Is there an end in sight for the Libya oil crisis?

Every good robbery film has a twist, maybe two.

The takeover of Libya’s Central Bank certainly did – after his installation by the Tripoli-based western government, the new interim Deputy Governor Abdel-Fattah Ghaffar appealed on television for the previous leadership to give him the passwords. The second, more serious surprise is the shutdown of the country’s oil production.

The bank’s previous governor, Sadiq Al Kabir, had come to be backed by the eastern, Benghazi-based government, dominated by General Khalifa Haftar.

Mr Al Kabir was forced out following a dispute with Prime Minister Abdul Hamid Dbeibah over the supply of funds, mostly from oil revenue, to his government. While Benghazi has seen a building boom, redevelopment in the west has stagnated.

As well as two governments and two central bank governors, Libya also has two oil ministers and might need a third after acting minister Khalifa Abdelsadiq, in the role for barely a month, was ordered to be arrested on charges of corruption.

Gen Haftar’s forces control most of the country’s key oil ports, as well as major fields in the far south-west that export through terminals west of Tripoli. In early August, Libya’s largest field, Sharara, was largely closed down.

Local protests were blamed, but responsibility appears to lie with Gen Haftar’s son Saddam, who ordered its stoppage in response to a Spanish arrest warrant issued for him in connection to allegations of arms smuggling. Sharara’s operating consortium features Spanish oil major Repsol.

Even then, though, the father and son had expressed concerns about the control of national oil revenue.

Last Monday, after the central bank takeover, the Benghazi administration declared the closure of all the country’s oil fields. Production was 1.17 million barrels per day in July, before the latest disruptions.

The National Oil Company issued and deleted statements, but said on Thursday its output was down to 591,000 barrels per day.

However, some oil ports were still operating late last week, while on Saturday, reports suggested three major fields in the east would return to production, and their associated Hariga port near Tobruk would resume operations. This may, though, be for local use to support the eastern economy and some private crude exports.

This confusion comes after the longest period of oil-sector stability in Libya’s postrevolutionary history. The most serious closure came through most of 2020, when national production was almost entirely halted during Gen Haftar’s ultimately unsuccessful attempt to capture Tripoli.

Since then, Libyan oil production has been quite stable, between 1 and 1.1 million barrels per day. The only exception was a relatively brief episode in May-June 2022, when the general’s forces blockaded fields, cutting national output in half.

The dispute ended when long-time NOC chairman Mustafa Sanallah was replaced by Farhat Bengdara, an ally of Gen Haftar’s. Since then, Libya has been making gradual progress on plans for more oil sector investment and increased production.

Oil prices have reacted only moderately to the shutdown news. Brent crude did gain more than $5 per barrel between August 21 and 26, but it has since given up about half those gains. Given the mixed messages from the various Libyan parties, and with international pressure on the new central bank leadership, this crisis might be resolved quickly.

The US administration, in particular, has leverage over Libyan financial transactions and would want to end the oil blockade swiftly to prevent a rise in prices ahead of November’s presidential election.

Europe, too, does not want to lose another important crude supplier to the Mediterranean, with the market there hit first by the ban on Russian crude imports, then the near-cessation of Middle East supplies delivered via the Red Sea.

But such short-term fixes won’t bring stability if not supported by a renewed Libyan political bargain. Even the previous status quo was dangerously dependent on the steady flow of funds to the west and east, both directly from oil exports and from redirecting smuggled fuel.

A prolonged halt in petroleum exports, or a sharp drop in prices, would undermine any compromise. A more overt conflict could repeat 2020s near-terminal halt.

Renewed volatility in Libya’s oil output complicates the job of Opec+. The group will have to decide very soon whether to pause its planned, phased increase in production, which was set to add 180,000 bpd each month from October.

The drop in Libyan output, if sustained, is equivalent to the planned boost from all other members to the end of the year. But if the cracks can be papered over, market conditions look less promising.

While they would sympathise with Libya’s problems, it would be very helpful for the rest of the Opec+ members to be able to proceed with easing production cuts without prices falling.

It would commence the long-overdue process of regaining market share. And it would permit those members that have submitted compensation plans for past overproduction, Iraq, Kazakhstan and Russia, to make up without having to change very much.

For now, the oil stoppage might be just another of Libya’s tempestuous but short-lived crises. The realignment of the political forces, though, suggests the situation is more fragile than for the last four years.

Neither local powers nor the key outside brokers seem to have a long-term solution, bringing oil market turbulence back to the southern Mediterranean shore.

Robin M Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis