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Oil Zone Fighting Threatens Libya with Economic Collapse
Oil Zone Fighting Threatens Libya with Economic Collapse
Libya: Amid Political Limbo, Time to Rescue the Economy
Libya: Amid Political Limbo, Time to Rescue the Economy
Burned equipment, including a charred and flattened crude oil tank in the background, is seen at the Ras Lanuf crude oil tank farm near Ras Lanuf, Libya, 17 October 2016. CRISIS GROUP/Claudia Gazzini

Oil Zone Fighting Threatens Libya with Economic Collapse

New clashes over Libya’s oilfields could wreck the fragile remains of the country’s economy. Beyond security help, international actors must support compromises on state financing between the opposing factions and help pull Libya back from the brink.

Libyans have seen rare glimmers of hope in recent months, with an uptick in oil exports and recent reverses inflicted on the jihadists of the Islamic State. But new fighting over the country’s oil crescent has upset precarious balances and threatens the country with a dangerous economic meltdown.

The new trouble began on 7 December, when a coalition of militias began an offensive to take control of the oil export facilities of the Gulf of Sirte, an area known as the “oil crescent” that is one of Libya’s main economic lifelines. The attacking forces moved from Jufra, south of Sirte, and advanced to Ben Jawwad, some 30 km west of Libya’s largest oil export terminal. Forces loyal to General Khalifa Haftar, which control the area, responded with airstrikes and pushed the assault force back to Jufra.

The rump government in Tripoli, the Presidency Council headed by Prime Minister Faez Serraj and backed by the UN and several Western powers, has distanced itself from this operation and stated it played no role in mobilising this force. Crisis Group warned in September and November that such an attack would be perilous.

Yet many Libyans, including members of units who launched the assault, claim the operation was carried out under the leadership of al-Mahdi al-Barghathi, the defence minister in Serraj’s government. Tripoli-based officials have been sounding the alarm for months about preparations for such an assault, alleging that Barghathi was providing legal cover and funds for the operation, and also coordinating the recruitment of men and provision of weapons.

The aim of the offensive was clearly to strike a blow against Haftar-led forces, whose control of the oil crescent is ill-tolerated by various Tripoli-based groups, including some members of the Presidency Council. Haftar took over the oil crescent in September. Since then he has greatly increased his negotiating position, having already established his Libyan National Army (LNA) as the dominant politico-military force in eastern Libya and seizing control of much of Benghazi over the course of 2016. For those attacking, regaining the oil crescent would not only mean controlling the oil terminals there, but also opening strategic supply roads to Benghazi, where forces allied with the Council against Haftar have suffered successive defeats since the beginning of the year.

But Haftar’s takeover of the oil fields has also allowed a 50 per cent rise in Libya’s oil exports at a time where Libya’s foreign cash reserves are growing dangerously depleted. And the new fighting comes just as Libyans had welcomed the liberation of Sirte from the Islamic State, with the last few blocks of the coastal city under the jihadist group’s control seized on 5 December.

Politically, the 7 December operation reveals further fragmentation in the coalition that is backing the Presidency Council and will likely make it more difficult to reach a negotiated solution to the Libyan conflict. In particular, Barghathi’s apparent role in the offensive is divisive. Several members of the Presidency Council, as well as the main military force in the west from the city of Misrata, had opposed such an escalation. It also raises the question of whether an already weak Presidency Council, facing increasing challenges in its own camp, has lost control of its defence ministry. And it affords its opponents in the east the opportunity to discredit it further. On 8 December, the day after the offensive on the oil terminals, Haftar-aligned forces retaliated by attacking Brak air force base, south of Sirte, inching closer to a confrontation with the Presidency Council-aligned Misrata forces now controlling Sirte.

The Attack on the Oil Crescent

Crisis Group on the Ground Crisis Group's Senior Analyst for Libya, Claudia Gazzini, walks through destroyed crude oil storage tanks in the Sidra tank farm, near Ras Lanuf, Libya, 16 October 2016. CRISIS GROUP/Claudia Gazzini

The 7 December offensive was carried out by a self-proclaimed “Operations Room for the Liberation of the Oil Fields and Ports”.

According to sources familiar with the operation, a surprisingly small force of some 600-800 men drawn mostly from former members of the Shura Council of the Benghazi Revolutionaries, an anti-Haftar military coalition, and another military grouping called the Benghazi Defence Brigade. Both are Islamist-dominated militias driven out of the eastern city earlier this year. It also includes men loyal to Ibrahim Jadran, the former commander of the Petroleum Facilities Guard in the area, who controlled it prior to Haftar’s takeover in September. Close associates of Barghathi were also actively involved in the operation: one is Idris Musa Bughuetin, the Operations Room’s commander; another is Osama al-Obidi, a colonel who was captured by the LNA on 7 December and transferred to its headquarters in Merj.

