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TheStreet Open House

Why Libyan Oil Price Relief Won't Last


NEW YORK ( TheStreet) -- Libya is expected to return to prewar levels of oil production next year, but being able to sustain that level of production is being called into question.

Peter Beutel, president of energy risk-management firm Cameron Hanover, for one, is certain that Libya will be able to overcome the daunting technological challenges involved in resurrecting the country's oil fields and make a full return to prewar output of 1.6 million barrels a day before the end of next year. That's back to business as usual after almost a year-long armed conflict this year between the forces loyal to long-running leader Colonel Muammar Gaddafi and the forces seeking to overthrow the government.

oil

"They're going to get every single rough neck and chemist from Rotterdam to southern Europe," Beutel said. "They're going to scour the entire continent looking for anyone who's able to get them to full production as soon as possible."

Meanwhile, Crispin Hawes, the head of Eurasia Group's Middle East and North Africa practices, says that the country's National Oil Corporation and its subsidiaries may be able to get around the problem of resurrecting more technically-challenged oil fields by raising production allocation allowances for certain international oil and gas companies. That way, these companies would be able to ramp up capacity and help Libya reach its prewar production targets before the end of 2012. International oil and gas companies in Libya can only work in joint-ventures with the NOC. Hawes says while increasing production allocation allowances to these international oil and gas companies would be a "big decision" for the NOC, it's "far from impossible," given that Libya "as I suspect," will soon try to push for a large Organization of the Petroleum Exporting Countries quota and aim for output capacity of 2 million barrels a day.

For many, it's apparent that Libya is on track to reaching prewar levels of production by the second half of next year, as output has already hit 1 million barrels a day. That's much better than what many had been expecting at this point in time. Furthermore, after last Wednesday's OPEC meeting in Vienna, Libyan oil minister Abdulrahman Ben Yazza painted a very optimistic picture of production, predicting that output will hit 1.3 million barrels a day by the first quarter of next year and 1.5 million barrels a day by the second half of 2012.

"Production is returning quite rapidly," says Andy Lipow, president of Lipow Oil Associates.

While Buetel is among the many who are convinced that Libya will return to normal production levels soon, even he is careful not to overestimate the downward pressure effect that this could have on global oil prices.

"Once it's up and running, how long can they keep it running before there's a dispute about who's really running the show?" posits Buetel. "There are a number of questions once you get from A to B."

Like many, Buetal considers the possibility of another internal flare-up.

As Teymur Huseynov, the head of global energy consulting at the specialist intelligence company Exclusive Analysis, sums up, "the differences in opinion between tribes that finished Gaddafi's regime could develop into another round of civil war with risks to the smooth operation of the oil industry in the country."

"There are still a lot of militia ... with weaponry ... power struggles ... everything is still a bit volatile," Petromatrix managing director Olivier Jakob agrees.

Huseynov for one, isn't convinced that Libyan oil production will return to prewar levels any time soon. Current estimates, he says, are overly optimistic. "Libyans themselves may try to paint a more optimistic picture of the current situation and their estimates about production increases in the coming months ... The message that they want to send is that the sector is managed efficiently and that it did not suffer that much of a damage during the civil war," he said.

Capital Economics' commodities economist Ross Strachan made a similar remark following the Libyan oil minister's comments after last week's OPEC meeting. "I think the key point is that you generally, obviously have assessments from government authorities who have an interest in presenting the most optimistic outcome that could happen," he said. "To be as positive and upbeat about the potential is quite a typical and standard procedure."

Looking ahead, all Huseynov can really see is the daunting amount of work that still needs to be done to resurrect oil fields. While the first batches of oilfields were technically the easiest ones to revive following the regime change and return of foreign employees and engineers to the country, increasing production will become more and more challenging down the line, he says. "There needs to be further testing of more difficult fields to assess their estimated return to the market." At the same time, any efforts by the National Oil Corporation to offer better contractual terms to foreign investors in order to employ urgently-needed infrastructure investments could face opposition from certain groups within the country.

Another area of concern, says Huseynov, is directly related to market demand for Libyan oil. Libya's traditionally more important customer base, European refiners and gas buyers, had increased their purchase of alternative sources of oil as Libya went offline in March due to the civil war. Now, says Huseynov, "their comeback and appetite for light oil is likely to be slower than expected due to higher demand for sour grades such Russian Urals, that are more suitable for production of middle distillates. These enjoy high demand on the European continent at the moment. "

Huseynov adds that the Greenstream natural gas pipeline connecting Libya to Italy has not been operating at full capacity -- not due to any kind of technical or security problems -- but because Italy switched to higher volumes of Russian gas during the war.

Petromatrix's Jakob says it's difficult to come up with a realistic estimate for the recovery timeline of Libya's oil production as the country's political framework -- and therefore operating environment -- continues to be shaky after Gaddafi's downfall .

Companies are taking it "one month at time," says Jakob, but notes that they are "pretty used to" working in a difficult operating environment.

Oil companies were mostly dipping Monday. Royal Dutch Shell (RDS.A) was falling 1.1% to $70.04; ConocoPhillips (COP) was down 0.3% to $68.21; BP (BP) was losing 1.2% to $40.89; Exxon Mobil (XOM) was down 0.1% to $80.06; Eni (E) was flat at $39.28; and Total (TOT) was up 0.2% to $47.37.

Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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