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Long-Term Investments by Western Operators Have Been Upended, Driving Down Production
Firefighters work to put out a fire at an oil-storage tank in the port of Sidra in January. Photo: Reuters
By Benoît Faucon And Georgi Kantchev
Georgi Kantchev The Wall Street Journal
BiographyGeorgi Kantchev georgi.kantchev@wsj.com @georgikantchev
The violence roiling Libya has increasingly targeted oil companies and their assets, upending long-term investments by Western companies and driving down production in a country that helped launch the world-wide rout in oil prices.
In just three months, Libyan oil production has fallen from nearly 900,000 barrels a day in October to about 325,000 barrels a day in January, largely because of oil fields being taken over by armed Libyan groups or shutdowns due to security concerns, according to officials at the National Oil Co.
The plunging output comes after civil war broke out mid-2014 and caused two big closures at the end of the year.
French major Total SA closed the Mabruk oil field in central Libya, a facility that once produced 30,000 to 40,000 barrels a day. And the country’s main oil port, known as Sidra, was closed because of fighting, denting the prospects of the three American companies that have a stake in connected fields— ConocoPhillips , Marathon Oil Corp. and Hess Corp.
Both sites were in the cross hairs of fresh violence on Tuesday. At Mabruk, at least four guards were killed and three hostages were taken when gunmen stormed the facility in a coordinated attack. But Mashallah al-Zawie, a top oil official, rose the estimate to nine on Thursday, according to the Associated Press. Libyan oil officials believe the attackers were radical Islamists and were investigating reports of a higher death toll.
Fighters from the Libya Dawn militia during clashes in January with forces loyal to Libya's internationally recognized government near al-Aqrabiyah, about 170 kilometers (105 miles) west of Tripoli.
Fighters from the Libya Dawn militia during clashes in January with forces loyal to Libya's internationally recognized government near al-Aqrabiyah, about 170 kilometers (105 miles) west of Tripoli. Photo: Agence France-Presse/Getty Images
Libya has been mired in violence and political divisions since longtime dictator Moammar Gadhafi was killed in an uprising in 2011, and a civil war has broken out between the internationally recognized government based in the country’s east and a rebel faction known as Libya Dawn that controls the country’s capital of Tripoli.
Oil has long been the country’s lifeblood, with exports reaching up to 1.3 million barrels a day at peak production from Africa’s largest crude reserves.
“There was an implicit agreement between the different fractions to avoid disrupting oil production,” said Richard Mallinson, a geopolitical analyst at London-based consultancy Energy Aspects. “Now the parties have realized that controlling oil means power.”
The instability has had knock-on effects for other companies.
‘There was an implicit agreement between the different fractions to avoid disrupting oil production...Now the parties have realized that controlling oil means power.’
—Richard Mallinson, geopolitical analyst at London-based consultancy Energy Aspects
Late December, the German energy company Wintershall Holding GmbH—which says it has invested more than $2 billion in Libya—shutdown its Libyan production because of the fighting at Sidra, which is close to the Ras Lanuf and Zueitina terminals it uses.
And OMV AG , said its North African business was being hurt by the unrest. The Austrian energy company is a partner in oil fields in central and southern Libya where the company says it produced an average of 8,000 barrels a day last year.
“The outlook in 2015 is even tougher,” OMV Chief Exacutive Gerhard Roiss said last week, citing both lower oil prices and Libyan crisis at a briefing for the company’s trading quarterly update. “In Libya, this situation is not changing; it’s deteriorating.”
Earlier in 2014, the situation was different.
Despite fighting raging in Tripoli last summer, Libya surprised the world with a sudden burst of new oil. By October, the country was churning out 887,000 barrels a day, up from 232,000 in June, according to the Organization of the Petroleum Exporting Countries.
Prices tumbled as investors realized that oil could still flow despite volatility in a place such as Libya. In six months, the price of Brent crude had plunged to less than $50 a barrel in January, from a high of $115 a barrel in June. On Thursday, it was trading at around $55 a barrel.
Lately, the market has had almost no reaction to news of renewed fighting in Libya and the draining of supplies there. That is because of OPEC’s decision in November not to cut production virtually guaranteed an oversupply whether Libya produces or not, analysts said.
“Libya became irrelevant,” said Tamas Varga, oil analyst at brokerage PVM in London.
The combination of falling prices and the threat of violence has chilled oil-company activity in Libya.
At the Sidra oil terminal. ConocoPhillips, Marathon Oil and Hess were part of a rush to return to Libya after sanctions were lifted against the Gadhafi regime in 2003, supplying a port that once exported over 300,000 barrels a day.
Fighters from the Libya Dawn militia secure the perimeter of the Mellitah Oil and Gas terminal on the outskirts of Zwara in western Libya in January. Photo: Getty Images
But around the new year, seven of its storage tanks were burned and two completely collapsed during clashes, and no exports have restarted, according to Libyan oil officials.
ConocoPhillips said last week that its production levels in Libya had fallen to 8,000 barrels a day of oil equivalent on average last year compared with 30,000 barrels a day in 2013.
ConocoPhillips and Hess didn’t respond to requests for comment. Marathon declined to comment.
The fighting hasn’t affected Libya’s offshore production. Two offshore fields, operated by Italy’s Eni SpA and Total joint-ventures and amounting to about 100,000 barrels a day, are out of reach of the belligerents. The rest of the oil output largely comes from desert fields in areas of far reaches of Western and Eastern Libya that have been spared by the civil war.
But continued fighting brings uncertainty for the country’s future, officials and experts say.
Even if there is peace, said Geoff Port, head of political risk firm North Africa Risk Consultancy, “you won’t see an immediate return of previous production levels.”
Write to Benoît Faucon at benoit.faucon@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com
