Why Russia Must Pressure Libya to Reduce its Oil Production

On July 23, 2017, Russia’s Energy Minister Alexander Novak told the Financial Times that Libya should join the oil supply production cut agreement brokered by Moscow and OPEC last December. Russia’s decision to target Libya, alongside Nigeria and US shale gas, surprised some observers, as Moscow retains tight links to military chieftain Khalifa Haftar, who holds de facto control over many of Libya’s oil-producing eastern regions and supports an expansion of Libya’s oil production.

Even though Russia’s crackdown on Libyan oil production places Moscow at odds with its allies in eastern Libya, Russia’s stringent enforcement of OPEC quotas benefits its strategic interests in three critical ways.

First, Russia has used its stance on oil production to position itself within the growing dispute between Saudi Arabia and Kuwait over the application of OPEC quotas to Libya. Saudi Arabia has urged Libya to cooperate with other OPEC members on increasing oil prices. To convince Libya to abide by OPEC’s requirements, Saudi Arabia has led by example, by agreeing to stricter limits on its own exports for the month of August.

Although Kuwait agreed to implement the Moscow-Riyadh OPEC quota framework in December 2016, Kuwaiti policymakers have been reluctant to extend the quotas to Libya or Nigeria, as they believe production caps on these states are premature. Kuwait’s rationale for opposing enforced production caps on Libya is that global demand for oil is rising and that June 2017 was an anomalously high production month for oil suppliers that is unlikely to be replicated in the near future.

Moscow’s decision to rebuff Kuwait’s policy and back Saudi Arabia’s OPEC strategy highlights its commitment to improving its relationship with Riyadh. Russian policymakers signed a landmark $3.5 billion arms deal with Saudi Arabia on July 11 and have expressed enthusiastic support for a Saudi-Russian committee on economic cooperation that will meet in Riyadh in October.

To demonstrate the extent of the thaw of the Russia-Saudi Arabia relationship, Moscow intends to aggressively pressure noncompliant OPEC members, like Libya, to cut production ahead of the August 7-8 gathering of oil producing countries in Abu Dhabi, United Arab Emirates.

Second, Russia’s enforcement of OPEC quotas allows Moscow to contain the negative blowback affects of unchecked Libyan oil production on the Russian economy and the strength of the Russian ruble. These concerns have been highlighted by notable Russian economic analysts, like eToro’s Mikhail Mashchenko, who believes that Libya’s increased oil production will compound the downward pressure on prices caused by record-breaking shale gas production in the United States and the Trump administration’s planned rig constructions.

While Libya’s oil production levels, which stood at 300,000 barrels a day in 2015 and 500,000 barrels a day in 2016, remain far below the 1.6 million barrels per day extracted under Muammar al-Gaddafi’s rule, the growth in Libyan oil extraction is a cause of concern for Russia. In May 2017, Libya’s National Oil Corporation (NOC) announced that Libya was producing 800,000 barrels of oil per day, its highest levels since 2014.

Without concerted external pressure from Russia and Saudi Arabia, Libya’s oil production levels are likely to increase further. The NOC recently predicted that Libya’s oil production levels could increase to 1.1-1.2 million barrels per day, if armed conflict subsided and local blockades ceased. A settlement between Tripoli and German oil firm Wintershall, which was given legal backing earlier this year by the Libyan Presidency Council could also increase Libyan oil production by additional 160,000 barrels per day.

Even though Russia cannot unilaterally coerce the Libyan government to cut supplies, it possesses critical leverage over the Libyan oil industry that could ultimately convince Tripoli to comply with OPEC quotas. In recent months, Russia has greatly expanded its investments in the Libyan petroleum sector. On February 21, Russian energy giant Rosneft signed a major crude oil offtake agreement with the NOC to strengthen Libya’s refining capacity and infrastructure in ways that will increase Libya’s long-term competitiveness in global energy markets.

Through this deal, Russia has become an indispensable player in the Libyan economy. The Kremlin, under the auspices of Rosneft, has used its close links with Haftar’s forces to facilitate energy export cooperation between the oil reserves he controls and the NOC. This arrangement has prevented Haftar from selling oil independently on the global markets, which would give Haftar the capital he needs to fund further military campaigns against the UN government in Libya. Russia’s importance as a guarantor of stability in Libya and influence over the Libyan oil markets could convince Tripoli to abide by OPEC quotas to avoid a major confrontation with Moscow.

Third, Russia’s aggressive enforcement of OPEC quotas underscores its role as an energy superpower, akin to the United States or Saudi Arabia. The willingness of major energy producing countries to implement Russia’s suggestions to increase the price of oil has bolstered perceptions of Moscow’s influence within global energy markets.

To demonstrate its commitment to raising oil prices, the United Arab Emirates (UAE) has agreed to scale back production in line with OPEC quotas, and has ratified a 10% oil production cut for the month of September. Nigeria has also taken tentative steps to cap production levels at 1.8 million barrels per day.

Even if Russia does not obtain a firm production cap commitment from Libya, an agreement to delay Libyan oil field expansions and the construction of ambitious energy-related infrastructure projects in Libya would highlight Moscow’s status as an arbiter on energy-related issues within the Gulf Cooperation Council (GCC). This agreement would also increase pressure on non-compliant states like Iraq, to adopt similar measures, even though gaining full cooperation from Baghdad is complicated by the Iraqi government’s lack of jurisdiction over Iraqi Kurdish oil contracts.

In short, Russia has a major opportunity at the August 7-8 Abu Dhabi summit to emphasize its unequivocal commitment to obtaining universal compliance amongst OPEC member states with oil production quotas. Achieving this level of compliance will be difficult in the near-term due to Iraq’s reconstruction efforts, Ecuador’s refusal to back OPEC quotas and collapsing production in Venezuela.

However, if Moscow can successfully use its political and economic influence in Libya to implement a change in Tripoli’s oil production patterns, Russian policymakers will take a major step towards stabilizing or increasing the global market price of oil ahead of the 2018 presidential elections.

Samuel Ramani is a DPhil candidate in International Relations at St. Antony’s College, University of Oxford. He is also a journalist who writes regularly for the Washington Post and Diplomat magazine. He can be followed on Twitter at samramani2.