any control over the institutions — even when their government was internationally recognized between August 2014 and March 2016. In fact, the Tobruk-based House of Representatives has set up parallel versions of both institutions: a Benghazi-based National Oil Company and a Benghazi-based Central Bank. Hifter's allies have tried multiple times to gain international recognition for these institutions, but they have failed each time.

Thus far, control of the Central Bank of Libya has eluded Hifter and his allies. During the cease-fire of the past two years, Hifter has tried to leverage control of oil terminals to gain more influence over the CBL. In June 2018, after Hifter seized the oil terminals back from Jadhran's guards, he declared he would only reopen the terminals if the House of Representatives' appointed central bank governor replaced the CBL's longtime governor Sadiq al-Kabir. He also demanded an audit to identify where the bank's oil revenue was spent. Hifter has accused the central bank of funding the Islamist militias that attack him, and while this may not have been entirely accurate, the bank has indeed financed groups on both sides of the war in the past, including Islamist militias; al-Kabir himself has been associated with Islamists.

A Civil War Changes the Cease-Fire Circumstances

Therein lies Hifter's dilemma if the new fighting in Libya does break out into a full-blown civil war. The GNA administers the central bank, which controls oil revenue. Fighters in several of the main militias protecting Tripoli, such as the Special Deterrence Forces, as well as many of the Misratan brigades that were involved in the offensive on Sirte, receive salaries from the CBL as public servants.

In short, this Gadhafi-era system means that when Hifter's forces allow oil to be exported from their areas of control, they are helping fund and finance the militias fighting them — as well as helping them secure crucial fuel for warfare efforts. During the cease-fire, this consequence was worth accepting so that Hifter could ensure continued civil payments throughout the country and build up popular support. But during an active conflict, the sacrifices to the LNA may be too great.

The Gadhafi-era system of exporting oil means that when Hifter's forces allow oil to be exported from their areas of control, they help fund, finance and fuel the very militias fighting against them.

One factor may drive Hifter to continue allowing oil exports, however, which is that some of the civil payments go to his own soldiers and civil servants in Cyrenaica. Like the NOC, Libya's central bank has tried to be pragmatic and apolitical when possible. This means maintaining government salaries in the east, including arrangements for some LNA members. If Hifter cuts oil exports, he would halt those payments, and though outside backers could augment the LNA fighters' salaries, government workers and civil servants in Cyrenaica would experience major salary reductions.

An Alternative Export System?

Realistically, if Hifter were to cut oil exports through the Tripoli-based NOC, he would likely try to continue exporting through a different vehicle: the House of Representatives-supported, Benghazi-based National Oil Company, which has struggled to get off the ground. The Benghazi-based National Oil Company would likely send any oil revenue it earns through the rival Central Bank that Tobruk has also set up, giving Hifter control of not only the oil flowing through Libya but also the key part he is currently missing: the country's oil revenue.

But it is not clear that this plan will work. There is an outstanding United Nations Security Council (UNSC) resolution barring oil sales involving anything but the Tripoli-based institutions; many different groups since 2011 have tried to export eastern Libyan oil independent of Tripoli, but they have always failed. It's entirely possible that in the heat of a civil war, Egypt and the United Arab Emirates would facilitate these oil exports in order to maintain Hifter's strength. The United States, however, is still staunchly aligned with the UNSC and in 2018 threatened to sanction Hifter if he did not resume oil flows through the official Tripoli-based institutions. Under the Obama administration, the U.S. Navy even physically intervened to prevent independent oil exports from Libya.

Nevertheless, continued oil flow out of Libya is the United States' primary interest, particularly as it seeks to sanction Iranian and Venezuelan oil exports. If Hifter cuts off oil through the Tripoli-based NOC — and the only way oil exports from Libya can remain at a relatively high level is if Hifter uses the Benghazi-based National Oil Company — the United States may cave. In any case, the longer the active fighting in Libya's civil war continues, the more likely it is that Hifter will take advantage of the leverage over the oil sector he has built up, putting Libyan oil exports in a fragile position.

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