Libya's Oil Industry Vulnerable to Protests

Libya's oil industry hopes life will return to normal now that a wave of protests has ebbed, but it will take months to ramp up production and more unrest is in prospect as political chaos spreads in the North African country.

A group of eastern rebels agreed last week to clear two major ports they had seized almost a year ago in a drive for regional autonomy.

Together with the freeing of the southern El Sharara oilfield, where a separate group has ended a blockade of its own, the ports' reopening could boost oil exports by 650,000 barrels a day in the next few weeks - helping to restore much of the 1.4 million bpd Libya used to pump before protests paralysed the sector.

The rebels agreed to end their blockades after Libyans voted for a new parliamentary assembly last month in which candidates campaigning for a federal state that would share oil wealth between all regions scored well in the neglected east, according to preliminary results.

But more protests can erupt at any time as the government is unable to control the militias who helped oust Muammar Gaddafi in 2011 and who can seize oil facilities at will in pursuit of political leverage and petroleum revenues.

The deal to reopen the eastern ports means the rebels will now be paid state salaries, which could tempt other militias to seize oil infrastructure in pursuit of similar rewards.

"Energy assets will remain a key bargaining chip for groups wishing to put pressure on national-level politicians," said Geoffrey Howard, analyst at London-based Control Risks, who is just back from a trip to Libya.

"Shutdowns are likely to continue over at least the coming year, making a return to full export levels highly unlikely."

A potential blackmail opportunity is a 70 percent-salary increase for oil workers which the government approved last autumn in a failed attempt to discourage protests, said Husni Bey, head of one of Libya's largest private conglomerates.

The central bank has warned against implementing the hike because it would ruin public finances already severely under strain after a year of oil protests.

Salary Increase
But in an indication that the government might bow to pressure, the cabinet of Prime Minister Abdullah al-Thinni said it had "reservations" about freezing salary increases for the country's judiciary.

At the same time the government said it might have to sell Islamic bonds to fund the $47 billion budget, an unusual step for an oil-producing country which used to be flush with cash.

A major problem is that oil output will rise only gradually, forcing the central bank to burn more foreign reserves, which have fallen to $109 billion from around $130 billion a year ago.

Libya can quickly sell 7.5 million barrels of oil stored at the reopened Ras Lanuf and Es Sider ports, but it might take time to restart connecting oilfields and pipelines which have been idle for longer than during the eight-month uprising against Gaddafi in 2011.

El Sharara lost at least 20 pumps due to repeated shutdowns, requiring several months of repairs to restore full capacity of 340,000 bpd, the state-run National Oil Corp has said.

While oil engineers scramble to restore output, Tripoli is facing the dilemma that it cannot cut the budget because up to 70 percent is spent on the public sector, subsidies on petrol and bread, and on militias in an attempt to keep popular frustrations in check.

Libya's new rulers with their under-equipped army and police have not dared to touch a system from the Gaddafi era under which people are put on the state payroll or given other generous allowances as a way to buy their acquiescence.

The state lost $40 billion in oil revenues due to the protests, Central Bank governor Saddek Omar Elkaber said last week.

Bey said that even with oil exports rising to one million barrels per day by the end of September the budget deficit would still be 50 percent.

The oil protests ended after authorities brought forward elections to June 25 to get rid of the old General National Congress, an assembly which many associate with the political infighting that has plagued Libya since Gaddafi's overthrow.

Results are not due until next week but partial counts show a strong showing of federalist candidates in the east loyal to the agenda of port rebel leader Ibrahim Jathran.

But questions remain over what kind of political system Libya will eventually adopt as a special body tasked with drafting a new national constitution has still not finished its work.

(By Ulf Laessing; Additional reporting by Feras Bosalum; Editing by Giles Elgood)