April 14, 2015 / 1:38 PM / 3 years ago

Discounts fail to lure oil buyers as Libya seeks to bypass Tripoli

CAIRO/BENGHAZI (Reuters) - Libya’s official government, holed up in the east after being forced to flee the capital, is struggling to sell crude oil under a new system it has devised in an attempt to bypass a rival administration in Tripoli.

A general view of the Zueitina oil terminal is seen in Zueitina, west of Benghazi April 7, 2014.REUTERS/Esam Omran Al-Fetori

Buyers are reluctant to take advantage of discounts on offer because they are unsure who exactly owns the oil being marketed by the eastern government, even though it is internationally recognized following an election last year, oil officials and insiders say.

In the fighting that has rocked Libya since Muammar Gaddafi was ousted four years ago, control of many oil production and export facilities has frequently changed hands, leaving major buyers wary of doing business with anybody other than the established state oil corporation, the NOC.

Last week, Prime Minister Abdullah al-Thinni announced that in future oil sales would be routed though a Dubai bank account belonging to a new state oil company reporting to his government in the east.

Oil revenues are at the heart of the struggle between the two governments that has effectively split the country in two.

Foreign buyers had always paid through the NOC and the central bank in Tripoli. But the capital has been under the control of the rival government since an armed faction, Libya Dawn, expelled Thinni last year.

But in the past few days, executives loyal to Thinni have begun contacting potential buyers, said Essa Essa, a Libyan oil analyst familiar with the talks.

Thinni’s government controls roughly half of Libya’s output of almost 600,000 barrels per day. But because of the risks they see in doing business with the east, prospective buyers have so far offered prices the government considers too low, said Essa.

One oil industry source said that while the eastern government had offered discounts, one potential buyer had been willing to pay only about a third of the $58 that oil is currently fetching on world markets.

A senior official in the new eastern state oil company said it would be “very difficult” to persuade buyers to pay into the new bank account and prove to them the company owns the oil.

Thousands of documents, contracts and geological maps are stored in Tripoli at the NOC and its subsidiaries. The new eastern entity has been operating out of port and other administrative premises but has no dedicated buildings or staff yet, oil sources say.

“It will take a long time to change the payment system. It also needs expertise and specialists,” the senior eastern oil company official said, said asking not to be named due to the sensitivity of the issue.

There were also fears that the United Nations, which has already stepped in to ban oil sales by renegade forces in the east, might take action again.

“The United Nations might slap sanctions on Libya as oil is a resource for all Libyans. NOC and the central bank are sovereign institutions,” the official said.

CENTRAL BANK BREAKUP?

The fighting has reduced oil production to less than half of what Libya was pumping before Gaddafi fell.

This has plunged the public finances into crisis as oil is the only source of funds for the budget, forcing the central bank to burn through its dollar reserves. The Libyan dinar has lost a third of its value on the parallel market due to a shortage of dollars.

Introducing a new payment system via another bank account could cripple the central bank, one of the last institutions still largely untouched by the fighting. The bank is paying public sector salaries, including those of the armed groups fighting on both sides.

But a refusal by the central bank to pay funds directly to either government has hit Thinni especially hard.

While Thinni’s forces have recently made progress in some areas, the chaos has disrupted central bank cash flows from Tripoli to the east, which has curtailed imports and undermined support for the prime minister.

“Oil and money is the only thing that Tobruk is missing,” said Mattia Toaldo, policy fellow at the European Council on Foreign Relations, referring to the eastern city where the elected parliament is based.

“By disrupting the oil industry they would bring down what’s left of the state,” he told the Reuters Global Oil Forum.

The United Nations has not yet commented on Thinni’s oil plans but has previously urged both sides to leave the central bank and state oil firm out of their struggle.

Last year, the U.N. Security Council banned the sale of oil other than though the NOC in Tripoli after a group of rebels in the east loaded oil on to a tanker which was eventually stopped by the U.S. Navy off the Cyprus coast.

Richard Cochrane, senior analyst, MENA, at consultancy IHS Country Risk, said Thinni might at best hope to sell small quantities via friendly countries such as Egypt.

“Regular exports would probably hit the sanctions wall,” he told the Reuters forum.

Editing by Giles Elgood

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