Tuesday Nov 19, 2024

EP84: Libya’s ‘Stable Instability’: What’s Keeping the Peace—and What Could Break It? Implications for the Oil and Gas Sector and Foreign Direct Investment

Summary:

In this episode, we discuss the ongoing political and military instability in Libya, which has persisted since the fall of Muammar Gaddafi in 2011. The country is divided between two rival governments, each vying for control of resources and political power. This division has led to frequent shutdowns of the oil and gas sector, a crucial source of income for Libya, and has deterred foreign direct investment. While there have been temporary resolutions to some conflicts, the underlying issues of mistrust and fragmentation remain, making Libya's future uncertain. We explore the impact of this instability on the global energy market and regional security, highlighting the international community's concern for Libya's fragile peace.

Questions to consider as you read/listen:

What are the main challenges to stability in Libya, and how do they interact with one another?
How does Libya's oil and gas sector contribute to both the stability and instability of the country?
What are the implications of Libya's instability for the global community, particularly in terms of energy markets and security?

Long format:

Libya’s ‘Stable Instability’: What’s Keeping the Peace—and What Could Break It? Implications for the Oil and Gas Sector and Foreign Direct Investment

TL;DR

Libya remains caught in a cycle of “stable instability,” with two rival governments—the UN-backed Government of National Unity (GNU) in Tripoli and the eastern administration led by Khalifa Haftar—competing for control. The country’s deep divisions, failure to hold elections, and reliance on fragmented militias perpetuate political and military tensions. Foreign powers play a dual role, both preventing full-scale conflict and exacerbating instability by supporting competing factions.

Libya’s oil and gas sector, crucial to its economy, is both a blessing and a curse, frequently disrupted by political disputes. While recent deals, like resolving the 2024 oil shutdown, have temporarily eased tensions, these solutions fail to address long-term challenges. Foreign investment is cautiously returning, but instability and the risk of sudden shutdowns remain deterrents.

Globally, Libya’s instability affects energy markets and regional security. Without significant reforms, reconciliation, and unified governance, Libya risks descending back into conflict, making its fragile peace a critical concern for both Libyans and the international community.

Introduction

Libya’s modern history is a testament to the paradox of “stable instability.” Despite years of ceasefires, political agreements, and foreign interventions, the country remains deeply divided, teetering on the edge of renewed conflict. Since the fall of Muammar Gaddafi in 2011, Libya has been locked in a cycle of power struggles, civil wars, and failed attempts at national reconciliation. Its dual government system—the UN-backed Government of National Unity (GNU) in Tripoli and the eastern administration led by Khalifa Haftar—exemplifies the fragmentation that prevents sustainable peace and governance.

This paper delves into the complexities of Libya’s ongoing instability, examining its political dynamics, the interplay of internal and external actors, and the critical role of its oil and gas sector. It explores the tensions between rival governments, the factors that fuel divisions, and the temporary measures that stave off outright collapse. While Libya’s challenges are immense, its stability—or lack thereof—has significant implications for regional and global security, energy markets, and international relations. Understanding Libya’s precarious balance is essential for grasping the broader implications of its fragile peace.

Information

Libya’s stability is that it is stable in its instability.

Libya's political landscape remains volatile, characterized by a division between two main rival governments: the Government of National Unity (GNU) in Tripoli, backed by the United Nations, and the House of Representatives in the east, supported by Khalifa Haftar and his Libyan National Army (LNA).

Libya has been split since 2014, with each government controlling different parts of the country, which inherently increases the risk of conflict. There have been very reports of significant troop movements on posts on X and on telegram, especially by forces affiliated with Khalifa Haftar, indicating potential preparations for military action. This was highlighted by posts suggesting deployments for a possible new war. Recently, there have been small-scale clashes, like those between militias in Tripoli, which, while not necessarily escalating into full civil war, illustrate the fragility of peace and the ever-present threat of violence. The balance of foreign powers, like Turkey and Russia, has been mentioned as a factor preventing full-scale conflict due to their influence over different factions. However, this also means that international dynamics could either stabilize or destabilize the situation especially as Russia becomes increasingly occupied with events in the Ukraine. The failure to hold national elections and the continued division between governmental bodies indicate a lack of progress towards national reconciliation, fueling ongoing tensions.

