The prospect of the return of the 1.2 million barrels per day (bpd) of crude oil that Libya was producing before the broad-based blockade of its energy infrastructure caused it to plummet to 100,000 bpd in January has done nothing to support the oil price as it has struggled to establish a floor above the US$40 per barrel (pb) level. According to various oil analysts, Libya’s oil output might recover to at least 500,000 bpd by the end of this year and even to over 1 million bpd shortly after that, based on the continued absence of the blockade ordered on the 18th of September by Khalifa Haftar, the commander of the rebel Libyan National Army (LNA). However, on the day that the agreement between Haftar’s forces and elements of Tripoli’s U.N.-recognised Government of National Accord (GNA) was signed, Haftar made it clear that the lifting of the blockade was only in place for one month – that is, until the 18th of October – unless a further agreement that lays out precisely how oil revenues are to be divided is made. Whether that deal is done will determine whether Libya produces 100,000+ bpd or 1 million+ bpd in the coming months.

A key part of the deal signed on 18 September between Haftar’s forces and the GNA Deputy Prime Minister – Ahmed Maiteeq – was an in-principle agreement to look into establishing a commission not only to determine how oil revenues across Libya are distributed but also to consider the implementation of a number of measures designed to stabilise the country’s perilous financial position. Already, according to figures out last month from the Libyan National Oil Corporation (NOC), the blockade from the 18th of January when it started to the 18th of September when it was lifted has cost the country at least US$9.8 billion in lost hydrocarbons revenues.

It has been easy to forget since the onset of civil war in 2011, which followed the ousting of long-time leader, Muammar Gaddafi, that Libya is the holder of Africa’s largest proved crude oil reserves, of 48 billion barrels as of the end of 2014. Before 2011, Libya had been producing around 1.65 million bpd of mostly high-quality light, sweet crude oil (notably the Es Sider and Sharara export crudes) on a rising production trajectory, up from about 1.4 million bpd in 2000, albeit well below the peak levels of more than 3 million bpd achieved in the late 1960s. That said, NOC plans were in place before 2011 to roll out enhanced oil recovery (EOR) techniques to increase crude oil production at maturing oil fields, and the NOC’s predictions of being able to increase capacity by around 775,000 bpd through EOR at existing oil fields looked well-founded. Around 80 per cent of all of Libya’s currently discovered recoverable reserves are located in the Sirte basin, which also accounts for most of the country’s oil production capacity oil reserves, according to the EIA, and oil and gas revenues historically account for at least 90 per cent of total government revenue. Related: Goldman Sachs: Biden Win Is Bullish For Oil

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Unsurprisingly, then, the Sirte basin has been a particular focus of the civil war, and of the broader dispute about oil revenue distribution. On the one side, almost all of the major onshore oil fields in the Sirte basin are held by Haftar’s forces and effectively under the administration of the parliament in Tobruk that was appointed by Haftar. On the other side, though, the U.N.-backed government of Libya – based in Tripoli – receives all of these revenues in the first place, as it essentially controls the NOC to all legal intents and purposes. The September agreement signed by Haftar and Maiteeq that allowed for a fuller resumption of Libyan crude oil exports includes the formation of a joint technical committee, which will – according to the official statement: “Oversee oil revenues and ensure the fair distribution of resources… and control the implementation of the terms of the agreement during the next three months, provided that its work is evaluated at the end of the 2020 and a plan is defined for the next year.” In order to address the fact that the GNA effectively holds sway over the NOC and, by extension, the Central Bank of Libya (in which the revenues are physically held), the committee will also “prepare a unified budget that meets the needs of each party… and the reconciliation of any dispute over budget allocations… and will require the Central Bank [in Tripoli] to cover the monthly or quarterly payments approved in the budget without any delay, and as soon as the joint technical committee requests the transfer.”

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These conditions hint at the fear of losing popular support in the regions under his control that is likely to have been a key reason why Haftar agreed to the lifting of the blockade in the first place. The opportunity cost of nearly US$10 billion in lost oil export revenues in less than nine months for a country that is more than 90 per cent dependent on such revenues underpinned widespread protests in the run-up to the signing of the agreement in Benghazi, one of Haftar’s strongholds. The same pattern of popular discontent also manifested itself in other cities in Haftar force-controlled areas in the east of Libya, especially over such issues as power cuts and shortages in petrol and cash. The protests in Benghazi culminated in arson on the headquarters of the eastern government in the city, an attack on a police station in Al-Marj, and the consequent death of at least one protester and the wounding of many others, according to local news reports. Related: Oil Prices Slide As Gulf Of Mexico Operators Race To Restart Production

In fact, Haftar indirectly cited these protests in the run-up to the signing of the 18th of September agreement when he stated that he had “put aside all military and political considerations…[to deal with the]…deterioration of living conditions [in Libya].” Encouragingly for the September deal, not only does Haftar benefit in terms of boosting his reputation from being seen to put ‘the people’ above his perceived personal interests but the GNA’s Maiteeq does too. Not only is Maiteeq seen as the principal architect of the September Agreement and is also head of the commission that is working out how to extend ensure that the blockade does not return but also he achieved both o these things when the current GNA Prime Minister, Fayez al-Sarraj, had noticeably not been able to.

Whether these personal motivations are sufficient to ensure the extension of the deal remains to be seen, although such motivations have yielded such positive outcomes in many similar circumstances elsewhere in the past. These dual personal ambitions may be enough to circumvent the technical difficulties inherent in the deal, including the fact that neither the GNA as a whole nor the Central Bank of Libya have publically and unequivocally agreed to the deal as yet. According to a Washington-based legal source who works closely with the Presidential Administration on energy matters spoken to by OilPrice.com last week, the NOC had been working on “alternative banking arrangements for the oil revenues that may or may not involve the input on final dispersal of more players” but the details of this have yet to be worked through and are dependent on how the current September Agreement operates.

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Much more likely to derail the current agreement are the broader geopolitical intentions of the foreign players attached to each side. In this context, although the U.S. has apparently done a good job so far in seeking to persuade Haftar to extend the September Agreement deadline – and also for the GNA to agree to the revenue distribution commission – Russia has an interest in spreading its influence out into Libya from its increasing strongholds in the Middle East, concentrated currently in the Shia Crescent of power. It is indeed Russia’s ‘Wagner’ group (Kremlin-directed fighters who operate under the guise of stateless mercenaries in order to avoid direct state-to-state conflict with the U.S. in trouble zones, such as their previous appearance in Ukraine) that is the main backer of Haftar. They are supported by elements from Egypt and the UAE, although the UAE’s position may well change due to the recent U.S.-brokered Israel-UAE peace accord. It was Turkish forces, though, that pushed back Haftar’s forces from key positions over the previous months, particularly in the north-west, supported by elements from Qatar and by pro-Turkish Syrian forces. Turkey, however, has a longstanding relationship with Russia’s chief Shia Crescent of power country, Iran – and its own close regional ally, Iraq – so Ankara is regarded by Moscow as always being persuadable to Russian interests.

By Simon Watkins for Oilprice.com

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