Analysis: Revolt in Libya likely to scar its oil sector

NEW YORK Wed Feb 23, 2011 1:39pm EST

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NEW YORK (Reuters) - Regardless of what comes next in Libya's lethal political standoff, the OPEC country's oil sector is nearly certain to suffer, bringing long-lasting supply disruptions or even permanent damage.

None of several potential outcomes is benign for Libya's oil industry -- the lifeblood of its economy -- or for oil prices. The scenarios run the gamut from all-out civil war and attacks on energy infrastructure to low-level neglect and reservoir damage, as foreign expertise flees the country.

Over decades, from Iran, to Iraq and Venezuela, periods of political chaos in OPEC countries have usually carved lasting scars on the oil sector, and few expect Libya to be any different.

"A period of chaos will probably interrupt Libya's refining and oil operations," said Amy Jaffe, an energy studies fellow and Middle East expert at Rice University in Houston. "The military is abandoning Gaddafi, so it's unclear who is left to protect oil installations. Lots of foreigners are being evacuated, so who will remain in place capable of operating Libya's oil industry? Will workers even show up?"

As Africa's No. 3 producer and the site of the continent's largest proved reserves, estimated at 44 billion barrels, Libyan oil usually accounts for 2 percent of world output.

The country, whose oil accounts for a fourth of Italy's demand, is the first major oil exporter to be thrust into acute turmoil since protests began sweeping through the Middle East in January, unseating presidents in Tunisia and Egypt so far.

An estimated 300,000 to 400,000 barrels per day (bpd) of Libya's 1.6 million bpd of production has been halted, as companies evacuate staff and suspend operations, according to the latest Reuters calculations.

Much of the country's oil industry is run by foreign firms including Eni and Repsol, while Libya's National Oil Corporation (NOC) has traditionally been tightly controlled by Gaddafi.

Libyan strongman Muammar Gaddafi defiantly pledged on Tuesday to stay in power at any cost, threatening to have protesters hunted down and killed "house by house."

With rival factions already laying claim to an oil-rich swath of eastern Libya, separated by hundreds of miles of desert from capital Tripoli in the west, the country could even face civil war, analysts warned.

YEARS TO BOUNCE BACK

In OPEC countries where oil infrastructure is the ultimate key to power and purse strings, war and other major political crises have typically resulted in supply disruptions that take years or decades to bounce back from.

Iran's 1979 revolution cut the country's output by more than half, and production never recovered fully. Iraq's 1990 invasion of Kuwait ultimately slashed output in both countries for years, and ravaged Kuwaiti oil wells. Venezuela's massive oil industry strike of 2002 crippled production, which has never returned to pre-strike levels.

To be sure, OPEC's top producer Saudi Arabia has stepped in to boost production in previous disruptions in other member producers, and the Saudi oil minister said on Tuesday the cartel, led by the kingdom, stands ready to pump more oil, but only when needed. U.S. officials say Saudi Arabia could replace Libyan supplies within a month, although it would leave less available spare capacity.

Libya's unrest has helped push Brent crude oil prices up nearly 6 percent since Friday, touching a 2-1/2-year high of nearly $109 a barrel, although the surge also reflects the chance that chaos will affect other oil-exporting countries. Brent rose $2.64 to $108.42 a barrel on Wednesday.

"The output of (Libya's) oil will probably not be completely halted, but it is difficult to see this level of chaos failing to result in significant operational disruptions," Eurasia Group analysts said in a note on Tuesday.

"It is likely that the country will experience a prolonged period of violent instability, with a potential for full blown civil war."

As the revolt aimed at ending Gaddafi's 41-year rule intensifies, oil infrastructure could enter the power play. Unlike in major African exporters Nigeria and Angola where oil is mostly offshore, installations are mostly on land in Libya, making them potentially more vulnerable.

"This effectively gives the country two political factions, two energy-producing basins, two oil output infrastructures. Economically at least, the seeds of protracted conflict -- regardless of what happens with Gaddafi or any political changes after he departs - have already been sown," said political risk consultancy Stratfor.

With oil companies scrambling to pull personnel from the country, Libya's oil industry "will have to operate under difficult circumstances. A sustained lack of security will keep foreign oil companies at bay for a while," said energy consultancy PFC in a note.

As yet, there are no reports of attacks on energy infrastructure, but eastern tribal leaders have threatened to shut off exports, revenue from which usually flows to capital Tripoli, Gaddafi's increasingly tenuous stronghold in the west. Nearby, an underwater gas line to Italy has already been interrupted.

The fact that Libya is cutting exports of refined products may indicate workers are already abandoning the country's refineries and their highly explosive plants out of fear.

A Time Magazine intelligence columnist wrote on Tuesday that Gaddafi himself may be ordering sabotage attacks on oil pipelines leading to the Mediterranean Sea, citing a source in the region.

At Libyan oil wells, which are mostly in remote desert areas, any abrupt halt could permanently damage infrastructure and compromise it for years.

"Anybody who feels they could still control the infrastructure in the future will probably not try to blow it up," said Jaffe.

"But companies, including the Libyan national oil company, may face a tough decision. Will they try for orderly shutdowns that ensure production can resume easily later, or keep fields going but risk events that could damage them?"

(Editing by Ramthan Hussain and Alden Bentley)

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Comments (1)
theJoe wrote:
Oil companies don’t seems to get it, the world will not need as much oil as hybrid and electric cars are making their way in the world at a much faster pace. Oil companies might want to face it, stockpiles of oil will be on the rise and oil prices will fall.

It’s odd that if the wind blows the wrong way or any other stupid reason the big oil jacks the price up. It is almost like a stock market in itself prices up and down all day for oil. Breaking News, Oil companies your day has come, hybrid and electric cars so suck it up you all won’t be sticking it to the people of the world much longer. Odd that it has not dropped oil prices already, I bet if we had news hybrid and electric cars were being phased out oil prices would go up, time to face it big oil some of you may need to find a new job, give it 10 years and we all may be driving a hybrid and electric car.

OH and let’s not forget about the other stuff to take big oil out, wind and solar energy and a host of other new energy that will bring oil down and soon too. The people investing in oil might want to think again or that may be you bubble that will pop, are you going to be holding the bag when it does and it will?

Feb 23, 2011 9:41am EST  --  Report as abuse
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