Given these points, while there's a ceasefire in place since 2020, the political and military developments suggest that Libya remains at risk of sliding back into conflict or civil war. The current risk factors include: persistent division between rival political and military factions; military mobilizations and readiness and counter mobilizations; and the influence of external powers, which might have their interests best served by instability. The current mitigating factors against civil war include: international calls for restraint and ceasefire agreements; and the economic incentive of oil production, which both sides have an interest in maintaining.

Therefore, while there's no definitive action indicating an immediate return to civil war, the underlying conditions suggest that Libya could indeed revert to conflict if the current political stalemate continues without resolution or if significant provocations occur.

The Future of Libya’s Government Stability

Libya's path to a stable government remains fraught with obstacles, defined by its ongoing political fragmentation and rivalry between the western Government of National Unity (GNU) in Tripoli and the eastern administration associated with General Khalifa Haftar. The fall of Muammar Gaddafi in 2011 created a power vacuum, leading to over a decade of instability, marked by civil wars, international interventions, and fragmented governance.

The GNU, recognized by the United Nations, struggles to maintain authority even in its own territories, as it depends on a coalition of militias that often prioritize local interests over national unity. Meanwhile, the eastern government, centered in Benghazi and led by Haftar’s Libyan National Army (LNA), controls key oil facilities and substantial swaths of territory but lacks international legitimacy.

International actors, particularly the United Nations, have prioritized national elections as the solution to Libya's instability. However, logistical and political challenges—such as disputes over the electoral framework, candidates' eligibility, and security concerns—continue to delay this critical step. Moreover, Libya's inability to unify its military under a single command structure exacerbates the security situation, making any political progress tenuous.

Differences Between the Tripoli and Eastern Governments

The divide between Libya’s two governments reflects deep-rooted disagreements over governance, resource distribution, and political legitimacy.

Tripoli’s Government of National Unity (GNU) is led by Abdul Hamid Dbeibah. The GNU is internationally recognized and claims jurisdiction over all of Libya, though it effectively governs the western region. The GNU controls the Central Bank of Libya, which handles oil revenues. This control has been a contentious point with the eastern administration. Security in the west is maintained by a coalition of militias, which, while loyal to Tripoli, often act independently, undermining central authority.

The Eastern Government (Benghazi-Based) is backed by Haftar’s LNA, the eastern administration holds power in eastern Libya and parts of the south. It lacks international recognition but compensates with control over vital oil export terminals. This administration often accuses the GNU of mismanaging oil revenues and marginalizing eastern Libya. The conflict between these governments has created a dual power structure, with each side vying for control over Libya’s vast resources and political future.

Tensions Between Benghazi and Tripoli

The rivalry between Tripoli and Benghazi is a defining characteristic of Libya’s instability. At its core, the tension revolves around resource control, governance, and military dominance. Libya's oil wealth is both a blessing and a curse. While Tripoli manages revenues through the Central Bank, Benghazi wields control over oilfields and export terminals. This division has led to periodic shutdowns as each side attempts to leverage its position. The LNA and western militias have engaged in repeated skirmishes, further destabilizing the country. Haftar’s failed assault on Tripoli in 2019 deepened the animosity between the factions. Both governments claim legitimacy, with little willingness to compromise. This rivalry undermines efforts to establish a unified national government. These tensions perpetuate a cycle of instability, where progress in one area, such as oil production, is often offset by setbacks in governance or security.

