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Does Democracy Cloud Libya's Oil Future?

By Daniel J. Graeber | Wed, 11 July 2012 22:10 | 0

Oil ports in eastern Libya had reopened by Monday, ending a weekend shutdown that coincided with the first democratic elections in a generation. NATO forces last year intervened in a civil war that ended with the death of long-time leader Moammar Gadhafi, opening the door for interim leaders to chart the path to democracy. Conflict in 2011 shut down virtually all of the country's oil production, though levels are moving closer to the pre-war output of around 1.6 million barrels per day. Without a coordinated national reconciliation effort, however, eastern claims at autonomy could undermine long-term prospects for Libya's oil future.

Libyan oil production before civil war erupted last year averaged 1.6 million bpd. By summer 2011, the International Energy Agency called on member states to release oil from their strategic petroleum reserves to offset liquidity concerns sparked by the Libyan war. In January, however, oil production was back above the 1 million bpd mark. By May, the IEA reported that Libyan oil production had reached 1.42 bpd.

In its annual outlook, the IEA said Libyan elections could cast a shadow over the international oil market.  Before the weekend election, armed gangs had ransacked election headquarters in the eastern city of Benghazi.  Pro-autonomy groups, meanwhile, had occupied the eastern ports of Brega, Es-Sider and Ras Lanuf, hitting crude oil exports to the tune of 300,000 bpd. Operations at Ras Lanuf were slow to emerge from war as it was, though state oil officials said that, by Monday, all three ports were back in service.  In terms of production, an official at the state-run National Oil Corp. said oil was "technically" back at the 1.6 million bpd mark.

Elections were the first in Libya in more than 40 years. Without the iron fist of Gadhafi, however, a unified Libya exists largely on paper. Though Iraq held elections in 2005, two years after the U.S.-led invasion toppled the regime of Saddam Hussein, internal rivalries still overshadow the country's crude oil ambitions. While production levels approaching 3 million bpd are pushing Iraq close to the top of OPEC, disputes between the central government and the regional Kurdish administration kept Exxon Mobil out of Iraq's latest international auction. Kurdish leaders, for their part, say oil companies wanting to work in Kirkuk, with an estimated 25 billion barrels of oil, need their permission, not Baghdad's.

The same could be true for Libya. In April, protestors in the former rebel capital of Benghazi called for more transparency from a state oil company. Demonstrators said they were frustrated with how the interim government was spending money, highlighting the growing frustration among post-revolutionary youth in the Middle East. Those protests coincided with one of Libya's first international oil and natural gas expos since the Gadhafi era ended last year.

Ports were back in service in Libya by Monday. Oil markets last week reacted strongly to poor economic data from the United States and the lingering strike from offshore oil workers in Norway. Brent crude prices moved closer to the $100 mark in Monday trading on signs that Norway may be headed from a complete shutdown of oil production. Investors are keeping an eye on the lacklustre performance of the U.S. and Chinese economies, coupled with on-going concerns in the Eurozone. Those factors help keep oil prices relatively low. But over their shoulders, its issues like Libya, where 300,000 bpd can be cut off at a whim, that forecasters cast their cautious glance.

By. Daniel Graeber of Oilprice.com

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