Libya: rich in oil, leaking fuel

Yet the reason for the absence of fuel in a particular area is often because the subsidized fuel earmarked for that area has been diverted and is now being sold on the black market. In this case, Libyans are not only paying inflated black-market prices, but also ultimately footing the bill for a subsidy that they aren’t receiving.

Despite its oil wealth, Libya has few functioning refineries for the production of fuels. This means that it needs to import around three-quarters of its fuel requirements, mostly from Italy. Domestic production accounts for the remaining quarter. About half of that domestically-produced fuel is for the domestic market, while the other half goes to state enterprises and major institutional customers. For example, subsidized fuel is supplied to the state electricity provider to fuel power stations.

Thus, Libya needs a means of estimating its fuel needs, so that it can establish how much fuel it needs to import and how much money should be budgeted for those imports.

But the problem with Libya’s system for estimating demand is that it is paper-based rather than market-based. Demand is calculated based upon the stated requirements of fuel distribution companies and institutional clients.

Statistics from the National Oil Corporation (NOC) indicate that such demand is being manipulated. The quantity of petrol reported to have been imported to Libya in 2016 was 30 per cent higher than in 2010. But it is hard to see how demand could have increased so significantly in this period – instead, it is likely much of this increase is heading to the black market. And it is being siphoned off at many stages of the supply chain.

Libya’s biggest operational refinery, housed in Zawiya’s oil complex, is controlled by the Shuhada Nasr Brigade (Nasr Martyrs Brigade), an armed group formed in 2011 and rebranded as a PFG unit in 2014. It has been accused of using its control of the refinery to divert fuel to the black market and has frustrated the NOC’s attempts to push it out.

In January 2017, after Sanalla publicly denounced the Nasr Brigade, it did leave the oil complex briefly. Yet within a few days of the group’s departure, protests against the move emerged, suspected of being instigated by the Nasr Brigade. Gas supplies to a nearby power plant were then mysteriously cut off, causing a blackout across 900 kilometres from the western border with Tunisia to the city of Ajdabiya. Days later, the Nasr Brigade returned.

The group has also been accused of involvement in human trafficking; its leader, Mohamed Kushlaf, was placed under sanctions by the UN Security Council in 2018 for his alleged involvement in human smuggling. But, despite this, he remains in post. Some of the Nasr Brigade’s fighters are currently engaged in fighting near Tripoli, opposing the offensive launched by pro-Haftar forces. Kushlaf’s brother, Walid, is accused of being the brains behind the business, dealing with the kingpins of the fuel smuggling sector on the northwest coast.

When Field Marshall Khalifa Haftar’s LAAF deployed troops from the northeast to Sebha in January and consolidated alliances with local armed groups, smuggling routes from depots in the north were disrupted, but only weeks later the flow resumed, as smugglers adapted.

A black-market fuel distributor based in Qatrun, interviewed in March, said Haftar’s forces had not so much stopped fuel theft as co-opted it. ‘Yes, we now need to deal or negotiate with new actors. But they are also the same old actors,’ he said. ‘Except they are now wearing the uniforms of Haftar’s army.’

An LAAF-affiliated group, Battalion 116, took over Sebha fuel depot from another local group that had been implicated in the illegal sale of fuel for years, but traders in the area told Chatham House researchers that modes of operation had not changed.

Large quantities of fuel and cooking gas continue to be sold out of the depot at black-market prices and are diverted to black market fuel stations and gas distributors. Though the Brega Petroleum Marketing Company, the official distributor, formally denies any allegations of fuel being illegally sold out of Sebha depot, one trader estimated that four in five tanker loads destined for distribution from Sebha to other southern cities end up on the black market.

The ‘ghost’ stations

While it appears on paper that fuel has made it to registered petrol stations, many of those petrol stations either don’t exist or never have any fuel.

‘At the end of [2017], I sent a small team to the west of Libya to investigate fuel smuggling. What they found was that of 105 petrol stations surveyed to which fuel is delivered regularly, 87 of them – 83 per cent – were non-operational,’ said Sanalla, the NOC chair, at Chatham House in January 2018. ‘We suspect they are used by smugglers as fronts.’ (The term ‘smuggling’ is often used in Libya to describe all aspects of the illegal oil trade, even if it stays within the country.)

A UN panel of experts found that more than 480 new petrol stations have been established since 2011 but indicated that most do not exist in reality. When Sanalla discovered that nearly all of the ‘ghost stations’ were built after 2010, he attempted to restrict the supply of fuel to only those stations built before 2010. Only a few days later, the prime minister’s office had blocked the order as ‘illegal’.

