Instability Damages Long-Term Oil Outlook

BMI View : We have grown increasingly bearish on Libya's oil outlook. We see high volatility in output over the next six to 18 months, stemming from ongoing political instability, and expect the unstable security situation and falling investment levels to weigh on production growth across our 10-year forecast period.

A Volatile Short-term Outlook -

This quarter we have revised our Libya oil production forecasts downwards, from 500,000 barrels per day (b/d) to 350,000b/d in 2014 and from 950,000b/d to 700,000b/d in 2015.

Persistent Outages
Libyan Unplanned Supply Outages ('000b/d)

Instability Damages Long-Term Oil Outlook

BMI View : We have grown increasingly bearish on Libya's oil outlook. We see high volatility in output over the next six to 18 months, stemming from ongoing political instability, and expect the unstable security situation and falling investment levels to weigh on production growth across our 10-year forecast period.

A Volatile Short-term Outlook -

This quarter we have revised our Libya oil production forecasts downwards, from 500,000 barrels per day (b/d) to 350,000b/d in 2014 and from 950,000b/d to 700,000b/d in 2015.

In part, the downgrade reflects poor output levels in the first half of 2014. Production has been highly volatile, due to shut-ins at major producing oilfields and the blockage of mid-stream infrastructure by various political and tribal factions. Unplanned supply outages have dragged on output, with average annual production below 300,00b/d.

Persistent Outages
Libyan Unplanned Supply Outages ('000b/d)

The downgrade also captures our view that, despite elections, we will see only limited gains in operational stability over the next six to 18 months. Several interrelated factors are driving this view -

  • Persistent security threats - security has deteriorated in the run-up to parliamentary elections, as a plethora of armed groups vie for power. Given the strength and number of the factional militias and Libya's weak state military capacity, we expect security to remain fragile in the immediate post-electoral period;

  • Political instability - politically, Libya is heavily factionalised; whichever group gains power, they face heavy opposition and will have limited mandate to rule. Mounting secular-Islamist divides threaten further destabilisation;

  • A weakening economy - Libya's macroeconomic outlook is worsening, with the loss of oil revenue fuelling a rising fiscal deficit. Resource limitations will weaken the ability of central government to exert their authority over diverse political factions.

The outcome of elections could impact our short-term outlook; in particular, a victory for Haftar could see the release of key eastern ports, supporting a significant production increase. Nevertheless, we see high level instability and ongoing supply outages as a feature of all post-election scenarios.

An Embattled Industry
Libya Oil Production, Consumption and Net Exports

A Tepid Recovery In The Mid-term

Over the mid-term, we forecast sluggish production growth, as gradual improvements to the operating environment support slow normalisation of Libyan oil output. We see production at 975,000b/d in 2016, reaching 1.2mnb/d by 2018.

Historically, Libya has proved capable of rapid increases in production, and so the risks to this view are laden to the upside. However, we see several factors slow the return of Libyan output -

  • Damage to infrastructure - repeated shut-ins and pipeline blockades have damaged midstream and upstream infrastructure and prevented key maintenance work. Extensive repairs will be needed to support the ramp-up of production at major oil fields

  • Continued instability - although we are expecting the situation in Libya to stabilise over the next two to three years, deep social and political fragmentation and the proliferation of armed militias point to a high probability of future production shut-ins, as oil and gas infrastructure remains key strategic target for opposition groups

Bearish Long-term

We have grown increasingly bearish in our long-term view on Libyan oil output. Previously, we forecast production to increase to 1.5mn b/d by 2023; we have revised this downwards to 1.3mnb/d.

Libya has vast resource potential, much of it unexplored, and so the risks here, again, lie heavily to the upside. However, we believe the legacy of current security environment could damage the appetite for investment over the longer term, weighing on Libya's sustainable production levels. We expect -

  • Limited investment in exploration - several major companies, including BP, Eni and Total have announced delays to onshore exploration programmes, damaging prospects for new production brought online before the end of our forecast period;

  • Limited investment in production - Libya has high natural decline rates, and heavy investments in enhanced oil recovery (EOR) techniques may be needed to support current production levels. However, EOR is expensive, and we question whether these types of investment will now be made.

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