International oil companies are counting the cost of months of unrest in Libya that have reduced the country’s production to a trickle and cast renewed doubt on the attractiveness of the north African country for investment.
Militias and striking workers have combined to close a series of export terminals and oilfields, cutting output from 1.4m barrels a day at the start of the year, to less than 200,000 b/d today, according to analysts.
The revenue loss alone – about $100m a day for the government and international operators such as Eni, Total and ConocoPhillips – is striking. But the longer term threat is a rush to the exit by oil companies.
“Libya was the focus of industry excitement about new investment from 2004 to 2007,” says Catherine Hunter, north Africa analyst at IHS Energy in London. “The resource is still first class, but the above ground problems are hugely challenging.”
For much of 2012, companies with stakes in Libya produced more than they had forecast, as output rebounded impressively after the 2011 civil war. OMV, the Austrian company, for example, reported that shipments from Libya exceeded expectations in the first half of last year.
But unrest has gathered pace this year, as disputes over pay and conditions have morphed into demands for greater regional control over resources.
Most of the country’s main export terminals were closed down in early August by guards paid by the government to protect them. Pipelines have been attacked and at the end of August production at oilfields in the south west of the country, the only onshore fields to have escaped unrest, was also halted.
On Monday a Libyan official was quoted by Reuters saying production would restart this week from Repsol’s El Sharara field and Libyan parliamentarians have also claimed to be close to a comprehensive deal to restore production. But executives at energy companies active in Libya remain pessimistic.
“Once it became clear that this was about something more than money, we’ve assumed Libyan production will be disrupted for a while,” says one.
A prolonged disruption poses very different problems for individual companies, depending on the scale of their commitment to the country.
For Eni of Italy, Repsol of Spain and OMV of Austria, Libya accounts for 10 per cent or more of global production. Announcing second-quarter results Eni said that it would struggle to increase production this year if its African output remained subdued. Since then the situation in Libya has only deteriorated.
Encouraged by their domestic governments, European companies have also invested heavily in key Libyan infrastructure. In the past decade, Eni, for example, has opened a new field in the southern desert, built the Greenstream pipeline to export gas direct to Italy and developed a new export terminal at Mellitah, west of Tripoli.
“European companies do not have the option of walking away from Libya – it is too important a part of their global portfolio,” says Rebecca Fitz, director of upstream at PFC Energy, a unit of IHS.
Some appear to be embracing the situation. Repsol has the rights to explore for oil in two blocks and the company has continued to drill exploration wells this year – a sign of long-term commitment as it takes many years to bring a field to production even if oil is found.
“We are absolutely committed,” Repsol says.
But other companies are hedging their bets. Last month, OMV spent $2.7bn buying oilfields from Statoil. Their location, in the North Sea, is politically a world away from Libya.
“If you see that in the Middle East and north Africa you have unstable situations then it definitely makes sense to have more production in stable regions,” OMV says.
Eni has also been making some effort to diversify away from north Africa, exploring in Asia in particular, although people close to the company suggest gas production from offshore fields in Libya has cushioned the company from the worst of the disruptions.
US companies are less tied to Libya, as the country tends to play a smaller part in their production mix. Most left the country for several years when their government imposed sanctions against the Gaddafi regime, and now they are under pressure from investors to redeploy capital in shale oil and gas opportunities at home.
Marathon Oil, the US company most dependent on Libya for output, was reported to have put its stake in Libya up for sale in July. ConocoPhillips has said it plans to exit countries where it has limited growth potential and little operational control. The company said Libya is not a focus for investment.
“Certain existing players will look to reduce their presence or completely exit Libya,” says James Janoskey, head of the Europe, Middle East and Africa oil and gas group at Credit Suisse, although he says sales of stakes will have to wait until the political situation stabilises.
The waning of US interest in the country threatens the Libyan government’s hopes of enticing more investment from American companies, as a counterweight to European influence.
Last month, even as Libyan output slumped, Nouri Balrwin, chairman of the National Oil Corporation, met David McFarland, deputy chief of mission at the US embassy in Libya, to express interest in US companies entering the country.
Previous efforts to diversify producers have failed because of the tough terms on offer for international oil companies according to analysts – the Libyan government takes up to 90 per cent of the income that international groups generate from crude sales.
Occidental, the US independent, was a significant bidder in the first rounds of licensing after Libya was reopened to international investors in 2004. But even now the country only accounts for 1.6 per cent of its global production. Royal Dutch Shell and BP have also made little progress on exploration efforts in the country.
“Even without the insecurity, the fiscal terms make us question whether Libyan exploration will ever work,” says Ms Fitz.
Additional reporting by Guy Chazan and Borzou Daragahi
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