Barghathi has told the Presidency Council that he did not order that attack. Yet there is strong evidence to the contrary. According to defence ministry sources, for the past three months Barghathi has been coordinating with Qatar-based Islamist politician Ismail Sallabi, who is also from Benghazi, and members of the Benghazi Defence Brigades in Tripoli in preparation for the offensive. They also allege that he has been tapping into the defence ministry’s budget (never earmarked for such an operation) while Sallabi obtained other funds from Qatar to recruit men. Sources in Misrata add that Barghathi and his aides have been purchasing weapons on the local arms market (a common practice even for officials in Libya, as an arms embargo prevents the legal purchase of weapons from abroad).

The credibility of the Presidency Council and its defence minister is at stake. If it is true that the Council had no knowledge of the offensive being planned, which is what it publicly stated in a 7 December communiqué, this attack underscores its weakness and inability to control what is happening on its own turf (since the offensive was planned and the force recruited in Tripoli). It is unlikely that the Council was fully in the dark, as preparations for the offensive were an open secret. Indeed, it may be that the Council, or some of its members, covertly backed the offensive to undermine Haftar and retake the crucial oil crescent. This would suggest political and military naivety, as such an assault was always unlikely to succeed without the support of Misratan armed groups, the most important in western Libya, and a way to counter Haftar’s air superiority.

“We Are Dying of Hunger”

Buildings destroyed in bouts of fighting line a road in Benghazi, 19 July 2016. CRISIS GROUP/Claudia Gazzini

The greatest repercussions, however, are economic. Since Haftar seized control of the oil crescent in September, he allowed oil exports from the terminals to resume and repairs to damaged facilities to be carried out. Revenues from these sales, made by the Tripoli-based National Oil Corporation (NOC), are paid to the Central Bank of Libya. Both institutions, whose unity the international community has sought to defend since the conflict began, recognise and work with the Presidency Council. The Haftar-supporting eastern government tried to create its own branches of the NOC and Central Bank, but Haftar himself has so far worked through the Tripoli-based NOC chairman.

Now, even if the 7 December offensive stops, it has already broken the delicate equilibrium that allowed the NOC to both cooperate with Haftar forces in the oil crescent and also to collaborate with the Presidency Council. Haftar could well claim that the Council has allowed state funds to be used to finance the offensive, end cooperation with the NOC and perhaps once again block exports.

So far Haftar has made no such move. But his continued cooperation in oil exports appears to be conditional on the Central Bank of Libya not disbursing funds to the Presidency Council through ad hoc procedures, which is what the Council and its international backers are asking the Central Bank to do. At present, such ad hoc procedures are frozen by political disagreements between Libya’s rival political entities – which may be one reason the 7 December operation happened in the first place.

If Haftar does cut back exports, this would put huge new strain on Libya’s struggling economy. The loss in oil exports due to the ports’ closure (when they were controlled by Jadran) and blockades of critical oil and gas infrastructure elsewhere over the last three years have significantly reduced oil production. From a high of 1.8 million barrels per day (bpd) in the era of the late former leader Muammar Qadhafi, it remained under 400,000 bpd for much of 2016. Since Haftar took control of the fields, it has begun to recover, reaching 600,000 bpd in November. Together, low oil production, prices and exports have resulted in a fiscal deficit of 56 percent of GDP in 2015, expected to remain approximately the same for 2016.

At this rate, Libya could be bankrupt by the end of 2017

At this rate, Libya could be bankrupt by the end of 2017. Foreign currency reserves are estimated to now be below $40 billion, compared to $75 billion in March 2015, the last known public figure. Even if, in the NOC’s optimistic scenario, production returns to 1 million bpd at a price of $50 a barrel, the country will barely recover. It is already suffering a severe liquidity crisis, with commercial banks limiting cash withdrawals. Libyans have to queue for hours to withdraw a maximum of $300 per day; sometimes weeks can go by without any cash in the banks. The U.S. dollar is traded at four times its official rate on the black market and inflation is rising rapidly, as most food and consumer goods are imported.

Such is the public frustration that a woman recently climbed on top of a fountain in downtown Tripoli, stripped off her veil and shouted: “We are dying of hunger. Do you want us to sell our honour to feed our children?

