The impact of frozen libyan oil producion

Ongoing events in Libya – the expected duration and impact of which many had at first badly miscalculated – have led to a number of serious challenges in the global energy sector. Oil production in Libya (Africa’s largest oil producer and the ninth largest in the world, producing 1.8 million barrels per day prior to the conflict) has come to a standstill.

Oil had always been part of Libya’s political make-up. Having joined the Organization of the Petroleum Exporting Countries (OPEC) after gaining independence, it played a pivotal role in the 1973 Arab oil embargo against the West.

During the following decade, relations with the West became tense and oil production in Libya fell.

Oil money is suspected to have been used by Muammar Gaddafi to fund terrorism, and Libya was directly linked to the destruction of two civilian planes that killed many people: one a French airliner and the other a PanAm flight that exploded over Scotland.

Libya then became a pariah state with sanctions imposed against it.

Despite sanctions, oil production picked up to 1.4 million barrels per day. Having fulfilled all United Nations requirements by 2003, international sanctions were lifted and Libyan oil production continued to grow, reaching 1.8 to 1.9 million barrels per day before the current crisis.

Bonanza for foreign companies

Producing 1.8 million barrels a day before the conflict, Libya is estimated to have oil reserves for another 63 years. Estimates vary, and others put Libyan oil production at 1.6 million barrels per day, producing 2% of world oil output and having reserves to maintain this level of production for 77 years. Whichever it is, most of Libya still remains unexplored and there could be even greater reserves yet to be discovered.

The extremely low cost of producing oil in Libya – as low as one US dollar per barrel in a market where the cost of crude oil is in excess of US$100 – makes Libyan oil an attractive proposition for multinational oil companies.

Foreign oil companies that operated in Libya prior to the insurrection include France’s Total, Italy’s ENI, the China National Petroleum Corp (CNPC), British Petroleum, the Spanish Oil consortium REPSOL, ExxonMobil, Chevron, Occidental Petroleum, Hess and Conoco Phillips. At the same time, China plays a central role in the Libyan oil industry.

China opposed the UN resolution that led to the North Atlantic Treaty Organisation (NATO) campaign in Libya.

There is a school of thought that the Libyan campaign is foremost about control of this rich oil source; that United States and European interests, the latter led by France and Italy, are vying with each other for dominance in the future Libya; and that the Western allies are seeking to squeeze China out of Libya.

ENI, the Italian oil consortium, is – or was – heavily involved in Libya’s oil production. And the European Union is heavily dependent on Libyan oil, with 85% of it going to Europe. Italy alone imports some 30% of its oil and 10% of its gas from Libya. That supply has now been disrupted.

Impact on global oil production

Whatever the strategic geopolitical objectives – if anything, other than its stated mission of protecting civilians – behind the NATO invasion of Libya may be, one thing is certain: it has disrupted oil supplies to the world market, with particularly a number of European countries being badly affected, while it has rearranged the hierarchy of oil producers within the African energy context.

With Libyan oil production being affected by the war, Nigeria and Algeria now move up the rungs in importance as African oil producers. Neither of these two is without its own internal destabilising political tensions.

In Nigeria, the eighth largest oil exporter in the world, oil production is frequently threatened by armed rebel gangs in the oil-rich Niger Delta, which regularly sabotages key oil installations. Despite its oil riches, the region is one of the poorest and is badly neglected by the Nigerian government.

By 2008, the US was importing more than one million barrels of crude oil a day from Nigeria. But the tensions here have forestalled plans to increase oil production, while about a quarter of the oil production here had effectively been shut down. Should the conflict in Libya be drawn out indefinitely and its oil production be affected correspondingly, it is doubtful whether Nigeria could step into the void.

Other oil-producing countries experienced mixed fortunes in their oil production at the outbreak of the conflict in Libya earlier this year:

Saudi Arabia raised its output in April from a much lower level in March. In April, soon after a major cut in output to boost prices, OPEC’s combined output was at its lowest since May 2009.

In Angola, oil production fell the most, but mainly because of field maintenance, it was claimed.

Initial estimates show output remained stable in Kuwait, while the United Arab Emirates showed a decline of 100 000 barrels per day.

Nigeria increased oil exports at the time.

Qatar’s interest in Libya

Europe is not alone in having an interest in Libyan oil reserves, not to mention an anticipated post-Gaddafi economic boom centred on infrastructure replacement, tourism and other non-oil sectors.

Seeing a gap to strengthen its own influence and position in North Africa and the Arab world, the tiny Gulf monarchy of Qatar has staked a claim for itself.

The pro-Western Qatar has long sought a greater role for itself in affairs in the region, but has always been overshadowed by Saudi Arabia. Whether the Emir has other motives or not, the monarchy is said to have thrown the Libyan rebels a lifeline – which they at one time complained was not coming from the Western allies – and is said to have supplied the Libyan rebels with cash, food and fuel that keeps them going against Gaddafi.

If the rebels win against Gaddafi, Qatar is likely to share in the anticipated economic boom in Libya, secure some lucrative energy deals and gain its much desired boosted influence in North Africa and the Middle East.

