Libya

Rich in Oil, Leaking Fuel

The oil-rich country is supposed to provide cheap, subsidized fuel to its citizens. But amid continuing violence and instability, up to one-third goes missing from official supply chains each year, fuelling a black market that ultimately steals from state coffers at the expense of the population.

In mid-August, as Libyans prepared for Eid al-Adha, temperatures rocketed to over 40 degrees centigrade. In the oppressive heat, many spent hours at petrol stations, hoping to refill their cars and stockpile in the midst of yet another fuel shortage.

Amid ongoing conflict between forces loosely aligned with the UN-backed Government of National Accord and Field Marshal Khalifa Haftar’s Libyan Arab Armed Forces (LAAF), officials blamed one another for the problems with the fuel supply.

But it was nothing new. Such shortages are common, and many Libyans are used to waiting hours at petrol stations. One Tripoli resident tweeted a Google Earth image, complaining that he could see the fuel queue at his local petrol station from space. Others reported travelling in excess of 100 kilometres to find petrol.

Various strategies have emerged: some stay overnight and choose to wait it out while others leave their car in the queue to return to it later. Many have their reserves at home in case they get caught short. As rumours circulate about potential shortages of fuel, many rush to fill up their cars before supplies are exhausted.

The effect is similar to a run on the banks, with a surge in demand soon exhausting the available supply. Unable to fill up at petrol stations that offer the official subsidised rate of $0.11 per litre, many end up buying from the black market, where prices can be 15 times higher in some areas of the country, particularly in the south. 'I filled my tank for 6.5 dinars (around $4.50) in Tripoli, 44 dinars ($31) in Sebha, and when I reached Ubari it cost me 75 dinars ($53),' a driver told Chatham House researchers in August.

As much as one-third of the supply of some fuels – such as petrol and diesel – is believed to be diverted to the black market each year, totalling around 1.3 million tonnes. This is enough petrol to fill 178 Olympic-sized swimming pools. Yet such is the extent of the dysfunction in the fuel sector that no one really knows how much is being diverted.

What we do know is that, while smuggling of Libyan fuel across international borders is longstanding, much of the fuel diverted from the formal distribution network is now being sold within Libya. This is a change. Rather than profits being made on sales in, say, Tunisia (where fuel is much more expensive), they are increasingly being made inside Libya. And ordinary Libyans are bearing the brunt of the state’s inability to combat vested interests and manage its finances.

Establishing demand

The lack of available fuel at petrol stations is often presented as evidence that more supply is needed. At first glance, this makes perfect sense.

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.

The oil refineries

Libya’s oil refineries are supposed to be guarded by Petroleum Facilities Guards (PFG) units. But according to the chair of the National Oil Corporation, Mustafa Sanalla, PFGs have ‘descended into local fiefs’.

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.

There are major discrepancies in the records for many local refineries. Libya’s Audit Bureau noted that the value of crude oil supplied to the refineries was approximately $2 billion in 2017, yet the value of the fuel actually received by fuel distribution depots, the next link in the supply chain, was only around $1 billion. This may be explained by the fact that the remainder is being supplied to institutional clients, but that is not clear.

‘When the tanker gets to the refinery or depot they ask the driver if the fuel is destined for a fuel station or black market. If it’s for a station they will obstruct the loading.’

‘As an official distributor, you face many hurdles when trying to obtain fuel because even at the refinery employees are seeking to make extra money,’ one insider told Chatham House researchers. ‘When the tanker gets to the refinery or depot they ask the driver if the fuel is destined for a fuel station or black market. If it’s for a station they will obstruct the loading.’

The fuel depots

Fuel produced in the refineries, along with the imported fuel, is supposed to be transported to state-run fuel depots, from where it will be distributed onwards through the formal network. But fuel depots are also connected with illegal activities.

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

More leaks

The Truck Drivers’ Association is the central body that organizes fuel transportation schedules and distributes transport assignments to drivers.

Officially, assignments are distributed in the form of shifts, decided according to criteria including order, region, availability and tanker specifications.

However, controllers and administrators from the Truck Drivers’ Association are allegedly manipulating shift schedules in agreements with militias and armed groups, who protect the process of fuel delivery in exchange for rents from the fuel.

Furthermore, fuel that has reached a legitimate recipient can still end up on the black market. Sometimes, armed groups may requisition fuel as part of their group’s own official supply, filling large tanks within their bases and then selling some on illegally. In other cases, traders may offer the owners of official stations money to buy their allocations, which they will then sell on at a profit.

Diversion of fuels intended for institutional clients is also a major problem.

In the searing heat of the Libyan summer, electricity power cuts can last over 12 hours a day, and sometimes as many as 18. Recriminations over electricity supply are a mainstay of everyday conversations. Just like the fuel distribution network, the Libyan electricity grid is creaking under the strain, facing a large number of challenges.

