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Oil Zone Fighting Threatens Libya with Economic Collapse
Oil Zone Fighting Threatens Libya with Economic Collapse
Avoiding a Protracted Conflict in Libya
Avoiding a Protracted Conflict in Libya
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

Consulting Analyst, Libya
Former Project Director, North Africa
boumilo

Avoiding a Protracted Conflict in Libya

The continued violence between the two local forces competing for power, and their inability to cooperate has locked the conflict in a stalemate that sees no immediate end. In this excerpt from its Watch List 2019 - Second Update, Crisis Group urges the European Union and its member states to work towards an internationally-monitored ceasefire.

This commentary is part of our Watch List 2019 – Second Update.

Since the outbreak of violence in Tripoli last April, the prospect of a negotiated settlement to end the competition for power in Libya has only grown more remote. The military offensive launched by the Libyan National Army (LNA), which is headed by Field Marshal Khalifa Haftar and based in the east, against forces allied with the UN-backed Government of National Accord (GNA) in Tripoli has thwarted UN-led efforts. Those had been aimed at forging a new power-sharing deal or charting a consensual roadmap to reunify critical Libyan state institutions, split between east and west since 2014. The pursuit of outright victory has displaced earlier strategies aimed at reconciling the two rival political and military authorities. For Haftar-led forces, success means capturing the capital, expelling armed groups opposed to the LNA, imposing transitional arrangements that would sideline Prime Minister Faiez Serraj’s GNA, and gaining control of state funds held by the Central Bank of Libya. For the Tripoli-based government, winning entails pushing the besieging forces outside the boundaries of western Libya and implementing a political roadmap that marginalises Haftar.

Diplomatic paralysis pervades this state of affairs. UN Security Council members are divided and unable to call for a cessation of hostilities, mostly owing to U.S. opposition to a draft resolution that would have done just that. The U.S. claims it resisted the draft resolution because it lacked a mechanism to ensure compliance, but its stance more likely reflected White House sympathy for Haftar and for his Saudi, Emirati and Egyptian supporters. More broadly, continued military support (in violation of a UN arms embargo) and funding for Haftar from Saudi Arabia, the United Arab Emirates (UAE), Egypt, France and Russia, and to pro-GNA forces by Turkey and Qatar, are fuelling both sides’ willingness to continue the fight.

Much is at stake for Europe. A protracted conflict in Libya would further destabilise its southern neighbourhood with direct economic and security ramifications, and would continue undermining EU cohesion in dealing with migration. Against the backdrop of UN Security Council paralysis, however, the EU and its member states likely have little leverage to stop the war, especially as European capitals are divided between those that betray a bias toward either Haftar (as in Paris) or the GNA (as in Rome). Still, the EU and member states could and should contribute to de-escalating tensions in the following ways:

  • Urge governing authorities in Tripoli and eastern Libya to reconsider their uncompromising positions and nudge them toward agreement on an internationally-monitored ceasefire, followed by negotiations for new political, military and financial arrangements under UN aegis and with EU technical and financial support;
     
  • Through joint or concerted high-level diplomatic missions representing all EU member states, or by tasking the EU foreign policy chief Mogherini to represent a common EU position, persuade Abu Dhabi, Riyadh and Cairo to recognise that a prolonged LNA offensive is unlikely to produce the swift or “clean” victory that would stabilise Libya and that their interests are better served at the negotiating table. They should similarly seek Ankara’s and Doha’s cooperation in persuading the GNA to sit with the LNA;
     
  • Seek to persuade President Donald Trump’s advisers, who themselves appear somewhat divided, to adopt a more even-handed approach toward the Libyan conflict by calling for a cessation of hostilities, including through the UN Security Council;
     
  • If and when a ceasefire is in place, support an economic dialogue to reconcile the Central Bank of Libya’s two separate administrations and address financial grievances that deepen the conflict, thus paving the way for a military de-escalation and a return to talks.

Tanks and Banks

Neither side shows appetite to accept a ceasefire.

