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Why resumed oil exports in Libya will benefit crude oil supply

Why resumed oil exports in Libya will benefit crude oil supply (Part 1 of 5)

Overview: The Libyan oil economy

A brief overview of Libyan politics

Muammar al-Gaddafi became the Chairman of the governing Revolutionary Command Council (or RCC) in Libya in 1969. In 1973, he formed the General People’s Committees (or GPCs), a democratic structure in Libya. However, he retained personal control over major decisions. During his tenure, the political relationship between Libya and the United States deteriorated. In 2011, an anti-Gaddafi uprising led by the National Transitional Council (or NTC) broke out, resulting in a civil war. Supported by NATO, the NTC prevailed in the war, resulting in the Gaddafi-government’s downfall. Gaddafi was later captured and killed by NTC militants.

Control of oil in Gaddafi’s ruling

Prior to the end of Gaddafi’s reign, Libya’s oil industry was run by the state-owned National Oil Corporation (or NOC). Its subsidiaries include the Arabian Gulf Oil Company (or AGOCO). In the wake of Gaddafi’s demise, control over the authorities of the NOC were controlled by the newly constituted ministry of oil. The relationship between NOC and its subsidiaries are the issues that would largely determine the outlook of Libya’s oil economy.

Political economy of Libya centers on oil

Libya oil production Jan-14 to May-14Enlarge Graph

As the civil war subsided in late 2011, the Libyan economy went through a rapid recovery phase in 2012, based on the resumption of liquid hydrocarbon production and exports. However, the economy started facing major challenges in 2013. During the second half of 2013, major oilfields and export terminals had to be shut down because of political tension. This resulted in oil production declining from its long-term average of ~1.6 million barrels per day to as low as 200–300 thousand barrels per day in May, 2014. With ~95% of government revenues tied to hydrocarbons sales, this has resulted in substantial budgetary pressure. In an estimate provided by the Libyan Ministry of Economy, the continuous disruption in 2013 cost the Libyan economy over $10 billion in 2013, or ~12% of its gross domestic product (or GDP). It’s expected that Libyan economy will rebound during 2014–2015, if the political situation improves as indicated by the recent developments.

Why the situation worsened after a brief recovery in 2012

Overview of Libyan EconomyEnlarge Graph

Libya’s economy is centered on revenues from oil exports. The collapse of Gadhafi’s regime in Libya has led to the development of new regional tensions over the control of its oilfields and political representation among various groups, given the steady flow of income from oil. The possible relocation of the headquarters of the National Oil Corporation (or NOC) from Tripoli to Benghazi also added to the pressure. This was followed by protests from staff and militias at key oilfields and export terminals across the country. The protests resulted in drastic declines in oil production and exports. Some of the militia have resorted to force to protect their interests. The force contributed to a number of security incidents, specifically targeting the oil ports and terminals in the eastern part of the country. The incidents targeted high-level state officials, civilians, and international or diplomatic entities.

An improvement in the political situation in Libya would lead to higher production and export of crude oil from Libya to the rest of the world. Higher supply of oil can help reduce oil price, which would negatively affect oil producers like ExxonMobil Corporation (XOM), ConocoPhillips (COP), and EOG Resources Inc. (or EOG). It’s important to note that most of these companies are components of energy exchange-traded funds (or ETFs) such as the Vanguard Energy ETF (VDE). However, this would be positive for oil producers who have active participation in oil production in Libya like Occidental Resources (OXY), Statoil ASA (or STO), ConocoPhillips (COP), and Marathon Oil Corporation (or MRO). Some of these are components of the Energy Select Sector SPDR (XLE).

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