Libya is planning to double its crude oil production next year.
Although it has been an OPEC member since 1962, as well as the African country with the largest (and best quality) oil reserves, for obvious geopolitical reasons it has not been involved in the recent agreement between OPEC and non-OPEC countries, which favours the Russian Federation, reconnects Russia to Saudi Arabia, thus avoiding too close a link between Russia and Iran, and make Russia play a primary broker’s role in the Middle East.
Also Iran has no intention to sabotage this agreement on oil prices, which will certainly favour also the Shiite republic.
Conversely Nigeria and Libya itself have increased their production, while the whole non-OPEC area, Russia, Brazil, Canada, Norway and Kazakhstan have increased stocks, especially because a decrease in oil and gas demand is expected, starting from China.
According to the statements made by the President of the National Oil Corporation (NOC), Mustafa Sanalla, currently Libya extracts 708,000 barrels/day, but production is expected to soon reach 900,000 and level off at around 1 million barrels per day in late 2017.
It is worth recalling that, pending the crazy and senseless Libyan civil war, production had fallen to 200,000 barrels per day.
Later it was NOC itself to deal with the various armed groups deployed to patrol the pipelines in exchange for considerable money payments and resorting to the effective support of General Khalifa Haftar’s forces.
In fact, Libya’s new presence on the global oil market was made possible by an agreement reached last September between NOC and General Khalifa Haftar, who holds power over most Libyan ports and, above all, on Ras Lanuf and Es Sider.
As already said, Libya was not involved in the agreement between OPEC and non-OPEC countries, along with Nigeria and Iran which, however – as stated by the Oil Minister, Zangrneh – supports the process of controlled reduction of the Vienna-based cartel’s oil production and of the even larger oil production of the non-OPEC area.
For the time being, the agreement is operating particularly between Russia, Saudi Arabia, Qatar and Venezuela.
Moreover, for the first time since 2012, few days ago Iran resumed its oil exports to Europe.
If the agreement between OPEC and non-OPEC countries works, Iran will have every interest in becoming an integral part of it.
If Saudi Arabia – albeit unwillingly – withdraws 4.5% of its daily oil production from the market, equivalent to 500,000 barrels a day, all the non-OPEC area will cooperate and contribute to this bullish operation for a total of 600,000 barrels a day, while the Russian Federation is ready to cut its daily production by 300,000 barrels.
Hence, with specific reference to Libya, a quick economic revival is expected – driven, as usual, by oil and gas – which will certainly not bring back the country to the glories of Muammar El Gaddafi’s leadership, with its 1.6 million barrels a day, but will certainly allow to somehow rebuild this poor and very unfortunate country.
Hence Libya as a sort of oil “replacement economy” for the rest of OPEC, which will allow to improve its economy but could even weaken – and virtually stultify – the OPEC and non-OPEC countries’ efforts to make the oil barrel price rise again.
Nevertheless we do not believe that NOC will shoot itself in the foot. Quite the reverse. We are certain that Libya will follow the rise on the markets with careful daily adjustments of its oil production.
Furthermore, in the second half of 2017, nothing prevents OPEC from adapting to another further decrease in oil production. If an oil barrel price of 60 US dollars were recorded – as is likely – also Iran would have an interest in participating in the process.
So far Iraq has lobbied to avoid having to enter into the agreement between OPEC and non-OPEC countries, considering that it must back a military and social effort against terrorism and the so-called Al Baghdadi’s “Caliphate”, but it eventually agreed to a daily ceiling of 4.35 million barrels a day.
Russia pressed for the agreement also with Iraq and, despite extraction restrictions, probably the increase above 60 dollars a barrel will allow high liquidity.
According to the independent analysts of this particular market, currently compliance with the agreement accounts for 90% approximately. This will enable Saudi Arabia, which has agreed to make the largest cuts, to stabilize the Middle East region. It will also enable Russia to become the great player and mediator in the Middle East and even the United States to make the oil shale extraction very profitable.
According to the most reliable economic intelligence analyses, however, the break-even point of the US shale oil is well under 30 US dollars per barrel – and this is the real Saudi Arabia’s problem.
Saudi Arabia did everything – even cutting the oil barrel price down, as until recently – to eliminate the North American competition since the very beginning, although the shale oil production cost in the United States varies greatly from one region to the other.
Saudi Arabia dreams of reducing the number of companies operating in the US shale oil sector to fewer than ten, so as to later try to achieve a vertical consolidation of that market with some large international players.
On the other hand, the Saudi oil production cost is very low and the country can afford a trade war with the US shale oil as long as it wants.
With specific reference to natural gas, which has a structurally different market compared to the oil one, a trade war is foreseen in the near future between some US operators and the EU traditional Russian gas suppliers, while Gazprom will take remedial measures by flooding European countries with low-cost natural gas.
Hence another trade war looming over the energy systems, not to mention the fact that if very low oil prices had continued to dominate the markets for another two years, Saudi Arabia would have gone into default in mid-2018 – and the 30 US dollars a barrel prolong Saudi Arabia’s life by approximately six months.
The other “poor” OPEC countries are in the same situation as the rich Saudi Arabia.
Saudi Arabia, however, has favoured the too low oil prices with a view to destroying the US and, above all, the Russian production.
Now, with the new agreement, the OPEC area becomes a point of reference for Russian geopolitics, and even Libya will increasingly operate in close connection with Russia, considering that it was exactly the Russian pressure that led to the “finalization” of the Algiers agreement and, later, to the Doha agreement.
Nevertheless Saudi Arabia, which has monetary reserves to the tune of 655 billion US dollars, cannot accept – for a long period of time – even a barrel price above 60 US dollars, unless it cuts its public spending and starts its external indebtedness.
Furthermore also Russia has the problem of the impoverishment of its oil fields in Western Siberia. Hence the production reduction, which for Moscow is not high, is a blessing for prices and for extending the lifecycle of oil wells – not to mention the fact that the sanctions, imposed as a result of the Ukrainian issue, blocked the arrival of modern extraction technologies in Russia, with the related increase in production costs.
Therefore if – thanks to this agreement with OPEC – Vladimir Putin succeeds in reaching the level of 100 US dollars per barrel within a time frame acceptable to international investors, the new “big game” in Central Asia and the Greater Middle East will begin.
Saudi Arabia began to extract large and unexpected oil quantities in the mid-1980s, on the basis of a political and financial agreement with the United States, which further destroyed the Soviet economy – but now the mechanism is working exactly in the opposite way.
Currently the Russian oil barrel production cost is equal to 5.4 US dollars. Saudi Arabia’s cost is only 3 US dollars, while obviously the next start of offshore extraction activities will only increase production costs.
In Libya, the production cost – net of the country’s political disaster – is similar to the Saudi one, but data shows that, without an increase – as expected – in production and prices, the Libyan State, or what remains of it, would have no more funds by the end of this year.
To some extents this is also the Russian problem.
Russia’s federal deficit amounts to 1.5 trillion rubles (23.2 billion US dollars) and, according to the relevant Ministers, the Russian Reserve Fund could dry up just at the end of 2017.
Hence, without the oil price recovery, the whole Russian strategic architecture would go to ruin, thus causing an even more severe geopolitical disaster than the one which led to the USSR collapse – as Putin put it.
However, as we have seen, if the agreement between OPEC and non-OPEC countries works – and is even strengthened during the year – the stabilization (and diversification) of the Russian economy and, consequently, the stabilization of the entire Middle East crisis arc, will be a reality.
GIANCARLO ELIA VALORI
Honorable de l’Académie des Sciences de l’Institut de France