One of these is the diversion of diesel fuel required to power the electricity generating stations. These institutional clients account for roughly 90 per cent of the supply of diesel. They also represent a soft target for those who wish to appropriate large amounts of fuel and sell it on the black market.

Overland smuggling

As fuel shortages have emerged and black-market prices have risen within Libya, cross border smuggling has taken a significant hit.

‘There is nothing for me here,’ said a Tunisian man in his early twenties when interviewed in a small town on the Tunisian-Libyan border in February 2019. ‘This town died.’

Overland smuggling of fuel to Tunisia has long been a staple route for fuel smugglers. Yet, because of increased border security within Tunisia and the growth of the black market within Libya, prices for Libyan fuel increased fourfold between 2015 and early 2019.

This has had a major impact on the economy in southern Tunisia. When interviewed, the man said that he used to work at a barber shop in addition to smuggling fuel. But the collapse of the smuggling sector had meant that the barber shop he used to work in had closed down. This made him solely reliant on fuel smuggling, which is becoming more difficult.

He said that he was forced to deal with militias in Libya, which control the market, while trans-Saharan routes were no longer viable. The Tunisian army now opens fire on smuggler convoys seeking to sneak fuel across the desert into Tunisia, he claimed. When asked what he was planning to do next, he responded that he was ‘saving for a boat to cross the Mediterranean’.

Some fuel continues to be smuggled to Chad, Niger and Sudan. It has been alleged that some armed groups from those countries that are operating in Libya are being paid in fuel rather than cash. Those groups then transport the fuel to their countries of origin and seek to sell the fuel at a profit.

Maritime smuggling  

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.

Following the money

Since his appointment as head of the official fuel distributor, the Brega Petroleum Marketing Company (BPMC), in 2018, Emad Bencora has been trying to fix some of the flaws in Libya’s leaking fuel distribution network.

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.

No easy fixes

The ongoing battle for Tripoli, and for control of the country, further complicates the issue.

In early September the NOC announced that it would restrict the distribution of kerosene, used for aviation fuel, in the east ‘until such time that assurances can be met that fuel is only being used for domestic and civilian aviation purposes’.

The NOC reports that consumption of aviation fuel has gone up 80 per cent in 2019 in comparison with the same period in 2018. Such an increase is not explainable by civilian aviation consumption alone; the outbreak of conflict in Tripoli earlier this year is a much likelier reason.

In response, authorities in the east of the country have accused the NOC of being partisan, and of failing to supply the east with adequate quantities of fuel, a charge that NOC vehemently denies. On 19 September, eastern authorities announced the formation of a rival eastern BPMC, further exacerbating governance and accountability challenges in the fuel sector (particularly given that the LAAF control a significant amount of oil and gas infrastructure).

Meanwhile, the capture of state resources continues apace.

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.

The existence of large differences between prices at the pump in Libya and neighbouring states has long been seen as an incentive for smugglers. This is one of the reasons put forward by Libya’s international partners as an argument for the removal expensive subsidies. But clearly the problems run far deeper.

Libya’s governance crisis exacerbates flawed governance structures within state-run and -owned institutions, providing ample opportunity to mask the diversion of fuels into the black market and for the individuals involved to make major profits while defrauding the state. In many cases, managers of state-run institutions are selling fuel to private companies in which they have a personal stake: a clear conflict of interest.

Indeed, the absence of profit and loss considerations allows the state-run institution to continue making losses, while the private enterprise profits. Furthermore, the state’s lack of enforcement ability also provides opportunities for armed groups to profit.

Such dynamics indicate that greater emphasis should be placed upon increasing the transparency within the fuel system and attempting to fix flaws in its governance, rather than expecting the removal of subsidies to bring a halt to smuggling and theft.

In the absence of such attempts, as these trends continue, it is Libyans who will foot the bill: at the pump in the short term and in less direct ways in the longer term as the state’s resources are depleted.

This article draws upon analysis and data collected by Valerie Stocker and Hamam al-Fasi for Chatham House’s project exploring the development of Libya’s conflict economy.

Key Findings

Fuel shortages continue

Despite Libya’s oil wealth, governance flaws and a lack of security have led to fuel shortages, especially in the south of the country. Since 2011 fuel has been diverted to the black market in increasing volumes.

Libyans pay twice

The result is that Libyans effectively pay twice – first for the fuel subsidies and second for the growing debts owed by state-owned institutions to the Libyan exchequer – for fuel that often doesn’t even reach their local pump. In some parts of the country, Libyans to pay up to 15 times the official subsidized rate to refuel their vehicles.

More transparency needed

Such dynamics indicate that greater emphasis should be placed upon increasing the transparency within the fuel system and attempting to fix flaws in its governance, rather than expecting the removal of subsidies alone to bring a halt to smuggling and theft.