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The Prize: Fighting for Libya’s Energy Wealth
The Prize: Fighting for Libya’s Energy Wealth
Table of Contents
  1. Executive Summary
After Libya’s Oil Grab, Compromise Could Lead to a Restart of Exports
After Libya’s Oil Grab, Compromise Could Lead to a Restart of Exports
El-Sharara oil field, Libya, 24 March 2015. CRISIS GROUP/Claudia Gazzini
Report 165 / Middle East & North Africa

The Prize: Fighting for Libya’s Energy Wealth

The imminent collapse of Libya’s economy could impoverish millions, foster chaos and more radicalisation. At the heart of Libya’s misery is frenzied competition for control over the country’s oil resources. Ongoing UN-led talks should urgently prioritise economic governance, local ceasefires and armed defence of oil facilities.

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Executive Summary

Libya’s economic conditions could turn sharply for the worse, as rival authorities vie to control rapidly shrinking national wealth. The struggle affects oil fields, pipelines and export terminals, as well as the boardrooms of national financial institutions. Combined with runaway spending due to corruption and dwindling revenue because of falling exports and energy prices, the financial situation – and with it citizen welfare – faces collapse in the context of a deep political crisis, militia battles and the spread of radical groups, including the Islamic State (IS). If living conditions plunge and militia members’ government salaries are not paid, the two governments competing for legitimacy will both lose support, and mutiny, mob rule and chaos will take over. Rather than wait for creation of a unity government, political and military actors, backed by internationals supporting a political solution, must urgently tackle economic governance in the UN-led talks.

The Prize: Libya's Hydrocarbon Wealth

In this video, our Senior Libya Analyst, Claudia Gazzini, explains the complex overlapping issues around the fight for Libya's energy wealth and how we went about researching the topic. CRISIS GROUP

Since the Qadhafi regime fell in 2011, Libya has been beset by attacks on, labour strikes at and armed takeovers of oil and gas facilities, mostly by militias seeking rents from the fledging central government. Initially brief and usually resolved by government concessions, the incidents gradually took on a life of their own, in an alarming sign of the fragmentation of political, economic and military power. They show the power accrued by militias during and since the 2011 uprising and the failure of efforts to integrate them into the national security sector. The dysfunctional security system for oil and gas infrastructure presents a tempting target for IS militants, as attacks in 2015 have shown.

One aspect of the hydrocarbon dispute is a challenge to the centralised model of political and economic governance developed around oil and gas resources that was crucial to the old regime’s power. But corruption that greased patronage networks was at that model’s centre, and corrupt energy sector practices have increased. A federalist movement some consider secessionist controls a number of the most important crude-oil export terminals. It exploits the situation by pursuing its own sale channels, adding to the centrifugal forces tearing Libya apart.

This complicates efforts to resolve a political conflict that in July 2014 triggered a split between rival parliaments, governments and military coalitions – one based in the capital, Tripoli, the other in the east, and both with support from competing regional players. Convinced of its legitimacy, each fights to control key institutions. As the most important, the Central Bank of Libya (CBL) and the National Oil Company (NOC), are under Tripoli’s control, the internationally recognised parliament in Tobruk and its government in al-Bayda are trying to set up parallel institutions. The sides also contest the assets of the Libyan Investment Authority (LIA, the sovereign wealth fund), in international courts. In anticipation of a unity government, most regional and all other international actors with a stake remain committed to the established CBL, NOC and LIA. They understand that these institutions jointly represent upwards of $130 billion and have senior technocratic expertise critical to rebuilding the state.

The longer negotiations stall, however, the greater the risk the Tobruk/Bayda authorities (which consider the Tripoli-based CBL and NOC biased against them) will be able to create rival institutions or weaken the existing ones. At the same time, Libya’s once-significant wealth (derived almost entirely from oil and gas sales) is haemorrhaging, due to corruption and mismanagement. Combined with reduced crude-oil exports because of damage to production and export sites, pipeline and other infrastructure blockades and the sharp decline in international oil prices, this makes remedial action urgent. Poor economic management already causes some shortages of fuel and basic goods; a wider economic crisis like a sudden, uncontrolled devaluation of the dinar, would severely harm millions. This would likely cause new security crises, encouraging more predatory behaviour by militias whose salaries the state pays, increasing the importance of the parallel economy (notably smuggling) and spurring new refugee flows.

