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Libya's Oil to Flow Despite Struggle Between Rival Governments

  • Reuters

Pipelines are seen at the Zueitina oil terminal in Zueitina, west of Benghazi, Libya, April 7, 2014.

Pipelines are seen at the Zueitina oil terminal in Zueitina, west of Benghazi, Libya, April 7, 2014.

A struggle has broken out for control of Libya's state-run energy sector as rival governments in Tripoli and the east compete for power, but a common interest in maintaining oil revenues will keep exports flowing for now.

The OPEC producer has had two governments and parliaments since an armed group took control of Tripoli in August, appointing its own prime minister and taking over ministries as the country disintegrates three years after the fall of Moammar Gadhafi.

Libya's internationally recognized government was forced to move to the eastern city of Bayda when the gunmen drove them out of the capital in the summer. The elected parliament is now in Tobruk, even further to the east.

The new rulers in Tripoli, largely boycotted by the rest of the world, have appointed their own oil minister, who has already held a press conference in the ministry and started discussing oil policies.

Their man, Mashallah Zawi, is challenging the internationally recognized government of Prime Minister Abdullah al-Thinni, who had put Mustafa Sanallah, chairman of the state-run National Oil Corporation, in charge of the oil sector.

The struggle is part of a wider conflict threatening to tear apart a country where factions of heavily armed former rebels, who helped oust Moammar Gadhafi in 2011, are now fighting for power and a share of Africa's biggest oil reserves.

Libya is divided between a rump state in the east, where Thinni's government and the elected parliament hold court, while Tripoli and central Libya are held by brigades allied to the western city of Misrata, which have taken control of the capital and set up an alternative parliament.

Oil revenues

But despite the struggle that is dividing towns, tribes and armed groups, officials at the National Oil Corporation say oil exports have not been affected. The conflicting parties need to keep the oil money, Libya's only source of income, flowing.

Revenues from oil export sales are being paid into a state-owned bank abroad. The money is then remitted to the central bank in Tripoli, which pays the salaries of thousands of public employees on both sides of the new political divide.

The fact that supporters and members of armed groups on both sides are on the state payroll is a legacy from Gadhafi, who made most adults government employees in order to buy their loyalty. Libya's new rulers have been too weak to change this system even though many people simply don't show up for work at overstaffed government offices.

Other former rebels have been put on the state payroll as members of semi-official security forces while a new national army is being created, even though many of them are more loyal to tribe, region or local commanders than the Libyan state.

“There is probably a big disincentive to disrupting the oil payments system, and payments will probably continue to get paid into the central bank,” said one Western diplomat.

That helps explain why oil production has risen despite the general chaos. Libya now pumps at least 800,000 barrels a day, four times more than five months ago, when Thinni's government managed to end a rebel blockade of oil ports in the east.

Still, the industry remains highly vulnerable as armed groups, often unaffiliated to political parties, seize oilfields or ports to press authorities to meet their financial demands.

Another potential difficulty is that the struggle to control the National Oil Corporation and the central bank might make foreign traders reluctant to buy Libyan oil if they cannot figure out who owns it.

Earlier this year, the United Nations banned the sale of oil not authorized by the National Oil Corporation when rebels campaigning for regional autonomy were trying to sell crude from seized eastern ports.

“Personally, given the reality on the ground of two parliaments, two governments... the U.N. should consider putting such a freeze on all Libyan assets and transactions until the picture is clear as to who is really in charge of Libyan sovereign assets,” said Hafed al Ghwell, a political analyst.

Oil needed

Husni Bey, head of one of Libya's largest private conglomerates, said the poor state of the public finances due to armed men disrupting oil production earlier this year, and a fall in oil prices, had forced all sides to cooperate in order to keep oil sales going.

Oil revenues would be as low as $28 billion in 2014, half last year's level, he said.

Ghwell said the central bank would have to burn more foreign currency reserves to fund the budget of $40 billion and annual imports of $30 billion.

Highlighting the challenges, the National Oil Corporation has called on oil workers to maximize production to offset the fall in oil prices.

With that financial dilemma, the competing powers are leaving National Oil Corporation technocrats to handle routine issues such as issuing tenders.

“Work is going very normally,” said Omran al-Zawie, spokesman for the Arabian Gulf Oil Co, a subsidiary of the National Oil Corporation running export ports in the east.

Analysts say another reason why Tripoli's new rulers have not tried to shake up the National oil Corporation is that up to 70 percent of oil production comes from the east, where Thinni's government is still in charge of export terminals.

Bey said oil revenues are booked abroad in an account of the state-owned Libyan Foreign Bank, which transfers the money to the central bank.

The central bank, trying to stay out of the conflict, has stopped all budget payments except salaries to public employees and essentials such as wheat imports.

But Ghwell, who works for the World Bank, said foreign buyers might freeze transactions as a result of confusion over who is in charge at the central bank. Its governor has been fired by the Tobruk-based parliament and he has filed a lawsuit to try to get his job back.

“There may also be a point at which the officially recognized Libyan government can request that all transactions from the central bank in Tripoli should not be recognized, which will add to the confusion,” Ghwell said.