Healing the Divide

Clouds dot the skyline over Merj, in Eastern Libya, 16 July 2016. CRISIS GROUP/Claudia Gazzini

Not enough attention has been given to healing the divide of Libya’s main economic institutions, which the Libyan Political Agreement signed in December 2015 has not ended. An improving relationship between the two rival governors of the Central Bank of Libya, Saddik ElKebir, based in Tripoli, and Ali al-Hibri, based in al-Bayda in the east, broke down in early June when Hibri authorised the distribution of Russian-minted banknotes. The Presidency Council has done little to address this, and in November, U.S. Secretary of State John Kerry and other international officials personally intervened to improve increasingly difficult relations between ElKebir and the Presidency Council. Likewise, Tripoli-based NOC chairman Mustafa Sanallah and his Benghazi-based counterpart Naji al-Mogrebi, who had agreed to work together this summer, have not communicated since October. Sanallah also has his own problems dealing with the Council.

In this chaotic political context, it is essential to stabilise the country’s economy and prevent further destruction of oil and gas installations. Even in the absence of an overarching political settlement there are important steps that can be taken.

First of all, the Presidency Council and its international backers must urgently prevent any further escalation in the Gulf of Sirte. One way to do so would be for the Presidency Council to launch an investigation into the 7 December offensive with the aim of determining who is responsible for organising the attempted assault on the oil terminals. Such steps might help quell tensions, reassert the authority of the Council and enable the consensus to get funds flowing to it again.

In this chaotic political context, it is essential to stabilise the country’s economy and prevent further destruction of oil and gas installations.

Secondly, with regard to economic considerations, the UN Security Council should reiterate its strict ban, outlined in UN Security Council Resolution 2146, against selling oil outside legal channels. It should insist on the principle that military forces in control of oil and gas facilities allow the NOC unhindered access to, and operation of, such facilities. Adherence to this principle would reduce the growing nervousness of the Presidency Council about its dire financial situation and help avert the prospect of economic disaster in the coming year.

Thirdly, the UN and backers of the diplomatic process in Libya should consider the necessity, now more than ever, of a serious economic track that encourages the various factions, even if they take time to reach a political settlement, to take interim measures to address urgent economic challenges.

Militarily, Libya’s conflict has been, in regional terms, relatively low-intensity. Keeping it that way, consolidating the defeat of the Islamic State in Sirte and extremists elsewhere, and eventually resolving it will require addressing the political divides, a process that has proven deeply frustrating and has been faced with many setbacks in the last year. A way to revive hope for a political settlement should begin with addressing looming economic problems before they get more serious, and strike economic compromises that help solve immediate governance problems. In other words, amid the necessary focus on getting Libya’s security balances right, policymakers should not forget to address the country’s bottom line.

Contributors

Senior Analyst, Libya
claudiagazzini
Project Director, North Africa
boumilo

Libya: Amid Political Limbo, Time to Rescue the Economy

As the UN-backed effort to form a unity government is yet to bear fruit, the conflict in Libya could face further escalation in 2017. In this excerpt from our Watch List 2017 annual early-warning report for European policy makers, Crisis Group urges the European Union and its member states to first focus on supporting a political settlement, which will contribute to solving the wider issues of uncontrolled migration flows and instability in the region.

This commentary is part of our annual early-warning report Watch List 2017.

The Libyan conflict will most likely continue without a decisive political and military settlement in 2017. Various political actors contest the legitimacy of the Government of National Accord, but a lack of consensus – among Libyans, neighbouring states and international stakeholders – on what should replace it suggests it will remain in place even as its effectiveness deteriorates and its opponents consolidate their positions. In this state of suspended animation, the European Union (EU) and its member states should make it their top priority to help stabilise Libya’s economic situation. The country’s financial collapse would cripple its few functioning and critically important institutions, precipitate a humanitarian crisis, fuel the war economy, complicate efforts to tackle migrant and refugee flows and, more broadly, further hinder international attempts to put the country on a more stable political footing.

Stalemate, But For How Long?

The interim government created by the Libyan Political Agreement on 17 December 2015 has had limited success in imposing its authority since its arrival in Tripoli in April 2016 and is unlikely to survive in its current form. But what will replace it? And how?

A best-case scenario would see its composition, organisation and responsibilities renegotiated – and Prime Minister Fayez Serraj and other core Presidency Council members replaced – to meet the approval of the Tobruk-based House of Representatives, whose endorsement is required to implement the agreement in both letter and spirit. This is not a silver bullet; it would need to be accompanied by a bottom-up process based on local governance where possible, with the aim of linking the urgent need to rebuild the central state with the reality of diffuse local power. At the very least, stabilising the centre offers opportunities to build institutional capacity and improve service delivery until solutions to thornier issues, such as demobilising militias and restructuring the security sector, can be found.

In the absence of concerted international pressure on Libyan factions to negotiate a new political deal, a breakthrough is unlikely.

