Libya’s Crippled Refining Sector Struggles To Meet Demand

Until just a few years ago Libya had grand plans to significantly expand its refining capacity. But not only have these plans stalled, existing capacity has proven woefully inadequate at meeting growing demand for refined products.

During a short period of optimism following the fall of Gaddafi, Libya’s NOC in 2013 announced an $80bn downstream drive (including petrochemicals projects) which would upgrade existing units and bring overall capacity to around 1mn b/d (MEES, 31 May 2013). But fast-forward to 2021 and refined products output remains at less than a third of 380,000 b/d nameplate capacity (see table 1). The bulk of current output, which meets only about half of the country’s domestic consumption, comes from the 120,000 b/d Zawiya refinery west of Tripoli.

Even before the 2011 revolution Libya’s refining fleet was in desperate need of upgrades due to Gaddafi-era sanctions and mismanagement. But nearly a decade of instability has prevented much-needed work. And a legal dispute over civil-war damages appears to have so far prevented the restart of the country’s 220,000 b/d Ras Lanuf refinery, shut since August 2013.

Ras Lanuf is ‘operated’ by the Libyan Emirati Refining Company (Lerco), which is a JV of NOC and Trasta Energy, a Dubai-based subsidiary of UAE industrial conglomerate Al Ghurair. Lerco and Trasta in 2013 initiated separate International Chamber of Commerce (ICC) arbitration tribunals against NOC seeking hundreds of millions in damages due to the refinery’s shutdown (MEES, 19 January 2018).

Not only did both attempts fail in 2018, but the ‘Lerco vs NOC’ tribunal ruled in favor of an NOC counterclaim, awarding it $116mn plus interest. Lerco disputed the ruling at the Paris Court of Appeal, which on 23 February upheld most parts of the ruling. NOC says it is now entitled to $132mn.

But the court did annul part of the ruling in which the tribunal had refused to recognize jurisdiction over some of Lerco’s original claims. “This will certainly color the pending contract-based arbitrations, as well as Trasta’s treaty-based arbitration against Libya,” says Damien Charlotin from the Investment Arbitration Reporter, a publication which specializes in arbitration cases.

Mr Charlotin tells MEES that two further cases by Lerco and Trasta that were initiated in late 2019/early 2020 now appear close to conclusion. Trasta is also trying its luck through a treaty-based claim arising from Libya’s signature on the Organization of Islamic Cooperation’s 1981 Investment Agreement. Here, Trasta alleges the state failed to protect the firm’s investment in the refinery following the start of the civil war in 2011.

Although NOC says it is working to restart the refinery as soon as possible, it remains unclear whether it can do so given the ongoing legal proceedings. MEES understands NOC’s ultimate aim is to return Ras Lanuf refinery under its full ownership.

But even Ras Lanuf’s restart won’t necessarily quench Libya’s thirst for products. Much like the rest of Libya’s refining capacity, Ras Lanuf’s typical output is heavily skewed towards fuel oil with the bulk of the remainder low quality diesel/gasoil and naphtha (MEES, 7 September 2012).

GASOLINE THIRST

The most recently available data for domestic products production put gasoline output at just 9,000 b/d or 8% of the country’s 2018 products output of 114,000 b/d. Fuel oil production was top at 35,000 b/d, while low quality diesel was second at 32,000 b/d (see chart).

Products output likely edged higher in 2019, a year with relatively few production shutdowns (MEES, 3 January 2020),), but an eight-month oil blockade in 2020 reduced the country’s oil output production from 1.2mn b/d in January to around 100,000 b/d for much of the year (MEES, 29 January).

As a result, refineries lacked feedstock and products imports rose by 16% to 125,000 b/d according to data intelligence firm Kpler (see table 2). Imports of gasoline were highest, rising by 16% to 63,000 b/d, while diesel imports rose 24% to 54,000 b/d. Libya’s already limited products exports (of mostly naphtha) fell from 36,000 b/d in 2019 to just 4,000 b/d last year, resulting in net product imports of 119,000 b/d (see table 3).

Beyond maintenance and repairs to existing refineries, pre-existing plans for upgrades and newbuild refineries look as distant as ever. NOC has made clear that its utmost priority for now is boosting upstream oil production capacity to 2.1mn b/d at an estimated cost of around $60bn, but even this looks highly uncertain (MEES, 24 December 2020).

That refinery plans are to take a backseat is not necessarily a bad thing. In any case, securing finance would be next to impossible given the ongoing inability of Libya to establish security and stability. Another factor is that beyond construction, such projects are not very labor intensive, meaning that funds would likely be better spent encouraging economic diversification and new sectors.

An easier option would be to continue exporting crude and concentrate on meeting products demand through imports. After all, the Mediterranean region is not exactly lacking in refining capacity.

Far more urgent is for Libya to reform its subsidy policies which distort levels of domestic ‘demand’. Smugglers have been known to make hefty profits by selling cheaper Libyan fuel in neighboring countries – some supplies have even made it as far as Malta. Certain groups also attempt to hoard supplies for a period which they then sell on the black market for much-higher rates. These practices have cost the state billions in lost revenues (MEES, 25 January 2019).