TRIPOLI (Reuters) - Almost every week, Prime Minister Ali Zeidan either tries to cajole the fighters choking off Libya's crude exports or threatens to break their blockade by force.
Neither tactic has worked. Their leader, Ibrahim al-Jathran, dug in at ports his men seized in August, says he will sell Libya's oil himself and carve out a semi-state unless the eastern region gets a fairer share of the revenues.
The mutiny, which has shut three ports accounting for around half the OPEC member's exports, has helped send global crude prices up and they could rise much further if any armed clash inflicts long term damage.
But lawmakers, oil sources and diplomats say Zeidan and Jathran are not on the brink of war, and that if the prime minister can survive a political crisis in the capital he may win the upper hand in the war of attrition over oil exports.
"There is no chance of Jathran exporting oil himself," said John Hamilton at CBI energy consultancy. "He can continue the blockade, inflicting damage on the government's credibility and finances, which gives him a high profile. But his autonomous government has no finances or credibility."
It is a fragile moment. Zeidan, from a small, liberal party, has survived an attempted vote of no confidence in the Congress, split between Islamists and his backers in the nationalist party, National Forces Alliance.
But he was further pressured by the resignation last week of at least four Islamist party cabinet ministers in protest over his government. His only source of strength, for now, appears to be the lack of a viable alternative premier.
Two years after the fall of Muammar Gaddafi, the struggle over exports is just one of the complex, inter-lacing disputes among heavily-armed former rebels, militias and powerful tribes emerging in the flux of post-revolt Libya.
Its constitution undrafted, parliament deadlocked, and its army still in the works, Zeidan's government often finds itself at the mercy of gun diplomacy.
The oil dispute is costing the government billions of dollars in lost revenues and Jathran, still a symbol for many federalists in the east, where the anti-Gaddafi rebellion began, is holding his ground.
But Zeidan is waiting him out, trying to divide the rebel ranks through tribal mediation in the hope that Jathran, whose support among the federalists on the ground is fraying, runs out of funds to keep his fighters on side.
"Everyone is looking for a face-saving way out of this," said one Libyan oil industry veteran.
ZEIDAN VS JATHRAN
With a long history of grievances under Gaddafi, federalists from the eastern region they call by the pre-Gaddafi name Cyrenaica want a fairer share of Libya's vast oil wealth, which they say the central government is squandering.
Jathran, a hero from the anti-Gaddafi revolt, defected from the state-run Petroleum Facilities Guard (PFG) with his troops in August and seized Ras Lanuf, Es Sider and Zuetina ports, which accounted for 600,000 barrels per day of exports.
Negotiations have gone nowhere. But an attempt earlier this month to load a tanker at Es Sider port ended abruptly when the navy opened fire. That made clear how difficult it would be for Jathran to sell oil independently of Tripoli.
For now, Zeidan has the advantage, analysts say, after restoring production in the west and restarting vital oil revenues, with output now at around 600,000 bpd.
Eurasia Group analyst Riccardo Fabiani said the prime minister may gain more leverage if he manages to reopen the Marsa al Hariga port by negotiating separately with rebels there, weakening Jathran's position.
Jathran claims he has 20,000 men backing his federalist cause. But even if his force is closer to 2,000 troops, evicting him by force would be complicated.
When clashes erupted this month on Libya's southern border, Zeidan asked for support from the powerful western region Misrata militia. But turning to militias to oust Jathran would likely incite more violence and inflame federalist sentiment.
"Zeidan would have to turn to the militias," said one diplomat. "That could lead to a major conflagration, so there has to be a negotiated solution."
Jathran himself has been evasive about his financial backing, but lawmakers and analysts say his political support may be waning. Even some eastern tribes who support federalism brand him a power-hungry warlord.
Federalist leaders say they are firm in three demands: an independent committee to supervise oil exports, a probe into oil corruption and a system to share oil revenue among the three regions Cyrenaica, Tripolitania and Fezzan in the south.
But Sadeq al Ghaithi, a former Islamist fighter who become a leading member of the Cyrenaica movement, last year left the political bureau after disputes over the Jathran leadership.
In a further sign of discontent, some former troops from the Petroleum Facilities Guard, who defected with Jathran, have protested to demand back pay of their government salaries.
Saad Bensharrada, a member of parliament's energy committee who was involved in mediation to end to the standoff, said Jathran appeared to be losing tribal support in the east.
"He changes his demands each month..what is happening now is that he is becoming more isolated," he said. "But Zeidan lacks the will to face the problem."
Jathran may be banking on pressure building on Zeidan after the resignations of his cabinet ministers. The premier faces an evolving crisis over the future of the congress, which has extended its transitional term though to February.
In the latest turmoil in Tripoli, gunmen kidnapped five Egyptian diplomats after Egypt arrested a top Libyan militia commander. They were all freed shortly afterwards, though both governments denied any deal.
But as weak as he may be, Zeidan may survive, with Islamists and the National Forces Alliance deadlocked in parliament and no clear candidate emerging to replace him.
One senior Cyrenaica movement activist said Jathran has only two options now: the collapse of Zeidan's government or a confrontation that shores up his backing.
"In this situation he cannot sell oil, if the government in Tripoli collapses he can," the activist said. "If he cannot sell the oil, the movement of Jathran will collapse because he needs the money to pay his troops to support his operations."
(Editing by Philippa Fletcher)