Other Arab countries are showing interest in Libya, such as Kuwait and Jordan, both of which agreed in May to establish a fund to help the Libyan rebels.

Some analysts believe Qatar’s chief aim is to gain control of a slice of the Libyan oil action. The monarchy’s own wealth has been built on gas, but is said to be eyeing potentially large Libyan gas exports to Europe. That would allow it to control much of the gas market together with Russia, a country with which it enjoys increasingly strong ties. With a foot inside Libya, Qatar moves closer to Europe and the markets it seeks.

Libyan foreign assets

Over many years, Gaddafi has used Libya’s immense wealth to buy friends in Africa through a system of patronage, which many believe is now part of the reason African leaders are resisting US and European pressure to take action against him. Through Libya’s sovereign wealth fund, LIA, he has invested more than US$70 billion in assets across Africa, Europe and many other parts of the world – in hotels, banking, arms manufacturing, and many other sectors – but also in the energy sectors of other countries. These have now been frozen, and await redistribution among the victors once Gaddafi is defeated, if he is to be defeated.

To this end, the 40-nation Libyan contact group met in mid-July with the country’s interim Transitional National Council (TNC). Topping the discussions were ways of how best the contact group of countries could assist the rebels against Gaddafi, how they could unblock Libya’s frozen global assets to benefit the rebels, and how they could get Libya’s oil flowing so that it could earn revenue for the rebels.

Greater transparency

Critics are warning that if these countries and the rebels are serious about bringing democracy, peace and stability to the ordinary people of Libya, they should start by introducing transparency in the oil sector.

“One of the clearest lessons from the Arab spring is that a lack of transparency over how a country manages its resources helps keep dictators in power, and creates the conditions for new ones to emerge. It’s what allowed Gaddafi to exert his stranglehold over the Libyan oil sector and what enabled the collusion of foreign companies and banks in his doing so,” writes Brendan O’Donnell in The Guardian. He is a senior oil campaigner at Global Witness, a non-governmental organisation dedicated to preventing natural resource-related conflict and corruption, and a former international head of campaigns for the development agency, ActionAid.

O’Donnell and Global Witness represent the other side of the coin in the debate around Western motives in Libya, and whether or not Gaddafi is as bad as he is made out to be.

O’Donnell says Global Witness has spent more than 18 years “investigating corruption in the oil industry, often in autocratic and unstable states like Libya”. The lack of transparency, he says, has allowed Gaddafi to use Libyan oil money to recruit mercenaries to brutalise his own people.

He adds that “our experience is that once bad practice is established in a state’s natural resource sector, it takes decades to undo – by which time citizens have been robbed of the benefits of their natural wealth.

“Gaddafi treated Libya’s oil money like a personal piggy bank, so transparency is urgently needed to prevent this happening again.

“It is crucial that the National Transitional Council’s positive statements about transparency and accountability are translated into practice. Mechanisms must be put in place that make it a mandatory requirement for information about the country’s oil sector to be made public,” he says.

O’Donnell explains that because oil companies do not have to disclose what they pay foreign governments for resource deals, and banks do not have to report on their financial dealings with sovereign funds such as Libya’s, citizens are left in the dark as to how their leaders are spending their money.

However, global efforts to combat this problem are gaining ground, with the US leading the way after President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. A clause in the Act requires US-listed companies to report the payments they make to governments in resource-extraction deals.

Early forecasts

In March, RPS Energy, which is part of the United Kingdom-based RPS Group – a FTSE 250 company with a turnover of $700m – released a study on the oil industry outlook following trouble in North Africa and the Middle East. While it was still early days in Libya, it did apply to that country as well.

The study found that political tension in oil-producing areas will continue to cause speculation about supply disruption which, in turn, will cause price spikes.

“It is possible that the current wave of unrest across the Middle East will cause actual supply disruption of a material nature, especially if Saudi (Arabia) is impacted. In either event, further material price increases will impact global energy demand growth, and may prompt a dip back into recession. This will eventually cause supply to be held in equilibrium with demand, allowing prices to return to more sustainable levels. Forecasting exactly where prices will go is difficult, especially under current circumstances,” RPS Energy reported.

Meanwhile, the unfolding events in respect of Libya started revealing a serious situation that could have major global consequences. In March, Total’s chief executive officer Christophe de Margerie announced that the company has shut down production at Libya’s Al Jurf Field, one of the last to be shut in within the country.

During the same month, the CNPC, China’s largest oil and gas producer by volume, announced it was evaluating its losses in Libya after its operations had been halted when more than 100 employees were evacuated from the country. China would not make new investments in Libya in the short term until the Libyan situation stabilised, a Ministry of Commerce official said.

Also in March, Libya Oil Holdings’ stake in Nambia’s Circle Oil – which holds title to a licence in the Ovambo Basin, and which is valued at N$300m – was frozen as a result of sanctions imposed by the EU.

