Europe looks to a divided Libya to ease energy crisis

Reuters

• $8bn deal with Italy’s Eni will produce 0.75bn cubic feet of gas a day
• Eni also has gas import ties with Algeria and Egypt
• Increased production has been marred by political instability

Italian oil major Eni’s $8 billion deal to develop two new gas fields in Libya is the biggest since the overthrow of veteran ruler Muammar Gaddafi.

It also marks the latest attempt by European energy companies to secure new supplies for the continent in North Africa.

Last year Eni struck an agreement to increase gas imports from Algeria, while Egypt also hopes to up energy sales to the European Union after the bloc vowed to slash its consumption of Russian gas following Vladimir Putin’s invasion of Ukraine. 

Eni’s new joint venture with Libya’s state-owned National Oil Corp (NOC) will begin production in 2026, with output plateauing at 0.75 billion cubic feet per day (bcf/d). Libya on average produced 1.2 billion bcf/d of gas in 2021. 

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“Libya isn’t a silver bullet to solve Europe’s gas shortage. The volumes that Italy is able to import from Libya aren’t huge, but every little extra helps,” said Martijn Murphy, principal analyst for upstream North Africa at Wood Mackenzie.

“There’s also considerable potential for the development of associated gas from Libya’s big oil producing fields in the Sirte basin.”

The prime ministers of Italy and Libya attended the signing ceremony on January 28 along with NOC chairman Farhat Bengdara, but Libya’s oil and gas minister Mohamed Aoun was absent. 

“The minister was against the reduction of government priority oil in this contract, whereas Bengdara thought the project was of such importance to the country that it was necessary to get it over the line,” Murphy said.

Libya’s joint venture contracts give the country around 80 to 90 percent of production and act like a royalty payment. Although the exact terms for the new Eni deal are not public, supplying Libya’s domestic market will take priority. 

“Longer term, Libya is re-evaluating its contracts to offer more favourable [terms] towards contractors in the future,” Murphy said.

Libya has 48.4 billion barrels of proven oil reserves, Africa’s largest, and 2.8 percent of the global total. 

Reuters/Hazem Ahmed

Disruptions and political risk

Eni holds stakes in 11 Libyan concessions and produces 80 percent of Libya’s gas. Its latest investment comes despite a recent company bond prospectus warning it is “particularly exposed to political risk” in Libya.

France’s TotalEnergies, Texas-based ConocoPhillips, Spain’s Repsol and Austria’s OMV are among the other international oil companies operating in the country. Many have declared force majeure on new exploration in the country amid ongoing political turmoil. 

Abdul Hamid Dbeibah was appointed Libya’s prime minister in March 2021 as part of a new UN-backed Government of National Unity. 

Dbeibeh failed to hold elections by the end of 2021 due to ongoing instability, prompting the Sirte-based House of Representatives to create an alternative Government of National Stability in March 2022, in which former interior minister Fathi Bashagha is prime minister. 

Dbeibah has refused to cede power to Bashagha, who is allied with Field Marshal Khalifa Haftar, commander of the Libyan National Army.

“The country is absolutely divided – it has returned to a situation where there are two governments both claiming legitimacy,” said Federica Saini Fasanotti, a non-resident senior fellow at Washington’s Brookings Institution.

Last April, tribes allied to the Libyan National Army closed some key oil fields. In response, Dbeibah in July appointed Bengdara – a Haftar ally and former central bank governor – as chairman of NOC, prompting the tribes to end the shutdown. 

“Things have become smoother between Haftar and Dbeibah,” said Fasanotti.

“It’s a big accomplishment for Haftar to have a close ally running the NOC and his militias haven’t blockaded the oil fields again, so in terms of the energy sector the situation is more under control right now.”

But, she added, “if there’s a big argument between Bengdara and Haftar, militiamen will enter the oil fields and stop production”.

Production targets

Libya’s annualised oil production was around 1 million bpd in 2022, Wood Mackenzie estimates. This figure would have been about 1.2 million bpd – almost the same as in 2021 – were it not for last year’s shutdowns. 

Oil production peaked this century in 2007 at 1.91 million bpd, the highest output since 1978, but slumped following Gaddafi’s fall in 2011 and has fluctuated wildly ever since due to civil war and strife.

Libya’s oil minister in January reiterated a long-standing target to increase oil production to 2 million bpd. 

“For now, 1.2 million bpd is probably the maximum the country can produce – there will be modest investments that could raise production slightly this year, notably by NOC subsidiaries which are developing new areas the international oil companies have vacated, but this is pretty small overall,” said Murphy. 

“To return to pre-war levels of about 1.6 million bpd requires multi-billion-dollar investments and the international oil companies don’t seem ready to do this.

“The above-ground risks are too great unless there’s a binding political agreement. There’s more downside risk to production than there is incremental upside potential.”

Renewed cooperation between NOC and oil and gas minister Aoun “could reinvigorate the energy sector, potentially paving the way for new projects and investments”, Fasanotti wrote in a report. 

NOC, which holds a 50 percent stake in most projects, has little money to invest itself. 

Although new oil exploration seems unlikely for now, there are considerable opportunities to increase production at existing sites including some where production remains halted after suffering multi-million-dollar war damage. 

“These areas have been in production for decades and have a lot of issues with ageing infrastructure, unreliable power facilities, pipeline leaks and inadequate storage that if resolved could deliver bigger and faster oil production increases than greenfield exploration,” Murphy said. 

TotalEnergies and ConocoPhillips in November jointly acquired a further 8.2 percent stake in Libya’s Waha concessions, which as of 2019 produced about 305,000 barrels of oil equivalent per day. The deal raised TotalEnergies’ stake in the concessions to 20.4 percent from 16.3 percent. 

Eni, meanwhile, bought a 42.5 percent stake in a BP-operated concession, taking over as operator. 

“Libya offers low-cost barrels, a close proximity to Europe and the scale of the resource is hugely appealing,” Murphy added. “That’s what is attracting the European majors, although the fiscal terms are pretty tough.”