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Analysis: Libya's security on high alert, threatening oil, gas sector in West

Highlights

Oil towns of Zawiya, Sabratha key to LNA control

Export terminal and refinery at Zawiya at risk

Risk of outages, but maybe stability long-term

London — The threat of an all-out war grows in OPEC member Libya raising the risk of oil supply outages, as the self-styled Libyan National Army begins its advance to capture the capital Tripoli and key towns in the West.

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Libya's fragile peace, which has seen oil production recover to above 1 million b/d, could soon end. Analysts believe there could be several clashes between LNA and various rivals groups and militias including forces loyal to the UN-backed Government of National Accord which could spill to the country's lucrative oil and gas sector.

Oil infrastructure in the West is a key risk, especially the town of Zawiya, which is home to a 300,000 b/d export terminal and a 120,000 b/d refinery, along with Sabratha, where the Mellitah gas and condensate terminal is located.

This escalation in violence comes only a few weeks after Libyan crude output recovered to over 1.06 million b/d in March according to the S&P Global Platts survey, after the startup of the Sharara field a month ago.

This move by General Khalifa Haftar of the LNA comes only 10 days ahead of April 14-16 national conference where the LNA and GNA along with other parties were going to sit together to reach a political consensus.

Haftar took the western Sharara field in mid-February, and production there is now approaching full capacity of around 300,000 b/d.

Almost all of Libya's key oil terminals and infrastructure, especially those in the east of the country, are already controlled by Haftar's LNA.

The country's oil industry has been at the mercy of groups vying for control of valuable assets, with armed attacks on key pipelines and production facilities since the 2011 civil war.

SHOWDOWN IN THE WEST

Most analysts believe this could be the start of more hostilities and confrontations.

"The LNA will enter Tripoli via alliances and not necessarily direct confrontations," Iliasse Sdiqui, a senior analyst at Whispering Bell, a risk management firm said.

"The involvement of Misrata will have a significant impact on developments and could protract combat operations. Alliances could shift in the short term, which would increase the likelihood of sporadic and intermittent clashes erupting across the capital city." Forces in the city-state of Misrata are key political players in the country and both the GNA and LNA have been trying to win them over in recent months. The Misratan forces played a huge role in the downfall of Muammar Gaddafi in 2011.

Mohammad Darwazah, a director at Medley Global Advisors, said the risk of disruption to the Libyan oil market will grow but the level of resistance to the LNA and the risks to oil assets will hinge on whether the GNA and Misratan-backed revolutionary units around Tripoli mobilize.

"If they [Zawiya and Sabratha] are taken, the LNA will finally have full control of the country's oil and gas infrastructure," added Darwazah. "Sabratha, home to the Mellitah export terminal and gas facilities, is probably an easier target for the LNA than Zawiya, where locals appear fractured, unable to decide whether or not to support the LNA or put up resistance," he added.

The advance by Haftar's troops on Libya's capital could be seen as bearish for crude prices, if it stabilizes Libyan output, according to analysts.

But the situation is likely to be very fluid with a growing chance of many flashpoints and violence.

ICE Brent futures were trading at $69.93/b on Friday afternoon in London after prices briefly touched $70/b on Thursday.

Some sources however do not expect an immediate impact on the oil sector from LNA's movements.

"Oil looks safe for now. The closest facility to the front lines is probably the Zawiya export terminal and refinery, which Haftar might take an interest in," Matthew Reed, vice president with Foreign Reports said.

"But, with Tripoli serving as the center of gravity for this conflict, more remote facilities and major export terminals to the east aren't in danger yet. The worst-case scenario is a civil war sequel pitting east versus west, which would make oil a prime target again," he added.

As well as a key oil exporter, Libya is also an important gas producer, with exports averaging 13.7 million cu/day so far this year, according to Platts estimates.

-- Eklavya Gupte, eklavya.gupte@spglobal.com

-- Fabio Reale, fabio.reale@spglobal.com

-- Edited by Paul Hickin, newsdesk@spglobal.com