A huge oil producer is trying to ramp up exports -- but the market isn't buying it

There’s been some good news out of Libya recently.

In the beginning of July, Libya’s two rival oil companies — the National Oil Corp. based in the western city in Tripoli and its eastern counterpart, which sits in Tobruk — agreed to merge.

It’s a complicated deal because of Libya’s complicated government. The Wall Street Journal reported at the time that the company will be moved to Benghazi in the east, something that the eastern side wanted, and will now report to the unity government in Tripoli and the parliament based in the East.

Then a few days later, the leader of Libya’s parastatal Petroleum Facilities Guard, Ibrahim Jathran, announced plans to resume exports from the eastern oil terminals of Es Sider and Ras Lanuf, the first and third-largest in the country, which have been closed since 2014. He added that exports will “be under the authority” of the Government of National Accord based in Tripoli, according to Bloomberg.

That means, Libya is now aiming to re-open four of the biggest ports in the country (including the two mentioned above), according to Bloomberg. They have a combined export capacity of 860,000 barrels per day — a number that’s greater than the total output of OPEC members Indonesia, Qatar, Ecuador, according to figures cited by RBC Capital Markets.

Screen shot 2016 05 31 at 2.12.14 pmRBC Capital MarketsLibya’s oil production from January 1991 to January 2016.

Theoretically speaking, this is all a positive sign for a country that’s seen over a million barrels a day of oil shut that’s trapped amid political and security challenges over the last year, keeping production stagnating around 330,000 to 400,000 barrels a day.
(As a reference point here, although Libya has the largest proven crude oil reserves in Africa, its production was the second lowest among OPEC members.)

However, both geopolitical watchers and market analysts have adopted a cautious posture in response to all the news, citing on-going political and security issues, past events, and possible infrastructure damage.

“While [the Jathran news] has led to speculation that the country’s output could quickly increase, historical evidence leads us to be more cautious,” wrote RBC Capital Markets’ Helima Croft in a note to clients on Thursday.

“Jathran’s pledge of loyalty to the GNA government has led to speculation that the country’s output could quickly double from around 350 kb/d. It should be noted that Jathran has made similar promises in the past, only to change his mind,” she explained.

Moreover, she argued that even if Jathran doesn’t reverse course, her team is “cautious about the durability of any increase as serious problems will likely persist.” As she wrote in her note:

“General Hafter, commander of the eastern regional military, does not seem on board with the broader reconciliation, and Abdullah al-Thani, the head of the eastern regional government, issued a set of tough demands for unifying the oil sector. Al-Thani’s demands included relocating the National Oil Company Head Quarters to Benghazi and a 40% revenue allocation to the east, both of which may be difficult for the GNA to meet.”

Notably, there were also several reports about attacks on various terminals a few months ago.

And this past week, Mohamed Elharari, an National Oil Corp. spokesman, told Bloomberg News that both Ras Lanuf and Es Sider “have come under attack, and most of Es Sider’s storage tanks are damaged.” (Although he also added that the Zueitina port is “completely functional.”)

“While we are more constructive on the prospects for a reopening of the ports, we expect the process to be relatively slow. Technical constraints will be significant, with large-scale maintenance works required to prepare the ports for commissioning,” argued a BMI Research team in a note on Thursday.

“It is probable that substantial damage to infrastructure has been incurred and this — alongside the stop-start nature of Libya’s production — will likely weigh on growth.”

Plus, both Croft and the BMI team noted that ISIS remains a risk, even despite the group’s recent defeats around Sirte.

As an end-note, one interesting thing about the recent developments in Libya is that markets more or less yawned off the news.

“Plans to restart exports have surfaced at various points over the last two years, but at no point has production been sustained. It is probable that the lifting of force majeure will place some downside pressure on prices, but we would expect the overall impact to be fairly limited, as extreme volatility in output has somewhat desensitised the markets to Libya,” argued the BMI team.

“That the oil price has failed to move in response to these developments may point to a lack of faith in the process.”

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