• Crude production in Sirte Basin at risk: Energy Aspects
  • Libya's oil output has dropped by almost 80% since 2011

Libya’s United-Nations-brokered peace deal may help calm deepening political turmoil, but the North African nation will struggle to restore oil production to levels reached before the Arab Spring five years ago.

Output in the country with Africa’s largest oil reserves has slumped almost 80 percent since Muammar Qaddafi was toppled. Representatives from the two rival factions that emerged after a 2011 rebellion ended the dictator’s 42-year rule -- an Islamist-backed government in Tripoli and an internationally recognized administration operating out of the east -- signed a peace deal on Thursday, paving the way for shuttered oil fields and export terminals to be reopened.

While a lasting peace deal would allow the North African country to ramp up its output from below 400,000 barrels a day last month, the threat from Islamic State in the oil-producing Sirte region means the situation may get worse in the short term, according to Richard Mallinson, a London-based geopolitical analyst at Energy Aspects Ltd.

“There’s no immediate signs that it’s opening up oil facilities,” he said by phone. “The risk is that this expansion of Islamic state into the Sirte basin and some of the producing fields there is a bigger risk than production coming back.”

Italy’s Eni SpA is the biggest international oil investor in the warn-torn country and days before the peace deal was brokered, Chief Executive Officer Claudio Descalzi said his company was talking to all the players in the country. With offshore operations sheltered from the conflict, Eni’s Libyan production, which consists mainly of gas, has increased by about 15 percent to 300,000 barrels of oil equivalent a day since 2011.

Finding Stability

Wintershall Holding GmbH, which operates eight onshore oil fields in the eastern Sirte basin, said it will take “time and patience” for Libya to find stability.

“The recent signing of the Libyan political agreement is an important step towards restoring peace and stability for the Libyan people, ” Stefan Leunig, a spokesman for Wintershall, said in an e-mail.

The company said onshore production has been halted several times since the summer of 2013 at the request of Libya’s national oil company. Wintershall was forced to suspend oil exports from the As-Sarah field last month because the Zueitina terminal was unable to load cargoes.

Insurgent Groups

“It’s still quite a long way before you can go from an agreement between the two rival governments to a Libyan industry which gets back to full capacity,” Paul Horsnell, head of commodities research at Standard Chartered Plc, said by phone. “There are still splits within the regional governments, there are still insurgent groups within there as well.”

While other attempts to reach a peace deal have failed, the situation might be different this time around as world powers agree on the need to counter the spread of Islamic State, according to Energy Aspects’s Mallinson.

“The renewed willingness of the international community to engage with the people who actually have power on the ground is more likely to break the deadlock,” he said.

Italy is drawing up plans to lead a military coalition that would seek to stabilize Libya but have no combat role, according to two Italian officials with knowledge of the matter.

Any additional Libyan output would feed a glut that has seen oil prices slump by more than 65 percent since June last year, and even the prospect of production coming back could spark further declines, Mallinson said.

Still, for now, the outlook for Libyan output is little changed, said Standard Chartered’s Horsnell.

“Does it change an expectation of Libya’s average production for next year? Probably not yet,” he said, adding that if output averaged 500,000 barrels, it would be a “very good outcome compared to where they are at the moment.”

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