By: Alex Saucer (asaucer@mobiusriskgroup.com)

The decade-long civil war in Libya is a complex and impactful conflict that has been largely ignored by Western media, especially during the COVID-19 pandemic. That may be about to change. The two main warring factions are implementing a compromise that could restart at least modest oil exports. Force majeure at three export terminals, in place since the LNA blockade began in January, has now been lifted. The first tanker, a 1,000,00-barrel Suezmax charted by China’s Unipec, is set to begin loading. This creates wrong side risk for crude markets and oil producers. Now at zero, Libyan exports have nowhere to go but up, with about 1 million BPD of potential new supply. 

Libya is still ravaged by the second Libyan civil war, which is largely an extension of the nation’s failure to install a functioning central government after the fall of former leader Moammar Gaddafi in 2011. The two main sides in the conflict are the UN-recognized Government of National accord (GNA) and Libyan National Army (LNA), led by General Khalifa Haftar. 

After several years of insufficient rule by the GNA, Haftar split off and founded the LNA, intending to replace the parliamentary UN-supported government with a more authoritarian regime. Over the past year, the Libyan conflict has spiraled into both a regional and a proxy conflict, with multiple other nations interfering as they push their own agendas. The LNA’s foreign backers include Russia, Iran, France, and most actively Egypt. The GNA is supported mainly by the EU, tentatively by the USA, and most actively by Turkey.

The ongoing cold war between Egypt and Turkey contributes substantially to the extension of the Libyan conflict. Both Egypt and Turkey seek to be the third major power in the region, after Saudi Arabia and Iran. Both have engaged in proxy campaigns across the Middle East and Africa. The primary driver of the Egyptian/Turkish conflict is the strategic geographic importance of Libya, their maritime rights in the Mediterranean, and ultimately the control of Libyan oil export dollars.

Libya’s large oil reserves, including key pipeline and terminal infrastructure that supports exports, have been the target for much of the fighting in recent years. A tremendous amount of infrastructure repair will be required before the nation can return to pre-conflict capacity. This civil war and its external influencers have made Libyan oil output volatile. 

Libyan oil production reached 1.65 million BPD in the year prior to the fall of Gaddafi (2010). More recently, Libya has struggled to produce anywhere close to this level. Production recovered to average 1.1 million BPD in 2019, however 2020 YTD (through August) has averaged a paltry 200,000 BPD. Last month, Libyan output hit a new monthly low of 80,000 BPD. Weak average daily production in 2020 is inclusive of the strong January tally of 790,000 BPD, thus making the YTD average ‘inflated’.

There are new reports of an agreement between the GNA and LNA to end the blockade on oil exports. There have been many false starts on Libyan exports, and that could be the case again. What may be different this time around is General Haftar’s need for additional funding as domestic instability has rocked his territory. Oil price reaction this week demonstrates greater market concern about this potential source for incremental oil supply.

The future in Libya is as murky as ever. The conflict appears to have entered a new phase this year after the yearlong siege on the GNA’s capital of Tripoli was ended, in part with the help of Turkish drones. Haftar was pushed back to his last outpost on the western edge of the country, in the city of Sirte. It was this LNA defeat that prompted Egypt to threaten a full-on invasion of Libya. Tensions have since cooled but the threat of direct Egyptian involvement remains. 

That prospect has the potential to help boost Libyan output in the short term, as Egypt would be better equipped than the GNA to protect and manage production/export infrastructure. But direct interference will likely draw a strong response from Turkey and pressure Iran and Russia to also get involved in a larger way. This could pull Saudi Arabia more directly into the conflict and turn Libya into yet another front of the long running Saudi Iranian proxy war. All of this suggests increased geopolitical and regional supply risk going forward. 

The outlook for stability in Libya, and northern Africa, is not bright. Fundamental differences between the GNA and the LNA seem irreconcilable, meaning a diplomatic solution feels untenable and improbable. This week’s optimism is derived from both sides’ supposed agreement to restart oil exports, but emerging rumors of GNA objections to this deal and what we know of history tempers that optimism. If foreign guns, money, and troops flow into Libya to fight on both sides, long term stability, and full oil production recovery, will face tough odds. This time could be different…. maybe.