Reduction of Tensions During the 2024 Oil Shutdown

In late 2024, Libya faced another crisis as the eastern government halted oil production over a dispute concerning the leadership of the Central Bank of Libya. The month-long shutdown affected major oilfields like Sharara and El Feel, disrupting the flow of approximately 350,000 barrels per day to the Zawiya refinery. This disruption not only cost Libya millions in lost revenue but also threatened global energy markets. The shutdown ended in October 2024 after both factions agreed to address the Central Bank issue. A unified Central Bank governor was appointed, temporarily easing tensions. This agreement allowed oilfields to reopen and production to resume, stabilizing the country’s economy. However, this resolution was more of a tactical ceasefire than a long-term solution, as the underlying issues of mistrust and political fragmentation remain unresolved.

The Return of Foreign Direct Investment (FDI) in the Oil and Gas Sector

Libya’s oil and gas sector is beginning to attract foreign investment after years of decline. Recent developments highlight a cautious yet renewed interest from international energy companies. Italy’s Eni and BP resumed onshore drilling in October 2024, marking their first operations in Libya in over a decade. This move signals confidence in Libya’s potential despite its ongoing challenges. France’s TotalEnergies has not been as full throttle a return to Libya as Eni. Posts from X suggest that there's interest from Emirati firms. For instance, there was a mention of the National Oil Corporation (NOC) presenting a new offer to the Emirati energy company "Trasta" regarding the Ras Lanuf refinery. This indicates ongoing negotiation or exploration of potential investment, though it's more about potential rather than confirmed investment.

Foreign investors are drawn to Libya’s vast oil reserves, low production costs, and strategic location near European markets. These factors make Libya one of the most resource-rich countries in Africa. While the return of FDI is encouraging, companies remain wary of the risks associated with Libya’s instability, including sudden shutdowns, infrastructure sabotage, and regulatory uncertainty.

Impact of Instability on FDI in the Oil and Gas Sector

Instability remains a significant deterrent to investment in Libya’s energy sector. Frequent protests, abductions, and armed clashes disrupt operations and threaten the safety of personnel. Oil facilities have repeatedly been shut down due to political disputes, creating an unreliable business environment. Years of conflict have left much of Libya’s oil infrastructure in disrepair to a degree, requiring substantial investment for repairs and upgrades. The absence of a unified government complicates legal frameworks, making it difficult for foreign companies to navigate contracts and compliance issues.

These challenges deter long-term investment, limiting Libya’s ability to fully capitalize on its energy resources.

Global Implications of Libyan Instability

Libya’s instability has far-reaching consequences for global energy markets. Libya holds Africa’s largest proven oil reserves. Disruptions in its oil exports, such as the 2024 shutdown, can contribute to global price volatility. But the more recent shutdown in 2024 did not impact the market at all from a price perspective. The global oil market is highly interconnected with numerous suppliers. If Libyan oil were to be shut down, other oil-producing countries could potentially increase their production to compensate for the shortfall. Countries like Saudi Arabia, Iraq, the UAE, and others within OPEC+, or non-OPEC countries like the U.S. and Russia, have the capacity to adjust their output to stabilize prices and supply, though they might not always choose to do so due to various economic or geopolitical reasons. Even if there's no direct oil supply issue for the U.S., a shutdown in Libya might temporarily increase oil prices globally due to perceived supply tightness.

Europe relies heavily on Libyan oil, with Italy, Spain, and Germany among the largest importers. Instability in Libya directly impacts energy security in these countries. Prolonged instability in Libya creates opportunities for extremist groups to operate, posing threats to regional and global security. Libya’s stability is thus not only a national issue but also a global one, with implications for energy markets, geopolitics, and economic stability.

Libya’s Major Trading Partners in Oil and Gas

Libya’s oil exports primarily target European markets are:

Italy: The largest importer of Libyan crude, leveraging its geographic proximity and strong historical ties.
Spain and Germany: Significant buyers of Libyan oil, reflecting Europe’s dependency on North African energy supplies.
China: An emerging partner, driven by its growing energy needs.
United States: While less reliant, the U.S. occasionally imports Libyan crude, particularly during periods of global supply constraints.

