Can Libya’s oil sector survive the storm?

Libya’s oil production experienced a significant decline due to a political crisis that lasted for a month. The crisis involved tensions between rival factions and led to the closure of important oil fields and ports. Output dropped by over 80%, from 1.2 million barrels per day (bpd) to approximately 500,000 bpd.

The appointment of Nagy Issa as the new governor of the Central Bank of Libya on October 1st brought a temporary resolution to the crisis. However, underlying political divisions between eastern and western Libya persist, and it remains to be seen whether Issa’s neutral position will be sufficient to address these tensions.

Political factions in Libya have a history of using oil blockades as a means of gaining leverage in negotiations. The eastern factions, which control most of the oil production, have frequently halted operations to demand a larger share of the oil revenues, which are technically controlled by the Tripoli-based Government of National Unity (GNU).

The GNU, led by Abdul Hamid Dbaiba, was established in 2020 through UN-mediated negotiations with the intention of overseeing elections. However, the elections have been postponed indefinitely, and Dbaiba has remained in power. His control is partly attributed to his ability to maintain the support of armed groups in Tripoli through government spending.

This spending has been a point of contention with the Central Bank. The former governor, Al Siddik al-Kabir, resisted many of Dbaiba’s financial requests. Although the GNU controls oil revenues, the UN Security Council mandates that the Central Bank act as the custodian of these funds, which are held in overseas accounts.

International oil companies have expressed concerns about the political instability and its potential impact on Libya’s oil sector. The recent crisis surrounding the Central Bank has raised doubts about the country’s ability to provide a stable business environment.

Despite these challenges, Libya has the potential to increase oil production to 2 million bpd. However, internal conflicts over oil revenue distribution and a significant development fund have hampered progress. The establishment of an independent oil services company in eastern Libya, “Arkino Oil,” has further complicated the situation, raising concerns in Tripoli about the eastern factions seeking greater autonomy.

Instability within Libya’s oil sector escalated in March with the suspension of Oil Minister Mohamed Aoun, who later resigned. His interim replacement, Khalifa Abdul Sadek, was also suspended and then reinstated, contributing to the ongoing disruption.

While the recent oil blockade has been lifted, this is considered a temporary solution. The lack of updated financial data from Libya’s Central Bank adds to the uncertainty surrounding the country’s economic situation.

Concerns remain that Libya’s current spending patterns could lead to financial difficulties. However, Dbeibah faces a difficult situation, as reducing spending could trigger further oil blockades or lead to his removal from power.