How the Libyan Supply Cut Affects Oil Markets

Several oil fields in Libya halted production as shutdowns widened, engineers reported on Tuesday, amid a dispute over control of the central bank and oil revenues. Mohammed al-Menfi, head of Tripoli’s Presidency Council, issued a decision to replace Central Bank chief Sadiq al-Kabir and the bank’s board of directors, a move rejected by the eastern parliament.

On Monday, authorities in the east, where most of the oil fields are located, threatened to shut them all down, escalating the conflict with the internationally recognized government in Tripoli, which relies heavily on oil revenue. Prime Minister Abdul Hamid Dbeibah of the Tripoli-based Government of National Unity condemned the shutdowns, saying oil fields should not be shut down “under flimsy pretexts.”

A complete shutdown of production

By Tuesday, Libya’s oil fields were in the process of being shut down. Engineers confirmed that oil production from the El Feel oil field in southwestern Libya had stopped, and production from several other fields in the east and southeast had either stopped or been reduced. Local operators indicated to Bloomberg that production will be phased out nationwide.

Libya’s oil output, which averaged 1.2 million bpd before the shutdowns, has fluctuated in recent months, with major outages in August and January due to political unrest. The current shutdown stems from renewed tensions between eastern and western Libya, particularly over the leadership of the Central Bank of Libya, which oversees the country’s oil wealth.

Impact on oil and shipping markets

Experts assess the impact on global oil markets. Kpler noted that the shutdown affects key ports including Marsa Al Hariga, Zueitina, Marsa Al Brega, Ras Lanuf and Es Sider. Kpler added: “This shutdown will mainly affect European refineries, which have received around 611,000 barrels so far this year. With Libyan crude mainly sweet, European refiners will likely turn to the US and West Africa to replace it.”

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For the shipping industry, the shutdown has mixed results. In an article from Tradewinds, Fearnley Securities commented: “While lower volumes generally have a negative impact, reduced exports from Libya have already affected aframaxes. to this situation”. According to leading shipping brokerage Pareto, Libya exported an average of about 1.04 million bpd over the past 12 months, most of which were to Spain, Italy and France. Pareto notes that replacement barrels may have to be found “further away”.

Libya’s long history of supply disruptions.

Right now, it’s hard to say how long the outage will last. The longest shutdown of Libyan oil production occurred from January 2020 to September 2020 and lasted approximately nine months. That shutdown was triggered by forces loyal to Khalifa Haftar, the leader of the Benghazi-based Libyan National Army (LNA), who have blocked key oil facilities as part of a wider political and military conflict against the Government of National Accord (GNA) recognized by UN. ) in Tripoli.

During this period, Libya’s oil production fell from about 1.2 million barrels per day (bpd) to less than 100,000 barrels per day, severely impacting the country’s economy. In 2020, the continued loss of revenue pushed both sides to the negotiating table. Shorter production disruptions have lasted from a few weeks to a few months, the last of which occurred in 2022 when local militias blockaded oil fields, including the largest Sharara oil field, resulting in a loss of one million barrel per day in production.

By Tom Kool for Oilprice.com

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