As oil markets maintain their focus on how quickly Saudi oil production can bounce back from attacks on Abiqaiq and Khurais, a long-running crisis a couple of thousand kilometers west in Libya is putting more than 1 million barrels per day at risk. The civil war in Libya between forces from the eastern and western parts of the country is not the country’s only production problem: The legitimacy of Tripoli’s National Oil Corporation (NOC), the entity that officially governs the country’s oil exports, is once again at stake. It faces a growing crisis over fuel distribution and a threat to its continuity from a breakaway unit that refuses to recognize the authority of the NOC’s leaders in Tripoli.

Despite years of fighting between the Libyan National Army (LNA) and the United Nations-recognized Government of National Accord (GNA), the country’s oil sector has suffered few lapses in production directly caused by fighting since the LNA seized control of eastern oil fields in September 2016. Many of the same limits that led the LNA to develop a pragmatic working relationship with the Tripoli-based NOC remain in place. A parallel National Oil Corporation based in Benghazi and controlled by eastern interests does not have the international backing necessary to duplicate the Tripoli NOC’s functions. However, the longer the battle between the LNA and the militias supporting the GNA drags on, the more stress the NOC will face, increasing the probability of an oil export disruption.

 

The Big Picture

For the past six months, a civil war has wrecked Libya. Eastern Libya, led by Khalifa Hifter and his Libyan National Army, has battled with western Libya, led by the internationally-recognized Government of National Accord over control of Tripoli. Throughout the conflict, Libyan oil exports have remained remarkably stable, but there are signs that disruptions could follow as the fighting drags on. That development could again roil global oil markets, which remain concerned about Saudi Arabia’s ability to quickly restore its own lost production.

A Dispute Over Fuel Supplies

With Tripoli the target of an LNA offensive since April, the NOC has reportedly capped supplies of kerosene and jet fuel to eastern Libya at the levels the region had consumed before the attacks. The limits apparently have been introduced over concerns that the LNA, led by Field Marshal Khalifa Hifter, is using the fuel to conduct its attacks on Tripoli. In response to the restrictions, the central and eastern operational units of Brega Petroleum Marketing Co. have broken off ties with Tripoli’s NOC. Brega sells local products in some of the affected regions.

 

The question now is whether the change in the Tripoli NOC’s decision-making has shifted the thinking of Hifter and his allies, who have been cooperating with the company. If Hifter were to retaliate by cutting off the NOC’s oil exports, he could face three possible consequences. First, the NOC would further restrict shipments of refined products to the east. Second, the Tripoli-based Central Bank of Libya could restrict the number of financial payments and the amount of cash available to eastern Libya. Finally, the United States has threatened to sanction Hifter should he try to do so.

Thus far, the potential consequences have been enough to keep Libya’s oil flowing. But if the NOC continues to squeeze eastern-bound fuel shipments or if the LNA continues to struggle to gain ground in Tripoli, Hifter will face more pressure from his allies to break ties with the Tripoli institution and bring the capital’s economy to a grinding halt. If he pulls that trigger, Hifter and his allies would almost certainly try to export oil through the parallel Benghazi-based NOC, despite its lack of international recognition, or subsidiaries of the Tripoli-based NOC that operate in eastern Libya.

Efforts by Hifter and the LNA to do so in the past have not only failed to gain customers, but also drew threats of sanctions. In fact, on Sept. 22, the United Arab Emirates and Turkey joined the United States, France and four other European countries in issuing a statement reiterating that Tripoli’s NOC was the only legitimate authority in Libya’s oil sector.

Adding Stress to the Global Oil Market

If Hifter decides to disrupt Libyan oil exports, the disruption will create significant ramifications for the global oil market. Already, there are concerns that Saudi Arabia has been too optimistic in its estimates of when it will be able to fully restore the 5.7 million barrels per day (bpd) of production knocked offline by the Abqaiq and Khurais attacks. Reportedly, it has already restored national production to the level it was before the attacks, but replacing the specialized parts and machinery needed to bring production capacity at Abqaiq back to pre-attack levels will likely take months. Even if Saudi Arabia has returned its total production to the 9.8 million bpd pre-attack level, its spare production capacity will likely remain tied up for some time, leaving the global oil market ill-prepared to deal with disruption on the order of Libya’s 1.05 million bpd of production. And given the aggressive strategy that Iran has adopted, it’s possible that it would aim another attack at Saudi Arabia’s oil sector, disrupting the market even further.