War, disaster jolt oil markets

Sam Fletcher
OGJ Senior Writer

Like some Biblical curse, war and natural disaster rode roughshod over world oil markets in late March as the North Atlantic Treaty Organization enforced a no-fly zone in Libya while Japan struggled to regain control of its nuclear power plants and economy damaged by a massive earthquake and tsunami.

The United Nations approved limited intervention as Libyan leader Moammar Gadhafi seemed poised to eliminate Libyans trying to oust him. The front-month crude price slipped 0.4% Mar. 18 in New York market only to jump 1.9% in early trading Mar. 21 after Gadhafi broke his brief ceasefire, prompting reprisal airstrikes.

The head of Libya’s National Oil Corp. threatened to bypass the traditional bidding process and award future contracts to producers from countries that abstained from the UN vote. “As for existing contracts, he took a more subtle position, saying that, ‘We are still considering all our contracts and agreements with the oil companies valid,’ but ‘if the work force is not coming…we are of course in talks with other people to bring staff.’ The implicit threat appears to be that, if western majors don't return their personnel quickly—which is inconceivable in the middle of war—the regime could try to effectively displace them,” said analysts in the Houston office of Raymond James & Associates Inc.

Prolonged strife likely
NATO’s action is “likely” to “prolong the strife” that has shut down 1.2 million b/d of Libya’s 1.6-million b/d production capacity, said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. The UN resolution froze NOC’s assets and the central bank, preventing sale of Libyan oil even if production resumes, KBC analysts said.

Olivier Jakob at Petromatrix in Zug, Switzerland, said it “seems inevitable the coalition’s imposition of a no-fly zone will quickly transform itself into air support for a rebel offensive,” adding, “Then the humanitarian operation becomes a war by proxy and explains why the US wants to quickly hand over command of the operations to the other coalition partners.” The Arab League approved the no-fly zone but “is already having some second thoughts, and this is likely to accelerate when the mission transforms,” he said.

Jakob said, “A stalemate at current positions leaves most of the oil export ports in the hands of the Gadhafi regime and is therefore increasing the chances that the rebels will have to move back to the offensive to regain Adjabiya, Brega, and Ras Lanuff. If with the air support from the coalition, then it will be difficult not to make it a battle for oil, and this is probably another reason why the US does not want to have command of the operations.”

Meanwhile, Jakob said, “There will be an increasing focus on Yemen following the massive shootings of last week. Yemen produces about 230,000 b/d of crude oil. About a third of it goes to China, none to Europe or the US.”

Although overshadowed by Libya, Japan’s nuclear crisis was still “offering some bearish potential that is countering the bullish potential out of the Middle East,” said Jakob. The longer it takes to resolve that crisis, “the longer it will take for the Japanese economy to restart and the more impact it could have on the industrial production in other countries,” he said.

Raymond James analysts said, “The crisis in Japan throws into question the future of nuclear power, both in the US and internationally. While it's unlikely that a large number of nuclear reactors are forcibly mothballed immediately, the regulatory process for future projects is bound to get even more difficult than it has been. This comes against the backdrop of an aging nuclear industry, with an estimated 143 reactors (out of 443) set to close by 2030. With this in mind, other low-carbon power sources—natural gas, to a lesser extent renewables, and longer-term clean coal—will increasingly need to fill the gap.”

(Online Mar. 21, 2011; author’s e-mail: samf@ogjonline.com)

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