Libya strikes raise risks of longer oil field shutdowns

By Nidaa Bakhsh and Alessandra Migliaccio
Bloomberg News

The international military intervention in Libya risks prolonging the shutdown of North Africa’s most productive oil fields as well as reprisals by Muammar Qaddafi’s regime against foreign energy assets.

Crude futures in New York gained as much as 2.3 percent today after the U.S., U.K. and France launched missiles and airstrikes at targets in Libya to halt Qaddafi’s advance on the rebel-held city of Benghazi. Oil has risen to a two-year high during the month-long conflict.

Libyan oil output has fallen to less than 400,000 barrels a day, about a quarter of the production before the crisis, and may stop, Shokri Ghanem, chairman of Libya’s National Oil Co., said on March 19. Italy’s Eni SpA (ENI), the biggest foreign oil company in Libya, evacuated the last of its expatriate staff after the United Nations authorized military action.

“The biggest risk for oil companies involves possible damage to their facilities which would make it harder to bring production back up once the conflict ends,” said Alessandro Marrone, a defense analyst at the IAI Institute of International Affairs in Rome. “Some facilities could be part of collateral damage from raids, others could be sabotaged as retaliation.”

Crude oil for April delivery rose as much as 2.3 percent to $103.35 a barrel today in electronic trading on the New York Mercantile Exchange. Futures reached $106.95 on March 7, the highest since 2008. In London, Brent crude gained as much as 2 percent to $116.22 a barrel today.

‘Prolonged Uncertainty’

JPMorgan Chase & Co., Bank of America Merrill Lynch and Barclays Plc analysts said that Libyan oil production is likely to remain suspended for the rest of 2011.

“Our operating assumption is that there will be very little Libyan oil exported in 2011,” said Lawrence Eagles, head of commodities research at JPMorgan in New York. “Clearly, political developments could change.”

As well as Rome-based Eni, foreign oil producers in Libya include France’s Total SA, Austria’s OMV AG (OMV) and Spain’s Repsol YPF SA. (REP) The U.K.’s largest oil companies Royal Dutch Shell Plc (RDSA) and BP Plc (BP/) were exploring for oil and gas before suspending operations when the anti-government uprising started in the east of the country in mid-February.

Libya pumped 1.59 million barrels of oil a day in January, making it the biggest producer in North Africa, according to estimates compiled by Bloomberg. That accounted for about 2 percent of global output.

“Western oil companies will have to hope Qaddafi does not destroy their facilities,” said Johannes Benigni, chief executive officer of consultants JBC Energy GmbH in Vienna. The foreign intervention means “prolonged increased uncertainty and thus volatility in oil markets,” he said.

‘Other Sources’

There is no need to call a special meeting of the Organization of Petroleum Exporting Countries to address the situation, Abdullah Al-Attiyah, Qatar’s deputy prime minister and former oil minister, said in Doha yesterday.

“The disappearance of the Libyan production hasn’t really affected supply and demand because we see compensation from other sources” including Saudi Arabia, Kuwait the United Arab Emirates and others, Attiyah said. “When I look to the inventory, I see that the inventory is very high, over 60 days.”

Some refiners in Japan have closed because of damage from the record earthquake that struck March 11, eliminating about 1 million barrels a day of demand that can go elsewhere, he said.

Qaddafi threatened to replace western oil firms with companies from India and China in a March 2 speech and more than 10 days later discussed possible investments with the ambassadors of the two countries and Russia, state-run television reported.

‘Fight for Every Inch’

“We will not leave our oil to America or France or Britain or the enemy Christian states that are aligned now against us,” the Libyan leader, who has ruled since 1969, said on state television yesterday. “ We will fight for every inch of our land and liberate every inch of it.”

The push by Qaddafi to take back rebel-held parts of the country, which provoked international action to protect civilians, saw fighting near oil installations at Ras Lanuf. Libyan’s oil and gas fields are split between the east of the country, where the rebellion is strongest and the west, where the capital, Tripoli, is situated.
Joint Chiefs

A no-fly zone is now in place over Libya, Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, said yesterday. The opening phase of the military strikes on Libya has had “a pretty significant effect very early” and Qaddafi’s forces have been pushed back from the rebel stronghold of Benghazi, Mullen said on CNN’s “State of the Union” program.

The conflict is likely to halt Libyan exports for months, the International Energy Agency said in a report last week, adding that output had already been reduced to a “trickle.”

“Supplies are already cut, so the question is how long it lasts,” said Artem Konchin, an oil and gas analyst at UniCredit SpA (UCG) in Moscow. “There is no easy way out of this situation. It’s a matter of how Qaddafi goes.”