After three months of war, more than 1,000 battlefront deaths and 100,000 displaced civilians, neither Haftar nor Serraj is near victory. Tripoli government forces scored a tactical win in late June when their fighters expelled Haftar’s forces from Ghariyan, a town 80km south of the capital. But in Tripoli’s southern suburbs, where front lines might shift daily, rival forces have been locked in a stalemate for the past three months and airstrikes from both sides continue. Despite this, and the casualty toll, neither side shows appetite to accept a ceasefire, as both view the conflict as existential and believe they can prevail on the battlefield. This means the deadly war around Tripoli likely will drag on and this, in turn, could bring additional military support from both sides’ external backers, triggering new fighting and likely further stalemate, but with even greater destruction.

The fighting around Tripoli is unlikely to end without greater regional support for a ceasefire. Libya’s institutional fractures, which have become conflict lines, and the existential narratives embraced by both sides reflect deeper geopolitical divides through the Middle East and North Africa. Haftar receives support from the UAE, Saudi Arabia and Egypt, who argue he is the only Libyan leader who can rein in Islamists of all stripes, whether the Muslim Brotherhood, jihadists or Qatari and Turkish-backed GNA-aligned militias in Tripoli, all of whom they view as a single undifferentiated enemy. The support offered to Haftar by his regional backers, like that offered to the GNA by its own Qatari and Turkish defenders, reveals the depth of the schism and the significance of this dividing line in regional politics. Tacit U.S. support for this worldview (dictated more by White House priorities elsewhere in the region than by a concrete U.S. vision for Libya), and the push to reshape the regional order espoused by the Emirati, Saudi and Egyptian axis, has also deepened Libya’s internal divides.

While international rifts and competing regional ambitions remain an overarching conflict driver, locally, interlocking competing narratives of political and military legitimacy, a battle for power, tribal rifts and recriminations, and a deeply polarised media are making the war even more intractable. But another important, often overlooked, conflict driver is competition over oil revenues, specifically management of and access to state funds, held by the Central Bank of Libya. Since 2014, the Central Bank has been divided into two rival administrations reflecting the country’s broader institutional divides: the internationally-recognised headquarters in Tripoli and the Benghazi branch, which operates as the central bank but is loyal to the east-based government and parliament. The Benghazi branch, which funds Haftar, has no access to the country’s oil revenues, which have accrued to the Central Bank in Tripoli. Instead, eastern authorities have funded themselves – illegitimately, in Tripoli’s eyes – by issuing almost $30 billion in promissory notes processed by east-based commercial banks. But this parallel funding scheme has strained the banks, which began to show signs of stress just as Haftar launched his offensive in April.

De-escalating the Libyan conflict necessitates resolving this longstanding financial dispute and the immediate banking problems it poses. Failure to mend the financial rift could prompt the Haftar-backed government to pursue independent oil sales, which would ultimately deepen the split between the duelling authorities in east and west.

Haftar sees no role for the UN or those who have risen to power as a result of UN mediation.

Zero-Sum Logic and Muddled Roadmaps

Although neither side is likely to win on the battlefield, the LNA and GNA-aligned forces, both captive to zero-sum logic, have rejected calls for a ceasefire and resuming talks. Instead, they propose conflicting political roadmaps that exclude their opponents from future negotiations. Haftar repeatedly declared that the assault on Tripoli will proceed and that, once it succeeds, he will impose a new transitional government. This would entail dismantling the governing bodies created by the 2015 UN-backed Skheirat agreement, disbanding his opponent’s militias, forming a constitutional committee and holding a referendum on a draft constitution, followed by elections. In this, Haftar sees no role for the UN or those who have risen to power as a result of UN mediation.

For his part, Serraj has publicly refused talks with Haftar. Apparently convinced that pro-GNA forces were close to military victory, he announced his own roadmap in June, from which he specifically excluded Haftar. Serraj’s plan consists of holding a nominally inclusive National Conference under UN aegis that would appoint a judicial committee to draft a new election law. In an attempt to bring east-based leaders to his side, he made vague promises about economic decentralisation and fairer resource distribution.

