The fighting in Libya has devolved into a protracted stalemate, which does not bode well for the country’s oil production.

General Khalifa Haftar and his militia, the Libyan National Army (LNA), continue their assault on Tripoli and the internationally-recognized Government of National Accord (GNA). The attack began in early April, but the LNA has been bogged down on the outskirts of the city.

For weeks, Libya’s oil production has held up surprisingly well. Output even rose a bit in April by 71,000 bpd, reaching 1.176 million barrels per day (mb/d), according to OPEC. The increase is impressive in the context of the outbreak of civil war.

But even though Libya managed to prevent production and export outages over the last few weeks, it’s not clear that successful streak can continue, especially because a stalemate between the two factions only increases the odds that the country’s oil sector gets caught in the crosshairs.

“Now the struggle is extending to Libya’s surviving institutions, the Central Bank of Libya (CBL) and the National Oil Corporation (NOC),” Hamish Kinnear, Senior Analyst for Verisk Maplecroft, wrote in a report on May 13.

At issue is the peculiar arrangement that has, to date, been behind Libya’s success in ramping up oil production over the past year. The GNA based in Tripoli has international recognition and control over the country’s most important institutions such as the central bank and the National Oil Company. But it doesn’t have a sizable military. The LNA, on the other hand, has the guns, but not the recognition or political legitimacy. Related: The IEA's Dire Warning For Energy Markets

Tripoli has sent the LNA funds in exchange for the latter’s ability to stabilize and guarantee security over Libya’s oil fields and export terminals. The LNA has paid off various local militias to maintain security, and that has often proven effective at keeping the oil flowing. In fact, the LNA’s ability at quelling unrest and contributing to the restoration of oil production and exports has raised the stature of Haftar internationally.

But it may have also allowed him to grow overly confident. He thought his attack on Tripoli would be swift, but he has been unable to dislodge the GNA. So far, oil has not been impacted, but that could change.

The GNA and the Central Bank of Libya are moving to cut off the funds that flow to the LNA. “Specifically, the governor of the Tripoli-based and internationally-recognised CBL, Al Seddik Omar al Kabir, has ordered banks to stop issuing letters of credit to the LNA,” Hamish Kinnear of Verisk Maplecroft wrote. “This will restrict the ability of the LNA to finance the import of the materials necessary to support its extended supply lines.”

As a result, the LNA may begin trying to sell oil through its own parallel National Oil Corporation based in the east, where Haftar’s militia controls territory and a few vital export terminals. But this probably won’t work. The UN has outlawed the illicit sale of oil from Libya. Oil traders probably won’t touch oil not blessed by Tripoli and the legitimate National Oil Corporation. A prior attempt to sell oil outside the purview of the NOC in March 2014 “ended with US Navy SEALs seizing an errant oil tanker,” Kinnear wrote in the Verisk Maplecroft report.

Haftar is undertaking what appears to be a tour of Europe to shore up support and assistance. He has enjoyed the support, at times, of France and Italy, among others, who view him as a bulwark of stability against Islamic militants in North Africa.

But Haftar has squandered support by attacking Tripoli. Both the French and Italian governments are calling for a ceasefire. Amnesty International said there is evidence that Haftar and the LNA have engaged in war crimes by indiscriminately attacking civilian areas of the Libyan capital.

The stalemate also exposes the notion that Haftar and his army are the answer to Libya’s instability – that he can roll over militants and unite the country – as disconnected with the realities on the ground. If anything is true, it’s that no faction has the ability to impose order on the entire country. In assaulting Tripoli, Haftar is trying to impose his will on rivals, but the stalemate shows the limits of such a strategy, especially since disparate militias within Tripoli have united against him. Related: Russia Hints At OPEC+ Deal Exit

However, he is showing no signs of letting up despite the miscalculation and despite having lost some international support. The LNA has “powerful friends with deep pockets,” Hamish Kinnear of Verisk Maplecroft noted. The UAE and Saudi Arabia will likely “step in with financial assistance” if the LNA loses access to funds from Libya’s central bank. In fact, even though many international players are dismayed at Haftar’s reckless decision to reignite civil war, and they are calling on him to return to the negotiating table, these foreign governments are also worried about seeing him routed. The result is many actors are playing both sides, which arguably increases the odds of a stalemate.

All of this means that there is quite a bit of risk to a major supply outage in Libya. The attempt to sell oil outside of the confines of the legitimate NOC could lead to a “repeat of the events of June 2018,” Hamish Kinnear of Verisk Maplecroft warned. Haftar tried to export oil from terminals under a parallel NOC, but was unable to do so because Tripoli declared force majeure. Ultimately, 850,000 bpd went offline as a result of the standoff. Haftar backed down last year after several weeks of disruptions.

Meanwhile, if the LNA begins to see its finances strained, it could struggle to maintain security at key oil fields. “In late April, for example, an armed group launched an attack on the LNA-controlled El Sharara oil field,” the Verisk Maplecroft report warned. “The attack was repulsed but further attempts are highly likely as the civil war continues.”

By Nick Cunningham of Oilprice.com

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