Even as UN-led negotiations for a Government of National Accord (GNA) continue, several steps should be taken, including at a minimum:

  • reiterating international determination that there can be only one CBL, NOC and LIA, with a GNA to appoint their senior managers; and oil sales or related contracts outside official channels will not be tolerated;
     
  • prioritising economic governance in the UN-led talks so as to secure agreement on short-term economic policy and interim management of key institutions. This should be done in a separate negotiating track, including representatives of both authorities and with the support of international financial institutions such as the IMF and the World Bank;
     
  • brokering of local ceasefires in the UN-led talks’ security track, or other channels where relevant, to increase revenues in the short term by allowing reopening of blockaded oil fields, pipelines and export facilities. Security arrangements for repair and reopening of damaged facilities should be negotiated in the longer term; and
     
  • making the question of the armed groups guarding oil facilities another priority security-track topic. Some of these have considerable arsenals and allies across Libya and are largely autonomous, so cannot be ignored. Including these armed groups could also help improve the protection of oil and gas infrastructure against attacks by IS affiliates.

The slow progress of the UN-led talks on political questions should dissuade neither the belligerents nor the internationals from encouraging such interim steps. That Libya has kept, against all odds, a minimum level of economic governance and even briefly increased oil exports shows that interim economic arrangements are possible; they could even deliver political gains by building confidence and demonstrating that compromise can be mutually beneficial. But this needs a push from outside, the resolve of both local and international actors – notably regional powers that have oscillated between backing a political solution and supporting one side or another – to maintain the integrity of the financial institutions and perseverance from negotiators. Above all, it entails convincing the two sides they are fighting over a rapidly diminishing prize and would be better off agreeing to these steps so as to share a bigger pot.

Tripoli/Brussels, 3 December 2015

Oil terminal of the Sirte Oil Company in Brega, Libya, in June 2016. CRISIS GROUP/Claudia Gazzini

After Libya’s Oil Grab, Compromise Could Lead to a Restart of Exports

The seizure of Libya’s main pre-2013 oil terminals by an opposition force is a blow to the authority of Libya’s fledgling UN-backed Presidency Council. But smart compromises might help restart the flow of oil, as Crisis Group’s Senior Libya analyst Claudia Gazzini explains in this Q&A.

What has happened on the ground in Libya?

Key crude oil export terminals in eastern Libya were seized on 11 September by General Khalifa Haftar’s Libya National Army (LNA). This is a force opposed to the fledgling Presidency Council (PC) based in Tripoli in the west of the country, backed by the UN and also supported by the U.S. and UK.

At dawn on the first day of the Muslim Eid al-Kebir feast, Haftar’s LNA forces moved into Sidra and Ras Lanuf oil terminals and the Ras Lanuf petrochemical complex in the Gulf of Sirte. By the end of the day they also controlled Zuwetina export terminal, further east. A fifth terminal, in Brega, also changed hands in the following days.

The Petroleum Facilities Guards (PFG) forces, under local strongman Ibrahim Jadran, a PC ally who has controlled the terminals since 2013, were either on leave for the Muslim holiday or surrendered without putting up significant resistance. With the exception of some clashes in Zuwetina on 11 September and east of Ras Lanuf the next day, the terminals’ takeover has therefore taken place with little bloodshed and no damage to the oil and gas infrastructure. Jadran and his brothers appear to have fled from their homes in Ajdabiya to nearby Brega after coming under attack by rival local factions. They are reportedly attempting a counter-offensive to retake the terminals, requesting help from the PC.

Map of Libya showing major oil installations. CRISIS GROUP/Claudia Gazzini

What does this mean for the UN-backed Libyan PC? And what is the PC’s likely reaction?

