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Libya faces major oil output shutdown as export blockade begins

Highlights

800,000 b/d will be shut-in due to oil blockade

NOC declares force majeure of exports from five key ports

LNA to use blockade as bargaining chip ahead of Berlin conference

London — Libya's oil sector could go into a tailspin with two-thirds of its total crude oil production of around 1.20 million b/d at risk after its key oil ports were suspended Saturday by the Libyan National Army.

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This led state-owned National Oil Corporation to declare force majeure on oil exports out of the Brega, Ras Lanuf, Marsa el Hariga, Zueitina and Es Sider terminals.

NOC warned that this blockade will lead to a 800,000 b/d production loss along with financial losses of approximately $55 million per day. Libya's crude production ranged between 1.15 and 1.20 million b/d, earlier in the week, according to S&P Global Platts estimates.

This blockade is taking place ahead of a peace conference in Berlin January 19, where the heads of two rival groups will meet with Western leaders to broker a diplomatic solution.

The country's prolonged civil conflict between the UN-backed Government of National Accord and the LNA has now lasted over ten months, and is now affecting Libya's oil shipments.

Battle for Tripoli

Tribal leaders in eastern Libya are demanding the LNA shut the country's oil export terminals to cut the oil revenues, which currently go to the Central Bank of Libya in Tripoli, which is under the jurisdiction of the GNA.

NOC confirmed that LNA General Command and the Petroleum Facilities Guard of the central and eastern regions had instructed the managements of NOC subsidiaries - Sirte Oil Company, Harouge Oil Operations, Waha Oil Company, Zueitina Oil Company and Arab Gulf Oil Company (AGOCO) - to stop oil exports from Brega, Ras Lanuf, Marsa el Hariga, Zueitina, and Es Sider ports.

Iliasse Sdiqui, associate director at Whispering Bell, said this move will be used as a bargaining chip by the LNA to achieve the long-coveted goal of controlling the eastern-CBL and oil revenues.

"An indirect disruption enables the LNA to claim plausible deniability and would help project the image that the army is merely responding to public demands," he said. "This highlights LNA and eastern-based interim government intent to follow through on its plans to control oil revenues. The LNA would only allow production to resume under certain conditions, including the cancellation of the Turkey-GNA deals and possibly the recognition of the Benghazi-based NOC."

NOC has repeatedly warned that shutting down oil exports and production will immediately impact its production, with "far-reaching and predictable consequences."

Political solution

Despite the political uncertainty and violence, Libya's crude output has remained largely unaffected in the past few months.

One of the main reasons for this is that almost all key oil terminals and infrastructure, especially those in the east of the country, are already controlled by the LNA, led by General Khalifa Haftar.

Libyan crude production averaged 1.05 million b/d in 2019, according to S&P Global Platts estimates, compared to 950,000 b/d in 2018 and 810,000 b/d in 2017.

Paul Sheldon, chief geopolitical adviser at Platts Analytics, said a genuine diplomatic solution remains an unlikely outcome from the Berlin event " as long as General Haftar retains a desire to take Tripoli militarily and gain political control of the country.

"Turkey's rising involvement will likely prolong the stalemate, but could also cause Haftar's primary supporters (UAE and Egypt) to ramp up their support in the escalating proxy war," he added.

"Down the road, if Haftar fails to take Tripoli and nearby export terminals, he may try to starve the Tripoli government of revenue by exporting independently from the east. As happened in mid-2018, this could at least temporarily disrupt all 700,000 b/d of eastern supply, as the international community is unlikely to approve a de facto abandonment of the diplomatic process," added Sheldon.