Libyan civil war oil update

 There have several important developments in the Libyan civil war, not least the temporary incursion into Tunisia and NATO’s decision to begin attacking Libyan state institutions. (The death of one of Gaddafi’s sons is a result.) These are important, but developments regarding the country’s oil industry are even more so. And so, this update.

Last weekend, government forces damanged rebel-controlled oil fields. How is not certain. Tripoli claims that British warplanes did the damage, but that seems unlikely to say the least. Wahid Bughaigis, the rebel oil minister, said that the damaged equipment included a generator, an oil tank, and several small diesel tanks to fuel the generators. The rebels say they will need at least a month to repair the damage.

The problem is that the rebels do not control the refineries or gasfields. They therefore need to import fuel, and that’s expensive. The Qatari government (working with Vitol, an oil trader) helped the rebels market one million barrels (for an above-market $129 million in revenue). The MT Equator tanker, carrying 550,000 barrels of that oil, arrived in Singapore for refueling on April 28, before steaming on to China. (China is being quite helpful where it counts.) $129 million, however, is not a lot in terms of rebel needs. Bougaighis said: “To put things in perspective, one cargo of gasoline of 25,000 metric tons costs us $75 million, so you don’t go far with $129 million.”

I suspect that he is wrong about that: 25,000 metric tons is around 7.9 million gallons, and I doubt they’re paying $9.44 per gallon. But I am sure that the rebels are facing energy problems. Benghazi used to get its electricity from natural gas supplied out of Brega. Brega, however, is in government hands. As a result, the rebels have cut electricity production in Benghazi by 25 percent to conserve fuel. Of course, in a country without anything resembling a smart grid, electricity cuts mean rotating outtages running as long as 3½ hours. Bughaigis: “We didn’t have this problem when the gas was supplied to the plants, but now we have to supply it (diesel) by sea and get it from the road.”

For what it’s worth, the U.S. cleared up (as best as it could) the remaining uncertainty about the ability of Americans to buy Libyan oil. The Office of Foreign Assets Control (OFAC) declared that said transactions involving Qatar Petroleum or Vitol are permitted provided the entity in Libya is under the control of the rebel-backed leadership. Anyone dealing with Libyan oil purchases must supply a report to OFAC detailing the arrangements within 30 days. The practical significance of this is limited, however, since the Europeans opened the door to rebel oil sales some time ago.

In the Department of Obvious: Vienna-based OMV, which produces some 10% of its total oil and gas production from Libya (33,000 boe a day), is seeing its profits go down. Production at the Shateira oil field shut down at the end of February due to violent clashes between government and rebel forces. Libya provided 20 percent of the crude used by OMV refineries, but it has been able to buy crude from Saudi Arabia, Kazakhstan and the Black Sea region to make up for the slack. OMV will have to upgrade the refinery in Burghausen, Germany, to process non-Libyan crude, but it should be able to do that.

Department of Not so Obvious: Eni’s production is down 9%, but profits are up 15% on high prices. Since April, Eni production in Libya has been about 50,000 to 55,000 barrels of oil equivalent per day, down from 280,000. (Libya accounted for about 10 percent of Eni's overall cash flow.) Eni said since April the company has been producing 50,000 to 55,000 barrels of oil equivalent a day in Libya for local electricity production, all coming from its Wafa facility. No Eni facilities in Libya have been damaged and are currently on “hot standby” ready to produce again once the situation stabilizes.

And finally, Department of WTF: Eni appears to have sent a tanker to western Libya to try to pick up oil from its production facilities. The Aqua got within a few kilometres of the Libyan port of Mellitah before turning away between April 20 and 21. (The booking from Mellitah to Venice probably cost over $500,000, including a risk premium to venture into Libyan waters.) It was there to load up 600,000 barrels of oil. The Libyan government, obviously, refused to let the Eni ship fill up. “They didn't want the crude to go, because they wouldn't have gotten any money for it,” said an industry source, adding, “They could use it to refine into gasoline.” I can understand why NATO would be happy to let the Italians give it the old college try (“Go get your oil! Just make sure that Tripoli knows it won’t get any money for it, 90% tax rate be damned.”) I am less sure as to why Eni thought it could possibly get its oil.

So there you have it. Nothing here changes the assessment that the rebels will win, but the government ability to strike at the fields is unexpected.

Comments

[bodzin]

What did you make of this article today:
http://www.reuters.com/article/2011/05/01/us-libya-oil-east-idUSTRE7402KT20110501

The short of it is that the rebels are doing more to defend their oil installations. Without knowing anything about the situation on the ground, I would bet $1 that some of these "rebels" have last names like "Wilkerson" and "Gonzalez" and paychecks in British pounds.

[Noel Maurer]

I tend to agree with you, although some may be receiving euros and be named Bernard or Dubois. It would be interesting to ask Abdeljalil Mayouf about that.

[Doug M.]

As long as the rebels control the actual oil fields, their credit will be good. They'll get screwed on terms, but they'll be able to buy stuff.

Note that Libya is sitting on ~~$100 billion in foreign currency reserves. (Foreign debt is stated at around $6 billion; I suspect that's low, but it's certainly a lot smaller than the currency reserves.) So the rebels actually have two pretty strong sources of credit -- "we have oil right now, and when we take over, we'll also inherit this mountain of cash".

The flip side of this is that Qaddafi actually has that mountain of cash. So he's flush. Sanctions will be inconvenient but will not stop his government from getting what it needs.

That said, what the Soviets used to call the 'correlation of forces' will tend to tilt against Qaddafi over time. The rebels will get a steady cash flow plus access to credit, their military competence can only increase, NATO bombing will degrade his 4C and infrastructure, and there's no friendly foreign power that's going to intervene to bail him out. The standard response to this would be a massive military effort aimed at winning the war quickly. Alas for Qaddafi, this is rendered impossible by the incompetence of his own military and Western determination not to let him crush the rebellion. So he has to go for a second-best strategy of playing rope-a-dope -- hanging on to what he's got, picking off isolated and low-visibility rebel strongholds here and there, continuing to hammer at Misrata, and waiting for the allies to get distracted and wander off.

It's possible that this might work, but it's not the way to bet. I'm holding steady at "more than a month, less than a year". In fact, I'll narrow it down a bit. The French Presidential elections are in April, so Qaddafi will be gone well before that.

Doug M.

[Noel Maurer]

Gaddafi isn't as flush as all that. He can't access the overseas assets, leaving him with only about $6 billion or so.

Meanwhile, the rebels have already begun looking for foreign loans. They will get them.

My prediction is looking pretty good. (It is the same as Doug's, with a follow-up post about what might go wrong.)