Libya edges closer to oil restart adding to OPEC market puzzle

London — Libya is poised to restart production of almost 400,000 b/d of crude, adding to the complex task the OPEC alliance faces balancing the needs of smaller producers to access the market while restricting its overall output.

Talks are "progressing well" between state-owned National Oil Corporation (NOC) and the tribal groups controlling the 300,000 b/d Sharara and 75,000 b/d El Feel fields about the prospective restart production at these key sites, said two sources with knowledge of the negotiations.

"Keep an eye on Sharara and El-Feel oilfields in the south," said one of the sources close to the talks. "The petroleum facility guards at the two fields are now considering their options in face of recent LNA setbacks across the west."

The country is currently exempted from historic cuts agreed by the so called OPEC+ alliance. The 23-member coalition of major producers led by Saudi Arabia and Russia meets via webinar on June 6 to discuss potentially extending 9.7 million b/d of cuts into the summer to rebalance markets in response to the ongoing global coronavirus pandemic. Libya's imminent restoration of production could add to tensions brewing over compliance and the economic needs of smaller producers including Mexico, Nigeria and Iraq.

Libya holds Africa's largest proven reserves of oil and its main light-sweet Sharara and Es Sider export crudes yield a large amount of middle distillates and gasoline, making it popular with refineries in the Mediterranean region and Northwest Europe.

Open valves

In Libya, two key pipeline valves connecting the Sharara, El Feel and Hamada fields with the key Zawiya export terminal and refinery on the Mediterranean coast have recently been reopened as a precursor to talks between NOC and tribal leaders concluding successfully, according to a source.

NOC has also exported some crude and condensate from its storage at the Zawiya terminal this week, a first from this port in almost four months. Libya is currently producing around 80,000 b/d of crude, less than a tenth of its output before January 18, when the Libyan National Army (LNA) led by Khalifa Haftar blockaded the oil port as part of its military campaign against the UN-backed Government of National Accord in Libyan (GNA).

Oil production has bottomed out at its lowest level since September 2011, when a civil war tore the country apart and led to the downfall of Colonel Moammar Qadhafi.

Despite recent official military gains by the official government, the LNAs still controls key oil infrastructure, mainly the eastern oil export terminals of Es Sider, Ras Lanuf, Brega, Zueitina and Marsa el Hariga.

July restart

Analysts are now expecting around 400,000 b/d of oil production to come online by next month.

"We tentatively forecast 400,000 b/d of western supply to begin restarting by July, as Haftar's tenuous alliances with militias may fray as his forces are pushed further east," said Paul Sheldon, chief geopolitical advisor at S&P Global Platts Analytics.

Hamish Kinnear, a MENA analyst at Verisk Maplecroft, said "balance of probabilities does seem to point to a re-opening of the fields soon."

However, the situation remains volatile. The LNA -- backed by Russia, the UAE, Saudi Arabia and other countries -- has been locked in a bitter conflict with the government supported primarily by Turkey. Oil facilities have been caught in the middle of their dispute.

NOC has declared force majeure on exports from five key export terminals shut by the LNA, which controls most of Libya's oil and gas infrastructure but does not control sales and distribution of revenue.

The lack of storage capacity at Libya's oil fields and terminals is one of the main reasons production has been shut since the blockade began.

Sources told Platts, there is concern that GNA might seize terminals paving the way for more conflict and instability.

"There is a possibility that GNA might move into a possible expansion into the eastern terminals," said the source. "Oil companies are concerned things will kick off and hit Ras Lanuf and Es Sider."