From a political and military point of view, these developments are a huge setback to the authority of the UN-backed fledgling government in Tripoli. General Haftar does not recognise the PC’s authority and has refused to place his forces under its command. That these forces have managed to dislodge a strategic (albeit controversial) PC ally and succeeded (at least so far) in taking Libya’s most important oil terminals is inflammatory.

The PC, a nine-member body formed after a December 2015 power-sharing deal, appears to be divided on how to respond: several of its members seem to favour a military attempt to regain control; others say they would be willing to accept the status quo on condition the LNA recognises the PC’s authority. Military factions in central/western Libya that do not fall under the PC’s authority (including some Tripoli and Misrata militias, and an anti-Haftar force known as the Benghazi Defence Brigade) are also clamouring for a military response.

The Prize: Libya's Hydrocarbon Wealth

In this video, our Senior Libya Analyst, Claudia Gazzini, explains the overlapping struggles to control Libya's vast oil wealth. Crisis Group

The situation remains fluid. The decision about how to respond is complicated by the fact that PC-aligned forces are already stretched in their ongoing battle to retake Sirte from Islamic State fighters and in securing the capital from rival forces. In fact, some in pro-PC circles fear that deploying men to the terminals will weaken already tenuous security arrangements in the capital and thus provide an opportunity for these anti-PC militias located on its outskirts to enter the city. Another factor to consider is the popular support that Haftar and the LNA currently enjoy in the east: any military response coming from western Libya is likely to be met with resistance from eastern tribes, especially where it concerns the terminals. But given the tensions that Haftar’s move has provoked, a military attempt on the terminals is certainly possible.

Why does Haftar refuse to recognise the PC?

Haftar has repeatedly refused to come under the PC’s authority for both political and military reasons. The political basis for his refusal to recognise the PC is the fact that the House of Representatives (HoR), the parliament based in Tobruk in the east of the country that appointed him general commander of the Libyan Armed Forces, has yet to officially endorse the December 2015 political agreement. The HoR – or rather, those HoR members still operating in Tobruk – have also repeatedly refused to recognise the cabinet line-up proposed by the PC.

Haftar and eastern Libyan parliamentarians have demanded revisions to the proposed unity government and to security provisions, specifically regarding the position of the supreme commander of the armed forces (which according to the agreement should be held by the head of the PC and his five deputies). Haftar thus considers himself as the legitimate head of the Libyan army and accuses PC-aligned forces in Tripoli of being militias outside state control. Haftar detractors accuse him of using this legal requirement and the war against extremists as a pretext to impose his military rule across Libya. They also accuse him of relying on foreign mercenaries.

What does Haftar hope to achieve by taking over the terminals?

By seizing the oil terminals in the Gulf of Sirte, Haftar and his supporters are trying to achieve a number of goals. First, they hope to consolidate the LNA’s control across eastern Libya. Ever since launching his Operation Dignity in 2014 against extremist groups in Benghazi, forces allied to Haftar have gradually consolidated control over most of the east, from Tobruk to the western outskirts of Benghazi, and across the oil fields in the eastern hinterland. The move on the oil terminals is just a natural extension of this ongoing attempt to expand their control. Secondly, they are hoping to secure the support of tribal leaders and other constituencies opposed to the PC’s deal with Ibrahim Jadran, whom many across Libya – including within Libya’s National Oil Corporation (NOC) – consider an unreliable partner. If Haftar were to swiftly reopen the ports and allow the NOC to export oil, he could potentially cast himself as the person who allowed Libya’s oil to flow again and put new revenue in the country’s depleted coffers. Most importantly, by controlling the oil terminals, he could increase his bargaining power vis-à-vis the PC.

Heavy smoke rises from Brega oil refinery, June 2016. CRISIS GROUP/Claudia Gazzini

Why is controlling these terminals so important?