The worst-case scenario is that forces under General Khalifa Haftar, bolstered by recent military successes in Benghazi, the Gulf of Sirte “oil crescent” and southern Libya, make good on his pledge to try to retake Tripoli. This would lead them into a major military confrontation with Tripoli-based Islamist militias and forces from Misrata that have been fighting the Islamic State.

The more likely scenario is that Libya remains in limbo. This is because Haftar’s forces are unlikely to advance significantly toward Tripoli, even with Egyptian, Emirati and perhaps Russian backing, as they lack sufficient support in western Libya. At the same time, in the absence of concerted international pressure on Libyan factions to negotiate a new political deal, a breakthrough is unlikely. The question then becomes how to stop the economic situation from deteriorating further until an opportunity for a political breakthrough arises.

Map of Libya. International Crisis Group.

The Oil Must Flow

Whatever its ideological and geopolitical dimensions, the conflict is largely about control of hydrocarbon resources and access to state funds. According to the National Oil Corporation (NOC), oil sector closures have cumulatively cost over $100 billion in lost revenues from oil exports since 2013, resulting, according to the Central Bank of Libya, in a fiscal deficit of 56 per cent of GDP for both 2015 and 2016. The Bank’s foreign-currency reserves are estimated to have fallen below $40 billion, compared to $75 billion in March 2015. Oil production has increased since September 2016 – when Haftar-aligned forces seized most oil facilities in the Gulf of Sirte – from around 250,000 barrels per day (b/d) to 700,000 (still far below the 1.8 million b/d of 2010). Even if production reaches 1 million b/d by the end of March 2017, as the NOC projects, the economic outlook remains bleak. With crude oil prices at $50 a barrel, production increases will not cover expected government expenditure of around $40 billion in 2017. Libya could be bankrupt by the end of the year.

Even before then, without careful economic stewardship and proactive government measures, the economy is likely to worsen and hardships increase for a population mainly dependent on government salaries. The liquidity crisis (with banks unable to dispense much cash) could worsen, the dinar could come under further pressure, and basic services such as electricity could face severe constraints due to poor management and cash-flow problems.

Political factors make the outlook even grimmer. Rifts and rival claims for control of the NOC, Central Bank and Libyan Investment Authority (LIA, the sovereign wealth fund, with over $60 billion of assets) could limit the activities of these key institutions, constraining public spending. Moreover, the Central Bank appears unwilling to authorise transfers to the government because the latter lacks parliamentary recognition. The government’s consequent inability to access and use state funds could undermine the loyalty of security forces, whose salaries it pays, and stimulate the illegal economy, including trafficking of migrants and subsidised goods.

Focus on the Economy (and Security Forces)

Europe has two strategic priorities in Libya: ensuring that the country is not a source of regional instability and finding a partner able to reduce the migrant flow. For both objectives, a political settlement is key. It may seem elusive now but will be far more difficult to accomplish in a collapsing economy, as warlordism and zero-sum calculations intensify. Such deterioration would not only increase the flow of migrants from sub-Saharan Africa but also see the number of Libyans trying to cross the Mediterranean continue to rise, a trend that started in 2016.

Economic troubles are negatively affecting the security forces, including those tasked with countering illegal migration. Some units are suspected of taking bribes to look the other way or even becoming party to the people-smuggling. This in part enabled over 160,000 migrants to cross the Mediterranean from Libya in 2016 – a record high, alongside a record number of deaths. Seeking agreements from the government on migration control, as the EU and its member states are doing, is a fool’s errand as long as it has no effective control over the security forces (even leaving aside human rights concerns). The government will not be able to exercise that control without a peace settlement based on a political process accompanied by a security track that involves key military actors and addresses disputes on security forces’ structure and chain of command.

The EU and its member states should [...] channel their energy toward addressing the economy.

While the EU and its member states should not walk away from the overarching goal of a comprehensive solution to the conflict, they should at the same time, and urgently, channel their energy toward addressing the economy. In particular, they should intensify efforts to broker an agreement on the disbursement of the 2017 budget between the government, House of Representatives and Central Bank. To resolve the internal rifts within the Central Bank and NOC, they should urge Prime Minister Serraj to promote talks between the rival chains of command in these institutions, as he did in 2016.

The EU and its member states should continue to make clear that they will not tolerate oil sales or related contracts outside official channels and ensure, through more careful vetting and improved monitoring, that Libyan security forces participating in EU anti-migration efforts are not involved in, or profiting from, people-smuggling or maritime trade of subsidised fuels. They should also ensure that any greater reliance on Libyan authorities for anti-migration measures does not result in migrants being denied the protection to which they are entitled under both international and European law.