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Libya oil output tumbles amid regional violence

The spiral of violence in Libya shows no indication of letting up, suggesting things could get much worse before they get better. That lowers the chances that Libya will be able to turn its oil fortunes around.

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    An Egyptian fighter jet lands in Egypt, Monday. Egyptian warplanes struck Islamic State targets in Libya in swift retribution for the extremists' beheading of a group of Egyptian Christian hostages on a beach.
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Libya’s oil fields and infrastructure have come under attack multiple times over much of the last two years, but events have recently taken a turn for the worse.

Libya’s National Oil Corporation (NOC) reported that a pipeline explosion on February 14 disrupted flows from a major oil field, threatening to further knock crude output offline in the war-torn country. The pipeline connects the El Sarir field, Libya’s largest producing oil field at 200,000 barrels per day, to the Hariga terminal on the Mediterranean coast. Exports can reportedly continue as there are significant volumes of oil stored on site at the Hariga port. But production has been severely curtailed.

That was not the only attack in recent days. Gunmen seized government buildings in Sirte, taking control of radio and television stations and forcing out government officials. A separate attack on the Bahi oil facility on February 13 failed to cause substantial damage. That field is operated by a joint venture made up of ConocoPhillips, Hess Corporation, and Marathon Oil Corporation. (Related: What’s Next For OPEC?)

Militant factions are stepping up their attacks on oil facilities. The NOC has come out and stated that it will shut down all oil field operations and pipelines if security cannot be guaranteed. “The NOC warns that the number of oil installation guards currently in the fields is not enough to protect them and to address such attacks,” Libya’s NOC said in a statement. “If these incidents continue, National Oil Corp. will regrettably be forced to stop all operations at all fields in order to preserve the lives.”

The pipeline attack led to a reduction in Libya’s oil production by about 180,000 barrels per day, likely bringing total production across the country to under 200,000 barrels per day. That is close to the lowest production rate in recent memory and is significantly down from the 1.6 million barrels per day that Libya produced before the civil war and overthrow of former leader Muammar Qadhafi.

The fighting has grown more complex as some fighters have claimed ties to the Islamic State in Iraq and Syria. The Islamic State is reportedly creating its own government institutions in the city of Derna. Libya Dawn, a group of militant factions which includes Islamic extremists, had already captured control of Tripoli last year, forcing the internationally-recognized government to flee the city. Meanwhile, an army led by General Khalifa Haftar has taken control of much of Libya’s east, and is vowing to cleanse the country of terrorists, as chronicled in a sweeping article in The New Yorker.

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The fighting has even sucked in Libya’s neighbors. The Egyptian air force bombed Islamic State targets inside Libya on February 16 in retaliation for the beheading of 21 Egyptian Coptic Christians. Egypt said it targeted training sites, weapons storage, and militant camps. (Related: What King Abdullah’s Passing Means For The Oil Markets)

Now Libya’s Prime Minister is calling upon the West to get involved, pleading for air strikes against the militants. “We have absolutely confirmed information that al Qaeda and IS are in Tripoli,” Prime Minister Abdullah al-Thinni said. "I ask world powers stand by Libya and launch military strikes against these groups…This threat will move to European countries, especially Italy.”

The spiral of violence shows no indication of letting up, suggesting things could get much worse before they get better. That lowers the chances that Libya will be able to turn its oil fortunes around. Oil accounts for around 90 percent of Libya’s budget revenues, meaning that the current low prices along with crumbling levels of production are hurling the country towards economic crisis, on top of the worsening security crisis.

So far the oil markets have ignored low levels of production in Libya – prices crashed over the previous seven months or so even though Libya has seen repeated bouts of violence. Now, the situation has worsened to such an extent that the markets are starting to take notice. Brent prices traded up to $62 per barrel on February 16, in part due to the recent pipeline explosion and Egyptian air strikes.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Source: http://oilprice.com/Energy/Crude-Oil/Libya-Oil-Output-Plunges-Amid-Heightened-Violence.html

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