The crude oil export terminals in the Gulf of Sirte account for approximately 80 per cent of Libya’s total oil exports (when oil is flowing at full capacity). In a country that depends almost entirely on oil and gas exports for its revenues, it is easy to see why their physical control is strategic. Unfortunately, since mid-2013 these terminals have remained offline, largely due to a power struggle between successive governments and local strongman Jadran, as well as to other political fractures that have divided the country since 2014. This has contributed (among other things) to a collapse of Libya’s oil production and thus a free fall in state revenues. Currently Libya produces approximately 200,000 barrels of crude oil a day, less than a fifth of what it was producing in 2012, and only half of which it appears to be exporting. (Natural-gas exports have not suffered as much, in part because of offshore production). Foreign-currency reserves have plummeted, with less than a year’s worth of funds in state coffers to run government operations and pay public-sector salaries.

At its establishment, one of the PC’s priorities was to increase oil exports in order to stabilise the economy, restore basic services (such as electricity and water supplies) and also fund future PC-backed projects. Securing control of the terminals was seen as key to achieving this. For this reason, in mid-2016, the PC struck an agreement with Jadran: in exchange for his recognition of the PC’s authority and reopening of the ports, the PC agreed to confirm him as the head of the Petroleum Facilities Guards in the area and to pay him and its employees. The PC also promised to create social-development projects in oil-rich areas. The deal appears to have been blessed by the PC’s international backers, most importantly by the U.S. and UK. The UN special envoy to Libya, Martin Kobler, also supported the arrangement, visiting Jadran in late July.

The PC paid a first instalment of around 40 million Libyan dinars (some $30 million) to Jadran in June; future instalments are conditional on the ports’ reopening and resumption of exports. However, no exports from the terminals have taken place thus far. A challenge to Jadran’s ability to reopen the terminals has been the fact that, in the last five months, Haftar-aligned forces gradually gained control of a number of oil fields (such as those in the Zella and Jalo areas) that feed into these terminals.

So is the current situation going to strain Libya’s economy further?

This largely depends on whether or not we are going to see a military response from anti-Haftar forces. An escalation would be disastrous for the current economy because fighting in the terminal area is not likely to be decisive west of Sidra and could actually damage the oil and gas infrastructure and delay further the resumption of oil exports. On the other hand, if LNA forces were to maintain control of the terminals we could see a swifter resumption of oil exports. This might sound paradoxical given the LNA’s hostility to the PC. However, one has to take into consideration the fact that the NOC, the authority that manages the country’s oil production and sales, has a good working relation with the LNA. Over the past two years, the Hariga oil terminal in Tobruk, which is under control of LNA-affiliated forces, has continued to export oil, with revenues from those sales going into accounts of the Tripoli-based Central Bank. So, in principle, there would be no obstacles to resuming exports from these terminals with the LNA in control.

What needs to happen next?

A first urgent step would need to be to de-escalate current tensions and avoid a renewed flare-up. The PC should refrain from launching a military offensive to recapture the terminals and instead engage in negotiations (either directly or through third parties) with LNA commanders to establish a new security arrangement in the terminals area that would be amenable to the LNA, local tribesmen, the PC as well as the NOC.

From the PC’s point of view, the incentive to pursue this line of action rather than military confrontation would be the quick resumption of oil exports and resulting flow of revenues, beneficial to both itself and the population at large. With the economy collapsing, the PC has the responsibility to factor in such considerations rather than pursue military objectives that would likely lead to prolonged conflict, with severe consequences for the population. The PC’s international backers should also refrain from encouraging a military response, and instead should call for a freezing of hostilities in order to allow negotiations to take place. In this regard, the U.S. and neighbouring Egypt, who have been backing respectively the PC-aligned and Haftar-aligned forces, have a key role to play. They, too, have an interest in encouraging steps that would help improve the economy.

From its side, the LNA must stand by its promise to work through the internationally recognised NOC, as per UN Security Council resolutions, and collaborate in ensuring a rapid resumption of oil exports from the terminals under its control. The LNA and its local allies must also refrain from targeting people’s homes and ensure that these forces do not interfere in civilian life, limiting themselves to guarding oil facilities.