U.S./NATO Strikes Against Libya Raise Reprisal, Oilfield Risks

Turkish Prime Minister Erdogan and Libyan leader Muammar Gaddafi. The Turkish government has gone on record opposing the imperialist threat of direct intervention in the North African state of Libya. a photo by Pan-African News Wire File Photos on Flickr.

Libya strikes raise reprisal, oilfield risks

March 21, 2011 - 7:14AM

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

Oil has risen to a two-year high during the month-long conflict between government forces and rebels. Prices may gain today after the US, UK and France launched cruise missiles and airstrikes at targets in Libya March 19 and yesterday, said John Sfakianakis, chief economist at Banque Saudi Fransi.

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, said on March 19. Italy's Eni SpA, the biggest foreign oil company in Libya, evacuated the last of its expatriate staff after the United Nations authorised military action against Gaddafi.

Advertisement: Story continues below "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."

Oil futures in New York closed at $US101.07 last week, after rising 3.5 per cent on March 17, the day the UN Security Council voted in favor of intervention. The contract rose to $US106.95 on March 7, the highest since 2008. In London, Brent futures ended last week at $US113.93 a barrel.

'Prolonged uncertainty'

Crude oil will resume trading in New York at 6 p.m. local time on March 20. Brent starts trading at midnight in London.

"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.

As well as Rome-based Eni, foreign oil producers in Libya include France's Total SA, Austria's OMV AG and Spain's Repsol YPF SA. The UK's largest oil companies Royal Dutch Shell Plc and BP Plc 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 produced 1.59 million barrels of oil a day in January, making it the biggest oil producer in North Africa, according to estimates compiled by Bloomberg. That accounted for about 2 per cent of global production.

'More speculative'

"Oil could go up tomorrow -- there's more uncertainty," Banque Saudi Fransi's John Sfakianakis said by phone from Riyadh yesterday. "Oil markets have already priced in the Libya uncertainty over the past three weeks, and they've also priced in the oil that has been taken off the market. So if there is a spike, it will be more speculative than real."

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

"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."

Demand reduced

Some refiners in Japan have closed due to damage from the record earthquake there, 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.

"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.

No-fly zone

A no-fly zone is now in place over Libya, Admiral Mike Mullen, chairman of the US Joint Chiefs of Staff, said yesterday. The opening phase of the military strikes on Libya has had "a pretty significant effect very early" and Gaddafi'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 in Moscow. "There is no easy way out of this situation. It's a matter of how Gaddafi goes."

Bloomberg