As foreign oil companies such as Eni of Italy and Repsol YPF of Spain shut down vast amounts of production in Libya, the question is no longer if the political crisis will affect the country’s output, but how long the oil disruption will last.
I am pessimistic.
As the Financial Times first reported on Monday, the departure of subcontractors forced international oil companies to follow suit. So far, we estimate that at least 350,000 barrels a day of output have been lost, or about 22 per cent of the country’s production. But the figure could very well be higher, as Eni and Total of France have not disclosed how much production they have shut down.
Assuming that Eni and Total have shut down volumes similar to those of Repsol YPF, the disruption could be conservatively nearing the 500,000 b/d figure, or about a third of the north African oil production level before the crisis started.
Oil traders are braced to receive as soon as Wednesday the first ‘force majeure’ notices, in effect legal clauses that allow producers to walk away from supply contracts for causes beyond their control. In fact, market chatter was that the first notices were already issued on Tuesday night for some oil products.
Oil prices have surged to a 2½-year high of almost $110 a barrel because of the crisis.
The biggest question is how long it will last. There are three main scenarios.
If Colonel Muammer Gaddafi, the Libyan leader who vowed on Tuesday to fight until the last drop of his blood, loses control of the country and the revolution triumphs, companies may return relatively quickly. Provided there is not damage to the oilfields and pipelines – none has so far been reported – Libyan oil could be flowing back into the market only days after the return of the oil companies and their contractors.
If the conflict drags into a civil war, companies are unlikely to return any time soon. First, it will be unsafe. Second, and more importantly, strong political pressure will prevent them from doing so, particularly after the reports of atrocities. The US and Europe are unlikely to allow the return of their companies, which, by producing oil and paying taxes to Col Gaddafi, would be in effect be subsidising the civil war.
If Col Gaddafi wins, the political pressure will be considerable.
Washington could reconsider political sanctions, including a return to the oil embargo. Europe, which for years has kept a cosy relationship with Col Gaddafi, could follow suit. In that scenario, some oil companies could have abandoned their oilfields for good. Yes, Libya’s state-owned National Oil Company could take over the fields – as happened in the 1980s when the American oil companies left the country – but I will strongly bet that production will not return to the pre-crisis level.
Don’t get me wrong. All could end very quickly – look at Tunisia and Egypt, where leaders fell only days after also promising to fight – and oil production could return to the pre-crisis level of 1.6m barrels a day very quickly. But there are alternative scenarios that point to a long-lasting supply disruption.
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