Insight: Libyan oil export flow a trickle, not a gush

LONDON/TRIPOLI Fri Oct 7, 2011 8:07am EDT

Shokri Ghanem, chairman of Libya's National Oil Corporation (NOC), speaks during a news conference in Tripoli March 19, 2011.  REUTERS/Ismail Zitouny

Shokri Ghanem, chairman of Libya's National Oil Corporation (NOC), speaks during a news conference in Tripoli March 19, 2011.

Credit: Reuters/Ismail Zitouny

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LONDON/TRIPOLI (Reuters) - Libya's prized light, sweet oil is trickling slowly onto the global spot market but demand from domestic refiners, production glitches and an internal struggle for control of the sector means it is unlikely to gush until deep into 2012.

Oil production resumed in early September and since then a flurry of field restarts has surprised many analysts who have been pessimistic about recovery prospects.

The National Oil Corporation(NOC) estimated Libya is pumping 350,000 barrels per day (bpd) and reiterated that full pre-war production was possible within 15 months.

But very little of this has leaked onto the spot market. Just two cargoes were exported in September, or a little over 2 percent of pre-war levels and many think the leap above the 1 mln bpd output hump could still be difficult.

"The ramp-up stage (of oil production) is where quick decision-making will be needed most and where the recovery could be derailed from the very good pace at which is has initially picked up," said Samuel Ciszuk, senior analyst at IHS Global Insight.

"We said from the beginning the main challenge might be the ramp-up, rather than the re-start so most of that is still to be seen."

Wood Mackenzie's upstream analyst for north Africa Ross Cassidy said it could take three years to restore full pre-war output.

Most industry sources and analysts peg current oil production at between 200,000-300,000 bpd and say that this could at least double by year-end, but Libyan oil officials are prioritizing filling tanks for refineries, not exports, in order to produce the fuels badly-needed to restore order.

Reuters calculations show that 130,000 barrels per day of refining capacity is now onstream - a figure that will likely rise to 230,000 bpd once the Zawiyah refinery reaches full output and could rise to 300,000 bpd by year-end if the Ras Lanuf plant restarts.

"Some of the oil is going to internal refiners so it will still be a while before we see a real push on exports," said Olivier Jakob, analyst at Petromatrix.

Traders browsing the marketplace for Libyan oil are dubious about availability.

Exports are expected to be more brisk in October as processing accelerates at some fields and others pump first oil but trading and shipping sources said so far only two or three of a total five cargoes are thought to be available for export.

Libya was also a regional exporter of products like fuel oil, jet fuel and naphtha but so far barrels processed domestically have been used to meet local demand.

"I think we need to take the Libyan figures with a pinch of salt," said an oil trader involved with one of the early Libyan transactions.

He added that traders have been confronted with confusion over the quality of crude oil and many have complained that they have not been invited to official tenders. Others may be reluctant to lift cargoes from Libyan waters which some still classify as a warzone for insurance purposes.

This means that the market will be starved of Libya's exports for many months, although higher oil processing at local refineries may still weigh on oil prices since it will cut demand for fuel imports.

Oil prices near $105 a barrel are now only slightly above the level in early February, before the Libyan revolt.

LOOTING AND DAMAGE

Tripoli is abuzz with talk of visiting envoys from companies like Royal Dutch Shell and Eni but workers are returning very slowly due to confusion over counterparties as well as safety and logistical concerns.

"Reaching 1.6 million barrels per day is going to be difficult because of the safety issues, the exodus of foreign workers, the breakdown of supply lines and widespread looting of oil field compounds. From the Sirte Basin you could get bottlenecks because of damage to terminals like Es Sider," said Ross Cassidy at Wood Mackenzie, referring to the country's main export terminal.

Most of the field restarts have been in areas untouched by fighting, but pumping oil in the Sirte Basin, which holds 80 percent of proven reserves, could prove difficult.

These fields mostly feed into export terminals where extensive war damage has already been reported and are not far from the remaining pro-Gaddafi bastions, making them vulnerable to future sabotage attacks.

In an indication of how long it might take to repair the worst of the damage, Benghazi-based oil firm Agoco said it could take a year to fix its power turbines near Mesla attacked by pro-Gaddafi troops this summer.

A full survey of damage has not been completed and oil executives in offices in Milan, Paris and New York are grappling with anecdotal evidence emerging from little known officials.

More damage is still being discovered and a Libyan official for Italian oil firm Eni said its largest field Elephant was in ruins, although the chief executive denied this.

Looting and the destruction of supporting infrastructure like offices and housing may also stall operations.

One oil trader whose firm is involved in the upstream and has yet to return to Libyan soil said a colleague had spotted company trucks on television being used by fighters as desert battlewagons.

RIVAL FACTIONS

Another important factor that could stall activity is an emerging power struggle within the oil sector between rival government and industry factions with poorly-defined responsibilities.

These are being played out in the regional rivalry between the oil-rich east and the capital Tripoli, between interim rulers the National Transitional Council and within the NOC.

Besides the loss of Libya's top oil official Shokri Ghanem who defected in June, many other key NOC staff have left in mysterious circumstances, Libyan industry sources said, amid allegations of corruption and ties with the former government.

This has created confusion for foreign companies and there are already early signs that this is affecting daily operations, with workers for the Libyan firms Sirte Oil and Waha Oil going on strike in recent weeks.

It is possible that leadership could change again when the NTC is officially dissolved upon the formal "liberation."

Relations between the NOC and its subsidiaries are also strained, with firms like Agoco, which played a key role during the revolution, likely to seek greater authority.

"The whole status of the NOC is in question," said Wood Mackenzie's Cassidy.

"The question is: who's in charge? Not everything is going to fall into place."

(Writing by Emma Farge; Additional Reporting by Jonathan Saul and Zaida Espana)

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