The international military intervention in Libya risks prolonging the shutdown of North Africa’s most productive oil fields as well as reprisals by Moammar Gadhafi’s regime against foreign energy assets.
A defiant Gadhafi vowed a "long war" after the U.S. and European militaries blasted his forces with airstrikes and over 100 cruise missiles early Sunday, hitting air defenses and at least two major air bases and shaking the Libyan capital with explosions and anti-aircraft fire.
Oil has risen to a two-year high during the monthlong conflict between government forces and rebels. Prices may rise after the U.S., U.K. and France launched airstrikes at targets in Libya this weekend, said John Sfakianakis, chief economist at Banque Saudi Fransi.
Libyan oil production has fallen to less than 400,000 barrels a day, about a quarter of its level before the crisis, and may stop altogether, Shokri Ghanem, chairman of Libya’s National Oil Co., said Saturday. Italy’s Eni SpA, the biggest foreign oil company in Libya, evacuated the last of its expatriate staff after the United Nations authorized military action against Gadhafi.
“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 $101.07 last week, after rising 3.5 percent on March 17, the day the UN Security Council voted in favor of intervention. The contract rose to $106.95 on March 7, the highest since 2008. In London, Brent futures ended last week at $113.93 a barrel.
“Western oil companies will have to hope Gadhafi 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, which said in a statement on March 18 it had evacuated all Italian staff, foreign oil producers in Libya include France’s Total SA, Austria’s OMV AG and Spain’s Repsol YPF SA. The U.K.’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 percent of global production.
“Oil could go up — there’s more uncertainty,” Banque Saudi Fransi’s John Sfakianakis said by phone from Riyadh on Saturday. “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.”
Gadhafi 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 not leave our land. We will fight for every inch of our land and liberate every inch of it.”
The push 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. 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.
A no-fly zone has now been put in place over Libya, Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, said yesterday. 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.
The Libyan conflict is likely to halt 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 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 Gadhafi goes.”
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