In principle, Serraj’s proposal hits all the points favoured by his Western interlocutors (inclusivity, decentralisation, elections and a UN umbrella), and for this reason it received endorsement from the UN, EU and some member states. However, he – like Haftar – has a distorted assessment of the power balance on the ground, overestimating his own strength and underestimating his adversary’s. This translates into an unrealistic belief that either side can implement its own roadmap without first reaching a settlement with the other.

Recommendations for the EU and Its Member States

The EU and member states should urge parties on both sides of the conflict to move away from their rhetoric of imminent triumph and toward more pragmatic positions that would open space for a possible de-escalation, an internationally-monitored ceasefire and resuming political and security sector talks, in the first instance to create new security arrangements in the capital. Through joint or concerted high-level diplomatic missions representing all EU member states or by tasking the HR/VP Mogherini to represent a common EU position, they should emphasise to decision-makers in Abu Dhabi, Riyadh, and Cairo that a prolonged LNA offensive is unlikely to produce a swift or “clean” victory that would stabilise Libya, and dissuade them from playing out their regional rivalries on the outskirts of Tripoli.

Instead, given the stalemate and the fact that prospects of a quick LNA victory have faded, they should argue that those countries’ best interests lie in convincing Haftar to agree to a ceasefire and support UN-led talks for a political and military settlement. They should underscore that continued airstrikes in the capital are alienating public support for the LNA’s cause while also empowering the very armed groups that Haftar’s offensive was meant to drive out of Tripoli. Likewise, they should press the GNA’s backers to refrain from supporting a counteroffensive by Tripoli-based forces that would pursue LNA forces beyond Tripoli’s environs eastward or to LNA-controlled oil installations. They should seek Ankara’s and Doha’s cooperation in persuading the GNA to sit with the LNA at the negotiating table.

[The EU and member states] should support UN efforts to forge an agreement on the management of Libya's finances.

A ceasefire would allow all sides, and their foreign backers, to work together on new security arrangements in the capital, the shortcomings of which were one of the original triggers of the conflict. In particular, the two sides need to agree on the role of armed groups, namely which ones continue to operate or demobilise, and decide who will secure what areas.

The EU and members states should also press the Trump administration – which at times has appeared inconsistent and divided between the White House on the one hand, and the State Department and Pentagon on the other – for clearer and more even-handed U.S. policy toward Libya. This should include U.S. support for a UN Security Council resolution calling for a cessation of hostilities. To this end, the EU should seek to persuade the White House that a protracted conflict in and around Tripoli will not unify Libya under one ruler, but will rather fragment and destabilise it further. Such ongoing fighting may well undermine U.S. anti-terrorism objectives: prolonged conflict almost certainly will strengthen armed groups, including those linked to radical Islamist organisations such as al-Qaeda and ISIS, whose affiliates have started operating with impunity in southern Libya since the outbreak of hostilities in April.

European diplomats also should press Washington to reject demands made by pro-LNA emissaries aimed at lifting or circumventing UN-imposed restrictions over Libya’s crude oil exports. For this purpose, they should convey the message to the U.S. administration, in particular the White House, that authorising independent oil sales to eastern authorities could, in the short run, give the upper hand to Haftar forces but poses the graver, long-term risk of consolidating the split between western and eastern authorities.

Finally, the EU and member states ought to intensify efforts to help reunify the rival Central Banks and offer technical advice on how to avert a looming banking crisis; likewise, as Crisis Group previously advocated, they should support UN efforts to forge an agreement on the management of Libya’s finances. They should step in to promote a financial and economic dialogue between rival branches of the Central Bank, especially at a time when the U.S. (which traditionally has led initiatives regarding Libya’s financial sector) has become far less active diplomatically. Failing to manage this dispute will only prolong the war and compound Libya’s post-2011 humanitarian emergency.