Elections Offer Upside To Oil Exports

BMI View: The outcome of the June 25 Libyan parliamentary elections is uncertain and volatility in Libyan oil production will continue. That said, if Haftar won a legitimate majority and secured control of parliament this would pose upside risks to oil exports due to the former General's support from rebels holding export terminals in the East. With instability in Iraq causing jitters in the oil market, Libya's 1mn b/d of production upside will play a crucial role in shaping global crude prices over the remainder of 2014.

On Sunday June 15, production from Libya's El Feel field was reportedly restarted after two months of protests had kept the field offline. The 80,000 barrel per day (b/d) field will bring much needed respite to production levels in Libya, which have struggled at around 200,000b/d due to instability. It will also help to soften the impact of the geopolitical premium being priced-in to global crude benchmarks due to the insurgency in Iraq.

Protests Depleting Financial Reserves

Struggling For Consistency
Libya Monthly Oil Production (000b/d)

BMI View: The outcome of the June 25 Libyan parliamentary elections is uncertain and volatility in Libyan oil production will continue. That said, if Haftar won a legitimate majority and secured control of parliament this would pose upside risks to oil exports due to the former General's support from rebels holding export terminals in the East. With instability in Iraq causing jitters in the oil market, Libya's 1mn b/d of production upside will play a crucial role in shaping global crude prices over the remainder of 2014.

On Sunday June 15, production from Libya's El Feel field was reportedly restarted after two months of protests had kept the field offline. The 80,000 barrel per day (b/d) field will bring much needed respite to production levels in Libya, which have struggled at around 200,000b/d due to instability. It will also help to soften the impact of the geopolitical premium being priced-in to global crude benchmarks due to the insurgency in Iraq.

Protests Depleting Financial Reserves

According to the director of Libya's Central Bank, Musbah Alkari, reserves have fallen from USD130bn to USD110bn over the past ten months as oil production has been restricted. With both rebel groups and oilfield workers using oil production as a bargaining tool to improve their standing position within Libya, the country has struggled to maintain consistent output, substantially depleting the country's financial resources. The country is reportedly earning just USD1bn a month in oil revenues, around one fifth of revenues gained prior to the protests.

Struggling For Consistency
Libya Monthly Oil Production (000b/d)

The restart of the El Feel field offers some positives to Libya's short-term oil export outlook. El Feel production may now be able to supply the Zawiya refinery, which has had to take crude from the offshore fields that have not been impacted by protests. Restarting the 340,000b/d El Sharara field, which has been offline since October 2013, would be another major step to increasing exports.

However, significant risks remain and we highlight that previous field restarts have been short-lived. Rebels still control the major ports of Ras Lanuf and Es Sidre which remain closed, while the agreement to reopen the Zueitina and El Hariga ports in April lasted only days. Our core view remains that volatility will remain in Libyan crude output ( see 'Future Shut-Ins To Undercut Short-Term Production Growth', May 14).

With the June 25 parliamentary election date rapidly approaching, we could see significant changes, though do not expect a lasting solution to the instability in the country. The divide between the military authoritarian movement on one side and Islamist groups on the other will remain, and oil infrastructure will continue to be targeted and used as a bargaining chip. That said, former General Khalifa Haftar, who is leading the military authoritarian efforts, has the backing of a number of army units and the rebels holding the eastern ports. If Haftar wins a legitimate victory in the forthcoming elections, a more concrete deal with rebels in the east could see oil flows increase in the second half of 2014.

Potential Downside To Brent Price

This could provide respite to global oil prices which have spiked on the back of instability in Iraq ( see 'Oil Break Out: All Eyes On Iraq', June 12). Libya is by far the single largest contributor to unplanned oil production outages among OPEC nations, with over 1mn b/d of capacity offline since September 2013.

Libya Toping OPEC Outages
Estimated OPEC Unplanned Outages (mn b/d)

Even if just half of the capacity currently offline in Libya can be restarted, it would provide significant downside pressure for Brent prices due to the improved supply availability. This would also be a timely return of oil to the market as we move into the high demand summer season in the Middle East, which sees greater domestic oil use.

Libya could therefore play a more crucial role in putting downward pressure on the Brent price over the coming months than Iraq. With Libyan exports already at very low levels, there is little room for more downside to production. Though with a potential upside of in excess of 1mn b/d, a government in Libya with the majority of popular support could play a significant role in shaping Brent prices over the remainder of 2014. However, we caution that a Haftar victory could also spark a significant backlash from the Islamist factions in the country, leading to continued volatility in oil production, though potentially from a higher production base.

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Related sectors of this article: Oil & Gas, Upstream, Production, Oil Market
Geography: Libya
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