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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
Reviving the JCPOA after Maximum Pressure
Reviving the JCPOA after Maximum Pressure
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

Reviving the JCPOA after Maximum Pressure

Reviving the Iran nuclear deal could help alleviate the threat of nuclear proliferation and cool regional tensions. In this excerpt from our Watch List 2021 for European policymakers, Crisis Group urges the EU and its member states to support the Biden administration in re-engaging with Tehran and to facilitate trade between Europe and Iran.

The Trump administration’s “maximum pressure” campaign, which defined its Iran policy and underpinned much of its approach to the wider Middle East, did not succeed. Its punitive approach was meant to curtail Iranian nuclear activity, which increased instead, and to lower regional tensions, which rose dramatically. Tehran responded to U.S. unilateral sanctions with a series of breaches of the Joint Comprehensive Plan of Action (JCPOA), slowly weakening the landmark 2015 nuclear accord. The deal’s further erosion could spark a non-proliferation crisis. Enmity between the U.S. and Iran, manifested in risky tit-for-tat military exchanges in the region, additionally strained relations between the Islamic Republic and U.S. allies Saudi Arabia and the United Arab Emirates (UAE). The mutual distrust simmered for years, frequently coming perilously close to a boil.

Joe Biden’s election to the U.S. presidency has raised hopes for a new U.S. Iran policy in 2021 that can help bring down the temperature in the Middle East and alleviate the threat of nuclear proliferation by reviving the JCPOA. To assist in these endeavours, the EU and its member states should: 

  • Support the Biden administration in re-engaging with Tehran and returning the U.S. to the JCPOA if Iran restores its compliance with the deal.
     
  • Encourage the Biden administration to facilitate international humanitarian support to Iran in response to the COVID-19 pandemic, including Tehran’s request for an International Monetary Fund loan.
     
  • Facilitate growth in trade between Europe and Iran as a crucial element in delivering the benefits envisioned under the nuclear agreement and laying the foundation for discussions with Tehran on a broader agenda, including Iran’s regional power projection and ballistic missile program. At the December 2020 EU-Iran High-Level Dialogue, both sides affirmed their interest in deepening bilateral cooperation. 
     
  • Encourage Gulf Arab states and Iran to enter an inclusive regional dialogue aimed at reducing frictions and opening communication channels to prevent dangerous misunderstandings.

A Vital Opening for Nuclear and Regional Diplomacy 

The 2018 U.S. withdrawal from the JCPOA put the nuclear deal under significant stress. Instead of delivering an improved accord, as the Trump administration boasted it would, it ended up demonstrating the importance of the existing one. Sweeping sanctions put in place by Washington in pursuit of maximalist demands, compounded in 2020 by the impact of the COVID-19 pandemic and Tehran’s mismanagement, have driven Iran’s economy into three years of recession in a row and quashed Iranian expectations that the agreement would yield financial rewards. 

Tehran has in turn broken its commitments to restrict its nuclear program. Notably, since 2019 it expanded its enriched uranium stockpile, raised the level of enrichment, and stepped up its research and development activity. On 2 December, following the killing of senior Iranian nuclear scientist Mohsen Fakhrizadeh the previous month, which media outlets and others widely attributed to Israel, the Iranian parliament passed legislation that would enable further breaches of the JCPOA. The government has already implemented the first of these parliamentary instructions by raising the uranium enrichment level to 20 per cent in early January. Another measure instructs the Iranian government to stop allowing enhanced international inspections under the Additional Protocol to the nuclear Non-Proliferation Treaty, which Tehran has been voluntarily implementing as part of the JCPOA, by 21 February if the JCPOA’s other signatories do not deliver various economic benefits laid out in the deal by that time. Limiting access would be a serious concern for the UK, France and Germany – the so-called E3 – who, along with China, Russia and Iran, remain JCPOA participants. 

The EU, which convenes the JCPOA signatory states under the Joint Commission, has played a pivotal role in diplomatic efforts to keep the accord alive, viewing it as the best available framework for holding Iran’s nuclear activities in check. But, at least in Tehran’s view, both the EU and E3 have failed so far to match their declared commitment to the deal with meaningful sanctions relief.

As the JCPOA began to unravel, regional tensions ratcheted upward in a series of incidents that risked major escalation.

As the JCPOA began to unravel, regional tensions ratcheted upward in a series of incidents that risked major escalation. Some of these incidents involved Iran and the U.S. alone, but others, such as a string of attacks on commercial shipping in the Gulf, underscored the entanglement of their respective allies as well. The danger is heightened by the near absence of consistent communication and decades of accumulated distrust between Iran and the two major Gulf Arab powers, Saudi Arabia and the UAE, which have precluded a security dialogue needed to mitigate tensions. These Gulf Arab states – along with Israel – are also pressing the U.S. not to rejoin the JCPOA or lift sanctions without concrete commitments from Tehran on matters that they consider of paramount concern, such as Iran’s ballistic missile program and what they view as its destabilising role in Yemen, Lebanon, Syria and Iraq. 

Recommendations for the EU and its Member States

The EU can play an important role in stabilising the nuclear agreement and championing constructive dialogue among Gulf actors. Having spent the past two and a half years hailing the JCPOA’s importance, the EU and its member states can claim vindication as they urge both Washington and Tehran to return to compliance with the agreement. Strong diplomatic support for reviving the JCPOA will strengthen the Biden administration’s hand against domestic critics urging it not to relinquish the leverage purportedly accumulated as a result of the “maximum pressure” approach. The Joint Commission can also help develop a roadmap and a timetable for Iran’s and the U.S.’s full resumption of their JCPOA obligations.

The EU and member states could buy more time and space for the incoming Biden administration by offering Iran, with Washington’s green light, some economic incentives of their own. For instance, they could revive President Emmanuel Macron’s 2019 initiative to pre-purchase Iranian oil as long as Iran agrees to halt any additional nuclear and regional escalation before the new U.S. administration moves to effectively dismantle the sanctions. European states should also work with the private sector to expand trade between Europe and Iran, which has deteriorated despite initiatives such as the Instrument in Support of Trade Exchanges (INSTEX), through providing European firms willing to re-engage with the Iranian market or invest in Iran with economic incentives, such as tax breaks. As part of its engagement with the new Biden administration, the EU should press for any measures that can provide immediate humanitarian relief to Iran, including approval of Tehran’s International Monetary Fund loan request for dealing with the COVID-19 pandemic.

European states should also work with the private sector to expand trade between Europe and Iran.

Shoring up the JCPOA does not mean dismissing non-nuclear concerns. European governments, like the U.S. and some of its regional allies, are apprehensive about Iran’s ballistic-missile development, its support of various armed non-state actors, and its human rights record. But stabilising an existing agreement that addresses a key strategic issue offers the best foundation for follow-on negotiations with Tehran.

In parallel to the nuclear file, Europe can help de-escalate regional tensions by encouraging and supporting dialogue between Iran and Gulf Arab states and emphasising that diplomacy offers the best way to both prevent violent incidents from spinning out of control and lay the foundations for a durable regional security framework. Launched as a diplomatic initiative by a core group of European states, with support from the EU high commissioner and the UN secretary-general, regional actors should be prepared to take ownership of such a dialogue to maximise the chances of success. While the Biden administration would need to nudge the Gulf Arab states to talk to Iran, European governments can hold preparatory discussions to understand interests, concerns and aspirations, as well as offer to provide venues for the dialogue, possibly in coordination with the U.S. They could also convene technical discussions among regional states, backed by the relevant UN agencies, to foster cooperation on issues of common interest, such as climate change, public health and maritime security.