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Libya's eastern region eyes crude sales in defiance of Tripoli

Highlights

LNA working on arrangement for exports with allies

Large scale shipment despite less political pressure

Oil output slides below 100,000 b/d as blockade persists

London — Libya's eastern region led by the self-styled Libyan National Army is exploring ways to sell crude oil independently, as more than the 90% of Libya's crude remains offline due to an oil blockade, sources told S&P Global Platts this week.

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The North African oil producer is currently in the midst of a civil conflict between the UN-backed Government of National Accord, or GNA, and the LNA, which has almost completely decimated its oil output.

Libyan crude production has fallen to below 100,000 b/d in the past week, and has fallen some 1.10 million b/d since the LNA-led oil blockade in mid-January began.

Edging closer to crude exports

Sources said the LNA -- along with representatives from a company that calls itself NOC East [the main rival to the Tripoli-based NOC] – are edging closer to exporting crude from the oil terminals it controls, with some of its allies.

The LNA is supported by Egypt, Russia, Saudi Arabia and the UAE, while the GNA is backed by Turkey and Qatar.

"I do hear that an arrangement is in the works to let the eastern government export without having to receive funds from the Central Bank in Tripoli," a source close to the matter said.

"It will happen gradually. The East is currently laying the groundwork for the move and relying on tribes to advance its interests. Gaining a fair share of oil and gas revenues is a work in progress and requires a lot of political efforts."

Representatives at the LNA were unavailable for comment.

Two weeks ago, LNA leader Khalifa Haftar visited Paris to meet President Emmanuel Macron and some French foreign ministry officials.

Sources said Haftar's Paris discussions focused on a mechanism to bypass the Tripoli-based Central Bank of Libya (CBL) in managing oil and gas revenues.

Chance of success?

Tripoli-based National Oil Corporation is the legitimate producer and exporter of Libyan oil, according to several UN resolutions, and this was also confirmed in an official communique at the recent Berlin peace talks.

Previous efforts by the Eastern region to export oil independently have not succeeded.

"But doubts remain about whether they will be successful this time," a second source said, adding that he expects shipments to be very small.

Analysts and trading sources say they expect less international pressure this time if the East were to reattempt oil exports but they do they expect some reaction.

Platts Analytics said similar objections would prove obstructive this time around, as this would effectively abandon the peace process and the UN-backed Tripoli government.

"But Haftar supporters include the UAE, Russia and France, while the US position remains ambiguous. So uncertainty is high," Paul Sheldon, a geopolitical adviser at Platts Analytics, said in a recent note.

Hamish Kinnear, a MENA analyst at Verisk Maplecroft, said eastern exports on a significant scale was unlikely in the short term.

"It would need buyers prepared to take a big legal and reputational risk, and that seems a bit pointless with a market that is already flooded with oil," he said.

'Illegal' imports

This comes over a week after state-owned NOC accused the eastern region of the country of "illegally" importing an aviation fuel shipment from the UAE in violation of UN and Libyan laws.

The shipment came from the UAE to Benghazi on a ship called Gulf Petroleum 4 and has been in the port for a number of days, NOC said.

NOC said it has informed the UN and the GNA and numerous other governments of this cargo, which is in "clear violation to UN resolutions and Libyan laws."

The state-owned company has regularly warned its oil buyers and shipowners to avoid "illegal" cargoes from the east.

NOC has previously accused the eastern-based oil company that calls itself NOC East of signing supply contracts with UAE and Egyptian companies.

In April last year, there were reports that NOC East was looking to export 2 million barrels of Saris/Mesla crude, but the shipment did not materialize.

In March 2014, US forces took control of the Morning Glory tanker in international waters after it had loaded from the then rebel-held port of Es Sider.

Representatives at NOC East were unavailable to comment.

The LNA that hopes that attempts to starve the GNA and Tripoli of its oil and gas revenues will pave the way for its control of the whole of Libya.

On top of Haftar's list is to control Libya's oil sector, particularly its oil and gas revenues. Haftar controls the bulk of Libya's key oil infrastructure, but does not have access to

the oil revenues via the Central Bank of Libya. Neither does he hold the reins of the state-owned National Oil Corporation.

These are also the demands of the Eastern Libyan tribesmen who have orchestrated an oil port blockade since January 18, slashing Libya's oil output.