Oil prices rise on fears of destruction, prolonged conflict in Libya

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Mar. 21 -- Oil prices continued to rise as traders feared the impact of a prolonged military confrontation on Libya’s oil and gas fields and supporting infrastructure, as well as outright threats by the country’s leader, Moammar Gadhafi.

“We will not leave our oil to America or France or Britain or the enemy Christian states that are aligned now against us,” said Gadhafi in a lightly veiled threat to destroy the country’s oil and gas facilities in the event his forces are defeated.

Libya’s Oil Minister Shukri Ghanem likewise played the oil card in an effort to bolster his country’s international support, telling reporters in Tripoli that future decisions on oil deals would favor countries that did not join the international force against Gadhafi: "A friend in need is a friend indeed.”

Ghanem’s simple remarks echoed Gadhafi, who threatened to replace western oil firms with companies from India and China in a Mar. 2 speech and more than 10 days later discussed possible investments with the ambassadors of the two countries and Russia (OGJ Online, Mar. 15, 2011).

No-fly zone in place
A no-fly zone is now in place over Libya, Adm. Mike Mullen, chairman of the US Joint Chiefs of Staff, said on Mar. 20. The opening phase of the military strikes on Libya has had “a pretty significant effect very early” and Gadhafi’s forces have been pushed back from the rebel stronghold of Benghazi, Mullen said on CNN’s “State of the Union” program.

Henri Guaino, a senior adviser to French President Nicolas Sarkozy, said 2 nights of bombing runs and missile attacks had hobbled Libya's air defenses, stalled Gadhafi's troops and all but ended attacks on civilians.

But Guaino, when asked how long the allied efforts would continue, replied simply: "A while yet."

The earlier effort by Gadhafi to take back rebel-held parts of the country, which provoked international action to protect civilians, saw fighting near oil installations at Ras Lanuf, as well as other locations. That fighting, together with Gadhafi’s threats, has traders worried.

What happens if rebel forces eventually go on the offensive against Gadhafi's troops also remains unclear, especially since 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 located.

“What would be the worst potential outcome is to have a kind of Somalia situation in Libya that has no government for a long period of time,” Eni SPA Chief Executive Officer Paolo Scaroni said over Bloomberg television 10 days ago (OGJ Online, Mar. 11, 2011).

But rebels denied that would happen: "Libya will not turn into Somalia or Iraq. It will not be divided. We are battling—the Libyan people—are battling a gang of mercenaries," Mohammed al-Misrati, a rebel spokesman in the stronghold of Misrata, told Al-Jazeera on Mar. 21.

Facility damage feared
Meanwhile, Alessandro Marrone, a defense analyst at the IAI Institute of International Affairs in Rome, said 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.

But Marrone also underlined several of the fears now facing international oil companies, saying that, “Some facilities could be part of collateral damage from raids, others could be sabotaged as retaliation.”

Mohammed El-Katiri, an analyst at consultants Eurasia Group, said that a long, drawn-out conflict at this point seems likely and that in none of the main scenarios of the unfolding conflict “will Libyan oil exports make a rapid recovery.”

Lawrence Eagles, head of commodities research at New York-based JP Morgan said his firm’s operating assumption is that there will be very little Libyan oil exported in 2011, while acknowledging that political developments in the North African country “could change.”

Their pessimism was reflected in the price of ICE April Brent which rose by more than $2 to a session high of $116.19/bbl and in early afternoon trading was up 1.6% to $115.75, approaching the 2½-year high of almost $120/bbl in late February. On the New York Mercantile Exchange, futures prices for West Texas Intermediate for April delivery rose by 1.9% to $103.03/bbl.

The price rises came despite warnings as well as assurances offered by the International Energy Agency and the Organization of Petroleum Exporting Countries.

Libya’s oil production
Ahead of the international bombing campaign, which started over the weekend, IEA warned that Libya’s oil production would remain off the market “for a considerable time.”

In its most recent monthly report, IEA said Libya’s oil exports were likely to be off for “months rather than weeks” due both to “war-inflicted damage on oil infrastructure” as well as a tightening of the international sanctions regime.

Despite the prospect of a drawn-out conflict or damage to the country’s oil infrastructure, IEA noted that international supplies of oil were sufficient to offset any declines in exports from Libya.

“Key Gulf producers, led by Saudi Arabia, with spare capacity are already ramping up output and are prepared to increase supplies further depending on market demand,” IEA said, noting that Saudi Arabia, Kuwait and the UAE all had ramped up production by a combined total of some 900,000 b/d since December.

“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, said Abdullah Al-Attiyah, Qatar’s deputy prime minister and former oil minister.

“When I look to the inventory, I see that the inventory is very high, over 60 days,” said Al-Attiyah, who noted that demand is down due to the Mar.11 natural disasters that hit Japan.

Some refiners in Japan have closed because of damage from the record earthquake that struck Mar. 11, eliminating about 1 million b/d of demand that can go elsewhere.

As a result, Al-Attiyah said there is no need to call a special meeting of OPEC to address the situation—a view that is unlikely to ease the concerns of traders caused by a string of adverse events in the region.

The uncertainty began with regime changes in Tunisia and Egypt, the armed uprising in Libya last month and further unrest in Yemen and Bahrain, which both share borders with Saudi Arabia, the world‘s largest oil producer.

Contact Eric Watkins at hippalus@yahoo.com.

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