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Libyan revolt likely to leave deep scars on oil sector

Libyan revolt likely to leave deep scars on oil sector

Oil sector may falter as Libya crisis worsens; OPEC producer is Africa's top holder of oil reserves; Oil surged 9 pct Tuesday on risk of Libya chaos spreading.

February 23, 2011 1:48 by



YEARS TO BOUNCE BACK

In OPEC countries where oil infrastructure is the ultimate key to power and purse strings, war and other major political crises have typically resulted in supply disruptions that take years or decades to bounce back from.

Iran’s 1979 revolution cut the country’s output by more than half, and production never recovered fully. Iraq’s 1990 invasion of Kuwait ultimately slashed output in both countries for years, and ravaged Kuwaiti oil wells. Venezuela’s massive oil industry strike of 2002 crippled production, which has never returned to pre-strike levels.

To be sure, OPEC’s top producer Saudi Arabia has stepped in to boost production in previous disruptions in other member producers, and the Saudi oil minister said on Tuesday the cartel, led by the kingdom, stands ready to pump more oil, but only when needed. U.S. officials say Saudi Arabia could replace Libyan supplies within a month, although it would leave less available spare capacity.

Libya’s unrest helped push U.S. oil futures up 8.5 percent on Tuesday to a 2-1/2-year high, although the surge also reflects the chance that chaos will affect other oil-exporting countries. “The output of (Libya’s) oil will probably not be completely halted, but it is difficult to see this level of chaos failing to result in significant operational disruptions,” Eurasia Group analysts said in a note on Tuesday. “It is likely that the country will experience a prolonged period of violent instability, with a potential for full blown civil war.” As the revolt aimed at ending Gaddafi’s 41-year rule intensifies, oil infrastructure could enter the power play. Unlike in major African exporters Nigeria and Angola where oil is mostly offshore, installations are mostly on land in Libya, making them potentially more vulnerable.

“This effectively gives the country two political factions, two energy-producing basins, two oil output infrastructures. Economically at least, the seeds of protracted conflict — regardless of what happens with Gaddafi or any political changes after he departs – have already been sown,” said political risk consultancy Stratfor.

With oil companies scrambling to pull personnel from the country, Libya’s oil industry “will have to operate under difficult circumstances. A sustained lack of security will keep foreign oil companies at bay for a while,” said energy consultancy PFC in a note. As yet, there are no reports of attacks on energy infrastructure, but eastern tribal leaders have threatened to shut off exports, revenue from which usually flows to capital Tripoli, Gaddafi’s increasingly tenuous stronghold in the west. Nearby, an underwater gas line to Italy has already been interrupted. The fact that Libya is cutting exports of refined products may indicate workers are already abandoning the country’s refineries and their highly explosive plants out of fear. A Time Magazine intelligence columnist wrote on Tuesday that Gaddafi himself may be ordering sabotage attacks on oil pipelines leading to the Mediterranean Sea, citing a source in the region. At Libyan oil wells, which are mostly in remote desert areas, any abrupt halt could permanently damage infrastructure and compromise it for years. “Anybody who feels they could still control the infrastructure in the future will probably not try to blow it up,” said Jaffe. “But companies, including the Libyan national oil company, may face a tough decision. Will they try for orderly shutdowns that ensure production can resume easily later, or keep fields going but risk events that could damage them?”

(By Joshua Schneyer. Editing by Ramthan Hussain)



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