Reconciliation hopes fade

14 July 2015

The ongoing violence in Libya looks likely to continue, with no signs of reconciliation between the two warring governments

2015 breakeven oil price $215

2014 breakeven oil price $206

As the security situation in Libya continues to deteriorate and the country’s internal conflict escalates, its economic outlook is looking increasingly bleak.

In the wake of the general election held in June 2014, Libya saw its government split into two rival administrations. The House of Representatives, which was elected in the 2014 vote, is now based in the eastern port city of Tobruk, while the Islamist-led General National Congress, which is supported by the powerful Libya Dawn militia coalition, holds sway in Tripoli.

Militias affiliated with the two coalitions have seen frequent clashes since the election, with battles for territory taking place in key locations including the country’s second city of Benghazi, as well as in western Libya. The jihadist group Islamic State in Iraq and Syria (Isis) has taken advantage of the chaotic aftermath of the 2011 uprising, using it as an opportunity to gain a foothold in North Africa.

Isis advances

Since first appearing in the eastern town of Derna in November 2014, militant groups pledging allegiance to Isis have spread west along the north coast, taking over parts of the cities of Benghazi and Sirte. They have carried out a series of high-profile attacks that include mass executions, strikes on oil and gas infrastructure, and a raid on the Corinthia hotel in central Tripoli, which killed nine people including five foreigners.

Amid the increasing violence, oil production has been disrupted, reducing output to about 400,000 barrels a day (b/d), a quarter of pre-revolution levels, when Libya was exporting 1.6 million b/d. At the same time, the price of Brent Crude has fallen by almost 50 per cent from June last year, further shrinking state revenues.

On 6 October 2014, the US-based IMF warned Libya’s political fragmentation has serious consequences for the country’s economy and public finances. “Large fiscal and current account deficits could deplete official reserves as the various factions compete to control them,” the fund said in a report. “Reinforcing central bank independence and establishing a transparent and accountable mechanism for managing Libya’s resources is an immediate priority.”

Due to the conflict, both the Tobruk government and its rival in Tripoli have been cut off from funding by the central bank, which remains independent from both factions and directly oversees the distribution of salaries to public sector workers, as well as funding the country’s generous subsidy system.

In January, the central bank released a statement calling on all political entities to “cooperate in dealing with the growing crisis and alert the public about the dangers facing the country in order to restore stability and protect Libya’s future”. It has proposed measures to try and slow the rapid decline of financial reserves, but, due to the continuing stand-off between Tripoli and Tobruk, no action has been taken.

Public payroll

Libya’s private sector has shrivelled since the 2011 revolution and public sector employment has ballooned. A quarter of the country’s population is on the public payroll, including fighters on both sides of the conflict, and public sector wages have been increased by some 250 per cent since the 2011 revolution.

In January, the Washington-based World Bank estimated that with oil prices of $65 a barrel and exports averaging 400,000 b/d, Libya’s 2015 budget deficit would increase to 31 per cent of GDP in 2015, from 11 per cent in 2014.

Amid the ongoing violence and political instability, many of the capital projects stakeholders hoped to see restart in the aftermath of the revolution have failed to see progress.

Although oil and gas schemes have seen significant disruption over recent months, offshore activities provide an opportunity for the country to increase output without the threat of attack from the many militant groups.

Libya’s offshore production is dominated by the Bouri field, which sits within the NC-41 concession and is jointly operated by Italy’s Eni and state-owned National Oil Corporation through the Mellitah Oil & Gas venture. In 2010, production capacity was about 45,000 b/d.

Bids are currently being evaluated for phase 2 of Libya’s Bahr Essalam development, which will deliver gas and condensates from 13 new subsea wells at the C-central and C-east area
of the field to the existing Sabratha gas processing platform. Bahr Essalam is also operated by Mellitah Oil & Gas.
It is expected that the contract for the design, procurement, manufacturing and fabrication of a subsea production system for phase two of the Bahr Essalam project will be issued before June.

Eni is the only foreign oil company to have maintained its output in the wake of Libya’s 2011 uprising.

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