Libyan revolt likely to leave deep scars on oil sector

Libyan protesters stand on top of a building during a demonstration in the seaport city of Tobruk on February 20.Photo: Reuters

Regardless of what comes next in Libya's lethal political standoff, the OPEC country's oil sector is nearly certain to suffer, bringing long-lasting supply disruptions or even permanent damage.
None of several potential outcomes is benign for Libya's oil industry -- the lifeblood of its economy -- or for oil prices. The scenarios run the gamut from all-out civil war and attacks on energy infrastructure to low-level neglect and reservoir damage, as foreign expertise flees the country.
Over decades, from Iran, to Iraq and Venezuela, periods of political chaos in OPEC countries have usually carved lasting scars on the oil sector, and few expect Libya to be any different.
"A period of chaos will probably interrupt Libya's refining and oil operations," said Amy Jaffe, an energy studies fellow and Middle East expert at Rice University in Houston.
"The military is abandoning Gaddafi, so it's unclear who is left to protect oil installations. Lots of foreigners are being evacuated, so who will remain in place capable of operating Libya's oil industry? Will workers even show up?"
As Africa's No. 3 producer and the site of the continent's largest proved reserves, estimated at 44 billion barrels, Libyan oil usually accounts for 2 percent of world output.
The country, whose oil accounts for a fourth of Italy's demand, is the first major oil exporter to be thrust into acute turmoil since protests began sweeping through the Middle East in January, unseating presidents in Tunisia and Egypt so far.
An estimated 300,000 barrels per day (bpd) of Libya's 1.6 million bpd of production has been halted, as companies evacuate staff and suspend operations. Much of the country's oil industry is run by foreign firms including Eni and Repsol, while Libya's National Oil Corporation (NOC) has traditionally been tightly controlled by Gaddafi.
Libyan strongman Muammar Gaddafi defiantly pledged on Tuesday to stay in power at any cost, threatening to have protesters hunted down and killed "house by house." With rival factions already laying claim to an oil-rich swath of eastern Libya, separated by hundreds of miles of desert from capital Tripoli in the west, the country could even face civil war, analysts warned.
In OPEC countries where oil infrastructure is the ultimate key to power and pursestrings, 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."