In April, Algeria’s former Energy minister Nordine Ait-Laoussine warned that the ongoing crises in Libya will have an effect on other oil-producing countries. He was opening a day-long conference of representatives of oil and gas-producing countries including Iraq and Nigeria, and industry executives to discuss changes in the energy sector.

While the outcome of the Arab revolutions is “by no means certain”, it is already evident that “important changes are in progresses that are likely to impact energy markets in the long term,” Ait-Laoussine said. But De Margerie took a different, more reassuring line, saying: “For now, there is nothing to be worried about, even if the price is high.”

In April, the US government gave permission for US companies to do oil deals with the Libyan rebels, thus providing a boost to their hopes of toppling Gaddafi.

In the same month, the EU froze the assets of three companies that were in joint ventures with Libya’s National Oil Corporation (NOC), the three being French major Total, US-based Occidental Petroleum Corporation and the Canadian firm, Petro Canada. Other companies that were targeted by the EU sanctions are all subsidiaries of NOC and include Azzawiya Oil Refining Company, Ras Lanuf Oil and Gas Processing Company, Brega, Sirte Oil Company and Waha Oil Company.

In May, Italy set up a group of government representatives and companies to secure deals with Libyan rebels in an attempt to secure exports of Libyan crude oil. It was reported that the Italian oil producer previously active in Libya, ENI, would meet with the Italian bank UniCredit – in which Gaddafi ironically holds an interest – and Libyan rebels to discuss the funding of a project to allow the export of Libyan crude to Italy.

In June, members of the International Energy Agency (IEA) agreed to release extra oil to make up for what it perceives as shortfalls in the market following the outbreak of the Libyan crisis. Executive director of the agency, Nobuo Tanaka, announced that the 28 IEA member countries had agreed to release 60 million barrels of oil during July in response to the ongoing disruption of oil supplies from Libya.

In the same month, NOC’s chairperson Shokri Ghanem fled Libya, arriving in Rome where he then announced that he could no longer tolerate the situation in his
own country.

The situation drags on, although Libya’s oil wealth could have funded weapons, food and other supplies for the rebels, had it not been inaccessible as war damage to the major Misla oil field, and its refineries have not been repaired.

Global oil rethink?

The outbreak of unrest and conflicts in countries in the Middle East and North Africa, particularly in Libya, initially led to mixed reactions and forecasts that ranged from some saying it would not impact on oil prices or global oil supplies, to others who held the opposite view. But it did cause a serious rethink in the EU where experts and officials started admitting that a rethink on energy diversification for the EU was urgently required.

The impact of the loss of Libyan oil in the world market has been such that the Obama administration decided in June to sell off 30 million barrels of oil from the US Strategic Petroleum Reserve – the largest such release ever.

To counter the turmoil in world oil supplies and the fear of rising oil prices, a concerted international infusion of 60 million barrels of oil into the world market was launched in July.

“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries, and their impact on the global economic recovery,” said US Secretary of Energy, Dr Steven Chu.

Many experts are convinced that the Libyan conflict will herald a reconfiguration of global oil supplies.

According to regional specialists cited by The Moscow News, the current threat of disruption to energy supplies from Africa and the Middle East was likely to benefit Russian producers.

It quoted Dr James Coyle, a political and energy analyst, as saying that whether Gaddafi remains or not, events in Libya would act as an impetus to the East-West energy corridor.

“‘There will be a real need to replace Libyan energy in the European market, and that replacement will probably be Saudi oil and Russian natural gas,” Dr Coyle is quoted as saying.

The Libyan conflict has thrown into disarray conventional thinking on other issues in the global energy sector. Libya, for instance, was to be a partner in the construction of the European- and US-sponsored Nabucco gas pipeline project to create a new East-West energy corridor bypassing Russia, which was seen as a threat to secure supplies. But now the Libyan crisis and the uprisings in other Arab countries have thrown the entire concept of energy security into question, and Russia now seems a far more stable supplier compared with some of the other Arab countries.

How fragile is the security of the old energy order? While some 13 African and Middle Eastern countries produce more than 28 million barrels per day – about a third of global consumption – the countries that have recently experienced disruptive anti-government protests together account for more than nine million of those barrels a day. If this production were to be lost, the world would be in serious trouble.

Gaddafi rebuffed

By March, following a shutdown of Western oil operations in Libya, Gaddafi – forced to find an alternative to restart oil production – met with the ambassadors of Russia, India and China, and called on firms in these countries to replace the departed Western firms. But while these countries had not supported the UN resolution that paved the way for the NATO invasion of Libya, they were reluctant to take up the offer. And as the Libyan conflict escalated, they were starting to take a less accommodating view of Gaddafi.

According to reports, the Gaddafi regime entered negotiations with Russian and Chinese firms to take over the ENI oil firm’s projects inside the country, Libya’s hitherto largest foreign producer. These initiatives did not amount to much, however, and Russia and China have shown a distinct coolness toward Gaddafi, while the TNC is now recognised by 30 countries, not least among them the US.

At the time of writing, Petroleum Economist reported that the cash-starved Gaddafi war machine was soliciting buyers for its oil fleet.

 Stef Terblanche