Libya’s role as a key supplier to Europe underscores the importance of its stability to the global energy market.

Impact on the USA of a Possible Libyan Oil Shutdown

A shutdown of Libyan oil production would likely have a minimal direct impact on the United States for several reasons. Libya's contribution to the global oil market, while significant to its economy, is relatively small on a global scale. The U.S. imports very little oil directly from Libya. Before Libya's civil unrest in the 2010s, it supplied about 1%-2% of U.S. oil imports, and this figure has likely decreased further with the diversification of U.S. import sources and increased domestic production. Over the past decade, the U.S. has significantly increased its own oil production, particularly from shale oil in regions like the Permian Basin. This surge has led to the U.S. becoming a net exporter of oil, reducing its reliance on imports from unstable regions like Libya. As of recent years, the U.S. has been more focused on exporting its surplus crude oil and refined products rather than relying heavily on imports. The U.S. maintains a Strategic Petroleum Reserve, which can be tapped in case of significant supply disruptions. Although the SPR levels have been drawn down in recent years, it still represents a buffer against short-term supply shocks. The U.S. has diversified its sources of oil imports, relying on countries like Canada, Mexico, Saudi Arabia, and others, which reduces the impact of any single country's supply disruption. This diversification strategy helps in mitigating risks associated with geopolitical instability in any one region. The U.S. has robust refining capabilities and can source crude from various grades and regions worldwide. If Libyan sweet crude were unavailable, U.S. refineries could adjust by sourcing similar crude grades from other regions or by modifying their operations to handle different crude types.

Conclusion

Libya’s continued instability underscores the challenges of navigating a fractured political landscape in a country rich in resources yet plagued by division. The duality of its governance—split between the Government of National Unity in Tripoli and the eastern administration led by Khalifa Haftar—has entrenched mistrust and stymied efforts at national reconciliation. While ceasefires and temporary agreements, such as the 2024 resolution of the oil shutdown, provide moments of reprieve, they fail to address the root causes of division and conflict.

The influence of external actors, both stabilizing and destabilizing, complicates the situation further. International calls for elections and unity are often undermined by competing interests, leaving Libya vulnerable to external manipulation and internal collapse. The oil and gas sector, a cornerstone of Libya’s economy, reflects this instability, attracting cautious foreign investment but remaining susceptible to political disputes and sabotage.

Without a unified government, a clear electoral framework, and a commitment from both domestic and international stakeholders to prioritize national stability over factional gains, Libya risks sliding back into open conflict. Its challenges serve as a stark reminder of how unresolved political fragmentation can perpetuate cycles of violence and undermine opportunities for sustainable development.

Libya’s stability, precarious as it is, remains crucial not only for its people but for global energy markets and regional security. Addressing the country’s deep-seated issues will require sustained diplomatic efforts, robust institutional reforms, and a commitment to ensuring that its vast resources benefit all Libyans, rather than fueling further division.

SOURCES

https://press.un.org/en/2024/sc15592.doc.htm

https://www.usip.org/publications/2023/05/libya-can-move-past-its-political-deadlock-it-will-take-work-maintain-deal

https://press.un.org/en/2024/sc15795.doc.htm

https://news.un.org/en/story/2024/05/1149716

https://www.aljazeera.com/news/2024/9/20/diplomatic-failings-and-elite-bargains-prolonging-libyas-turmoil-analysts

https://www.cfr.org/global-conflict-tracker/conflict/civil-war-libya

https://carnegieendowment.org/posts/2019/05/the-conflict-in-libya?lang=en

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/100324-libyas-eastern-faction-ends-monthlong-oil-shutdown

https://www.reuters.com/world/africa/whats-behind-libyas-oil-shutdown-2024-08-28/

https://www.reuters.com/world/africa/libya-preparing-restart-oil-output-central-bank-crisis-eases-2024-10-01/

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/090224-libya-oil-shutdown-endures-despite-isolated-resumptions-sources