• GB Davis

Oil to Get a Bid ($USO) off Libya

For those that have been monitoring the upward movement in crude in recent weeks, that appears to be driven by ongoing geopolitical undercurrents (as is often prone to). First, Venezuelan crude oil production has fallen another 300,000 bpd to 732,000 after crippling global sanctions on their terrorist regime - such trend - appears to not be poised to reverse anytime soon. Second, the situation in Libya has deteriorated.


Libya's National Oil Corporation Chief: Oil And Gas Exports Face The Biggest Threat Since 2011, Given Scale Of Fighting – Reuters


"Over the last three years, Khalifa Hifter and his Libyan National Army have gained a stranglehold over Libya's oil infrastructure. However, Hifter does not control the flow of oil revenue, which is managed through the Central Bank of Libya in Tripoli. Hifter will take steps to try to gain that control. Much of the central bank's oil revenue is distributed in the form of civil salaries throughout the country, which sometimes pay militias fighting Hifter. The longer the Libyan civil war continues, the more likely it is that Hifter's forces will consider cutting off oil production to limit financial support for his adversaries." Stratfor (note Libya crude oil production fell to ~300,000 when oil production was cut previously)


On April 10, after the LNA shot down a GNA plane over Tripoli, the CIA flew a leased asset (B350 N389DD ISR) through Libya headed towards Tripoli for recon and ops. US Special Operation Command JSOC Dash 8 Q200 RO-6A N8200R heading to #Libya (4/10) from Souda Bay and back (4/11)


Italy has also been seen flying recon missions out to Libya.. Italian Air Force E-550A CAEW GLF5 have been patrolling off the coast of Libya - why? Eni terminals are almost exclusively located in the western part of Libya, the only government able to guarantee the permanence of Italian wells and pipelines (the fractured government of Tripoli, now overtaken by Haftar). People fleeing the lands by sea towards Europe have been stopped by Italy no longer taking any refugees.


The EU has tried to get ahead of the situation, though France stubbornly blocked an EU statement (4/10) this week - Italy-French politics. (see CFR Foreign Affairs article here--> https://www.foreignaffairs.com/articles/france/2018-10-31/how-france-and-italys-rivalry-hurting-libya?utm_campaign=tw_daily_soc&utm_source=twitter_posts&utm_medium=social


Though the EU did ultimately release a statement on 4/11. " Declaration by FedericaMog on behalf of the EU on the situation in #Libya: “The European Union and its Member States call on all parties to immediately cease all military operations.”


Brookings is calling on the U.S. to put forth policy on the issue, which is more than a flare at this point.


Germany has come out with an official statement (4/11): " On #Libya: There can only be one message, for all and importantly also to General Haftar: military operations must be stopped immediately. Already the situation of the civilian population is particularly acute. More violence puts lives at stake. "


Intelligence assets are monitoring AS Ailes Ltd Dassault Falcon 10 100 F-GSLZ from Benghazi to Amman and speculation about the potential to move on from there to Russia for a meeting with Russian ministers, was confirmed on 4/12.


Russia has dispatched assets to Libya on 4/12 via Russian jet Petroff Air GLF5 P4-PPP.


"By controlling Fezzan in the southwest and Cyrenaica in the east, Hifter now controls virtually all of Libya's onshore oil production, giving him economic and political leverage.


The only meaningful oil fields out of his grasp are a couple of small offshore fields in Western Libya in the Mediterranean. And beyond oil fields, only one major refinery and one major oil export terminal — in Zawiya, which is to the west of Tripoli — is outside of his control. (A few small export terminals are also beyond his reach). By and large, despite working with the Tripoli-based NOC, Hifter controls virtually the only economic resource of value in Libya.


Zawiya is a key prize that Hifter likely wants to secure as a part of his Tripoli offensive. The question now is: Will he continue to pragmatically allow the Tripoli-based NOC to access the oil under his control while fighting pro-GNA militias in Tripoli? The head of the NOC, Mustafa Sanalla, has called upon his institution to remain apolitical despite its location. But the NOC's previous pragmatism in deftly navigating the dispute between Hifter and his Tripoli-based rivals occurred during a cease-fire, not during active hostilities. The breakdown of that cease-fire demands a new way of thinking.


The Battle for the Central Bank and the National Oil Corporation

A key cause of Libya's broader ongoing geopolitical dilemma is the division between the regions of Cyrenaica in the east, where the House of Representatives is located, and Tripolitania in the west, where the GNA is based. This divide has become more pronounced over the last century: Before then, neither region belonged in any meaningful way to the same political entity. During his rule from 1969-2011, Gadhafi tried to paper over the regions' differences by centralizing control of Libya's oil sector. His policies allowed a handful of key institutions to control oil revenue, none of which became more important than the Central Bank of Libya (CBL) and the NOC. Functionally, the NOC oversaw oil production and oil sales under Gadhafi, but revenue flowed through the central bank, which worked with Libya's finance ministry to help pay salaries for public workers. That system remains in place today.