‘That is textbook state capture,’ fumed Sanalla.

The existence of ‘ghost stations’ on paper means that the owners of those stations, the fuel distribution companies, can officially requisition fuel, and legitimate paperwork can be presented at a fuel depot or refinery to obtain it. But that fuel will then be diverted from the formal distribution network.

Libya’s dysfunction has also underpinned the growth of higher-value seaborne fuel smuggling, principally of diesel. These schemes allow refined products to enter international fuel markets.

The investigation surrounding a prominent smuggler, Fahmi Salim Ben Khalifa, known as ‘The Boss’, and his network offers an insight into these operations and to a cast of characters that apparently share little in common.

Khalifa had long been a smuggler of some renown in Libya. Before fuel smuggling ramped up after 2011, he reportedly smuggled drugs. So prominent were his activities in his hometown of Zuwara that one of the sides of the port had become known as ‘Fahmi’s port.’

Khalifa’s preferred method of illegally obtaining fuel turns the story back to the Zawiya refinery complex, where Khalifa’s network apparently used legitimate paperwork to obtain diesel, only to not deliver it to its official destination. From Zawiya, the fuel would be taken along the coastline to Zuwara, where onshore pumping stations would fill small boats just off the coast. These small boats would then sail on to be decanted onto tankers.

For the international dimension of the sales, Khalifa needed legal cover. He obtained this through the creation of a front company. A press report that has published a translation of the letter of certification used by Khalifa’s front company indicates that it was signed by Ali Qatrani, a boycotting member of Libya’s Presidency Council with close links to Khalifa Haftar. Qatrani had apparently signed the letter in 2015 in his capacity as chair of the Economy, Trade and Investment Committee of the House of Representatives, the officially recognized parliament. He has denied wrongdoing.

From the Libyan coast, the fuel went onwards to Malta, where individuals with connections to organized crime networks are believed to have facilitated the movement of the fuel onward to Italy. Once in Italy, mixing agents were added to the low-grade diesel in order to make it compatible with commercial vehicles. It was then distributed by organized crime groups at 60 per cent below the market rate.

Two months after Khalifa’s arrest in Libya in August 2017, Italian police announced the findings of an investigation that had tracked at least $35 million worth of smuggled low-grade Libyan diesel, delivered by Khalifa’s network to petrol stations in Italy and beyond. Following Khalifa’s arrest, maritime smuggling declined. But the smuggling networks on the northwest coast remain operational and maritime smuggling continues.

Historically, massive shortfalls in income from fuel sales cascade through the system, but as the institutions involved are not subject to profit-and-loss considerations, nothing stops.

It has worked like this: fuel station owners have accrued significant debts to the fuel distribution companies, which in turn have accrued debts to the state-owned entities. According to the Libyan Audit Bureau, while more than 4 billion dinars ($2.8 billion) was spent on fuel imports to Libya alone in 2017, the amount received by BPMC for all fuel (domestic production and imports) was only 282 million dinars ($200 million).

This illustrates that the lost revenues from sales are relatively small in comparison to the cost of the subsidy. Yet BPMC was estimated to owe the NOC approximately 8.4 billion dinars ($6 billion) for fuel sales over the period 2011–15, according to the Audit Bureau.

Bencora has sought to fix this by ensuring that the fuel distribution companies pay BPMC in advance for the fuel that they receive. Libya has four fuel distribution companies, created as part of a privatization drive in the fuel sector. But, each of them is beset by governance challenges and are said by a former senior Libyan official to have ‘no chance of being profitable.’

There is a limited margin to be made when the price of fuels are fixed at the low, subsidised rate. Moreover, these fuel distribution companies have lost control of many of the fuel stations that are supposed to be a part of their franchises. As a result, they are struggling to pay for the fuel, raising the possibility of further shortages at the pump. And in the east of the country, it appears that BPMC is being pressured to release fuel without payment.

Bencora faces an uphill task. There is a huge amount of political pressure to maintain supply of fuel regardless of the lack of payment.

With a population of only 6.5 million, Libya’s per capita GDP is more than 20 per cent higher than that of oil-rich Iraq.

Libya’s oil wealth has long been used as a means of paying off the population, but since 2011, the checks and balances introduced by the Gaddafi regime to keep expenditure under control have eroded.

In 2010, 17 per cent of the Libyan budget was allocated for salaries, while that figure climbed to 58 per cent in 2018. It is an irony that most of the armed factions battling it out continue to collect state salaries. But this profligacy also extends to the oversight of the costly fuel subsidy: 6.6 billion dinars ($4.7 billion) were set aside for subsidies in 2018.