Halt to Libyan oil production will force Europe to seek alternatives, experts say

Libya's latest oil blockade could disrupt crude exports to Europe, its biggest market, forcing European refineries to seek alternatives, experts said.

Libya's eastern-based administration said it was shutting down oilfields and suspending production amid rising tension with the UN-recognised government in Tripoli.

A statement by the Benghazi administration posted on X said it was “suspending all oil production and exports until further notice”, citing “force majeure”.

It linked the move to “repeated attacks on the leaders, employees and administrations of the Central Bank” in Tripoli, which manages Libya's large oil resources and the state budget.

Francesco Sassi, research fellow at Ricerche Industriali Energetiche in Bologna, said: “Europe has no other way but to look for alternative suppliers. The Atlantic basin seems a good place to start with, due to geopolitical constraints in the Suez Canal and Middle East straits.

“Western Africa, North and South America are the main alternative sources of oil. Yet the amount of crude that the Libyan chaos could take off the market is significant,” Mr Sassi told The National.

In 2020, Europe’s imports accounted for about 63 per cent of Libya’s crude oil and condensate exports, according to the US Energy Information Administration.

Most of Libya’s exports went to Italy, Germany and Spain. In Asia, China received an estimated 25 per cent of Libya’s oil exports in 2020, the EIA said.

Libya's oil production stood at 1.2 million barrels per day before the state-owned National Oil Corporation closed the Sharara oilfield, the country’s largest, in response to protests on August 7.

National output as of Thursday morning amounted to 450,000 bpd, Francesco Calzoni, regional manager for North Africa and the Gulf at Aldebaran Threat Consultants told The National.

A portion of that will be allocated to meet domestic demand, which means exports will be significantly affected if production does not resume quickly, he said.

Austria’s OMV, one of the operators of Sharara, said the company’s other projects in Libya had not been affected.

“We are closely monitoring development and availability of Libyan crude oil supply,” OMV told The National on Wednesday.

“As of now, in case of a reduction in Libyan exports we anticipate that we can fully replace with alternative grades available on the market without an impact on our operations or to product supply.”

US crude option

Europe's main alternative source for Libya's light sweet crude is light sweet US shale oil.

“But it is unclear if there is sufficient excess supply and transport capacity for that to act as an immediate substitute that keeps a lid of price,” said Hasnain Malik, emerging and frontier markets equity strategy, Tellimer.

Europe became the top export destination for US crude in 2023 following the effects of Russia’s invasion of Ukraine and the inclusion of West Texas Intermediate (WTI) crude oil in Dated Brent, which is used to price more than two-thirds of the world's traded crude oil.

Last year, US crude exports to Europe averaged 1.8 million bpd, slightly more than US exports to Asia and Oceania of 1.7 million bpd, according to the EIA.

No end in sight

The last time Libya suffered a major supply disruption was in 2022.

Military commander Field Marshal Khalifa Haftar, whose forces control the oil-rich eastern Libya, orchestrated a blockade on fields and ports that year, prompting NOC to declare force majeure for exports.

The blockade was lifted following the appointment of Farhat Bengdara as NOC chairman.

In 2020, forces allied with Khalifa Haftar shut down Libya's key oil ports for eight months, causing a significant decline in the country's oil production.

"Without a significant and quick breakthrough in negotiations that offers a telling precedent for how long this disruption might last [the situation remains uncertain]," Mr Malik told The National.

Libya has remained divided since the civil war that ensued following the 2011 revolution.

The western part of the country is governed by the internationally recognised administration known as the Government of National Unity, which was established through a UN-led political process ahead of elections scheduled for December 2021.

In the eastern region, a rival government called the Government of National Stability emerged in March 2022, taking control of about three-quarters of the country's oil production capacity.

“How long Libyan disruptions last is very difficult to assess, we have seen them lasting few days to several months. My sense is it will last for a bit longer than the latest ones,” Giovanni Staunovo, strategist at UBS, told The National.