It should be no surprise that behind the scenes, the Eastern and Western Libyan rivals have fought for control over both the CBL and the NOC. Both are technically based in Tripoli, making it difficult for the House of Representatives and Hifter to exert any control over the institutions — even when their government was internationally recognized between August 2014 and March 2016. In fact, the Tobruk-based House of Representatives has set up parallel versions of both institutions: a Benghazi-based National Oil Company and a Benghazi-based Central Bank. Hifter's allies have tried multiple times to gain international recognition for these institutions, but they have failed each time.


Thus far, control of the Central Bank of Libya has eluded Hifter and his allies. During the cease-fire of the past two years, Hifter has tried to leverage control of oil terminals to gain more influence over the CBL. In June 2018, after Hifter seized the oil terminals back from Jadhran's guards, he declared he would only reopen the terminals if the House of Representatives' appointed central bank governor replaced the CBL's longtime governor Sadiq al-Kabir. He also demanded an audit to identify where the bank's oil revenue was spent. Hifter has accused the central bank of funding the Islamist militias that attack him, and while this may not have been entirely accurate, the bank has indeed financed groups on both sides of the war in the past, including Islamist militias; al-Kabir himself has been associated with Islamists.


A Civil War Changes the Cease-Fire Circumstances

Therein lies Hifter's dilemma if the new fighting in Libya does break out into a full-blown civil war. The GNA administers the central bank, which controls oil revenue. Fighters in several of the main militias protecting Tripoli, such as the Special Deterrence Forces, as well as many of the Misratan brigades that were involved in the offensive on Sirte, receive salaries from the CBL as public servants.


In short, this Gadhafi-era system means that when Hifter's forces allow oil to be exported from their areas of control, they are helping fund and finance the militias fighting them — as well as helping them secure crucial fuel for warfare efforts. During the cease-fire, this consequence was worth accepting so that Hifter could ensure continued civil payments throughout the country and build up popular support. But during an active conflict, the sacrifices to the LNA may be too great.


The Gadhafi-era system of exporting oil means that when Hifter's forces allow oil to be exported from their areas of control, they help fund, finance and fuel the very militias fighting against them.


One factor may drive Hifter to continue allowing oil exports, however, which is that some of the civil payments go to his own soldiers and civil servants in Cyrenaica. Like the NOC, Libya's central bank has tried to be pragmatic and apolitical when possible. This means maintaining government salaries in the east, including arrangements for some LNA members. If Hifter cuts oil exports, he would halt those payments, and though outside backers could augment the LNA fighters' salaries, government workers and civil servants in Cyrenaica would experience major salary reductions.


An Alternative Export System?

Realistically, if Hifter were to cut oil exports through the Tripoli-based NOC, he would likely try to continue exporting through a different vehicle: the House of Representatives-supported, Benghazi-based National Oil Company, which has struggled to get off the ground. The Benghazi-based National Oil Company would likely send any oil revenue it earns through the rival Central Bank that Tobruk has also set up, giving Hifter control of not only the oil flowing through Libya but also the key part he is currently missing: the country's oil revenue.


But it is not clear that this plan will work. There is an outstanding United Nations Security Council (UNSC) resolution barring oil sales involving anything but the Tripoli-based institutions; many different groups since 2011 have tried to export eastern Libyan oil independent of Tripoli, but they have always failed. It's entirely possible that in the heat of a civil war, Egypt and the United Arab Emirates would facilitate these oil exports in order to maintain Hifter's strength. The United States, however, is still staunchly aligned with the UNSC and in 2018 threatened to sanction Hifter if he did not resume oil flows through the official Tripoli-based institutions. Under the Obama administration, the U.S. Navy even physically intervened to prevent independent oil exports from Libya.


Nevertheless, continued oil flow out of Libya is the United States' primary interest, particularly as it seeks to sanction Iranian and Venezuelan oil exports. If Hifter cuts off oil through the Tripoli-based NOC — and the only way oil exports from Libya can remain at a relatively high level is if Hifter uses the Benghazi-based National Oil Company — the United States may cave. In any case, the longer the active fighting in Libya's civil war continues, the more likely it is that Hifter will take advantage of the leverage over the oil sector he has built up, putting Libyan oil exports in a fragile position." via Stratfor


A ceasefire in the next few months with Libyan crude running over 1,000,000 now (see chart below) would ease (ceteris paribus) oil concerns; where a civil war, could lead some flooring in the price absent off-set by OPEC or other producers.


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