Libya’s First Oil Expansion in 10 Months Aiding Refiners: Energy

Jan 15, 2014 3:38 pm ET

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Jan. 15 (Bloomberg) -- The first expansion in Libyan oil production in 10 months is poised to lower regional crude costs, boosting margins for European refiners that have been closing at the fastest rate in decades.

The holder of Africa’s largest crude reserves tripled supply to about 650,000 barrels a day in the three weeks to Jan. 13, according to the government. The production rate, 42 percent of the average for the past decade, is a signal to analysts at KBC Energy Economics and Petromatrix GmbH that competing grades may get cheaper. Libyan oil is categorized as light sweet because of its below-average sulfur content and lower density.

Europe shut about 10 percent of its refining capacity since 2008 amid rising prices for crude, increased competition from new Asian plants and the U.S. shale-oil production surge that lowered demand for imported fuel. A sustained Libyan recovery may help curb the relative cost of crudes from the Caspian Sea region, Algeria and North Sea. Sharara, Libya’s second-largest field, resumed output on Jan. 4, and the government is negotiating with protesters to keep it open.

“All European refiners are likely to profit from rising Libyan production as light, sweet supply increases,” said Ehsan Ul-Haq, a senior market analyst at KBC in Walton-on-Thames, England, who’s worked in the oil industry for two decades. “The Mediterranean refiners will benefit the most.”

Eastern Ports

Libya may end the closure of eastern ports held by rebels later this month, Oil Minister Abdulbari Al-Arusi said in New Delhi on Jan. 13. Should production hold at current rates it would mark the first monthly increase since March 2013 and compares with 210,000 barrels a day in December, according to data compiled by Bloomberg. Exports from Waha in the east, the largest field, halted in July.

Production will probably average 650,000 barrels a day or more this year, Goldman Sachs Group Inc. said in a report Jan. 6. Exports all but stopped during the 2011 uprising that led to the ouster of Muammar Qaddafi. Shipments revived after the former ruler’s death before plunging again in the second half of last year amid strikes, protests and the formation of a self- declared, semi-autonomous government in the east.

Libyan exports may not return to normal any time soon because those divisions have yet to be resolved. An oil tanker attempting to load last week at Es Sider in the east was turned away by the navy. The central government’s Prime Minister Ali Zaidan threatened to sink any ship collecting crude from the eastern region after rebel leaders there said they would protect vessels.

Sharara Field

Protesters had threatened to shut the Sharara field today if the government doesn’t satisfy their demands, which include the creation of a local council and granting of national identity cards to Tuareg tribesmen. The demands are being met “very slowly,” Mustafa Lamin, a spokesman for the protesters, said yesterday.

The field is working normally, and protesters will meet with government officials today before deciding whether to shut the field again, Lamin said by phone earlier today.

“The problem in Libya, like some other Middle East and African oil producers, needs to be resolved at grassroots level,” said Abhishek Deshpande, an analyst at Natixis SA in London. “There needs to be proper negotiation and solution between Libyan government and former rebels, militia and tribal forces. Military force will only make the situation worse.”

Brent-WTI

While a recovery in Libyan oil flows will help narrow the gap in prices between Brent crude, the European benchmark, and West Texas Intermediate, its U.S. equivalent, the two grades are not expected to return to parity soon. It is the world’s most- traded energy spread.

Brent rose 74 cents to close at $107.13 a barrel today, exceeding WTI by $12.96. The spread will average $6 in 2014, according to Commerzbank AG, while Goldman Sachs Group Inc. predicts $9, Barclays Plc $8 and ABN Amro Bank NV $5.

Europe’s refineries will be helped because the return of Libyan oil coincides with surging shipments of light, sweet crudes from the North Sea and Caspian Sea including Azerbaijan.

Daily exports of North Sea Brent, Forties, Oseberg and Ekofisk crudes, which make up the Dated Brent benchmark, will jump to a two-year high in February, loading programs obtained by Bloomberg News show. Shipments of CPC Blend for the same month will jump to the most since at least January 2008. The Caspian Sea grade is shipped to global markets from a terminal on the Black Sea near Russia’s Novorossiysk port. Exports of Azeri Light from Ceyhan in Turkey will increase to the most in 23 months.

‘Sustainable Basis’

“If Libya were to resume exports from the west on a sustainable basis, light crude grades would come under pressure, particularly Saharan, Azeri,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a consultant in London.

Light, sweet crudes in the Mediterranean mostly trade in relation to Brent. The official selling price of Saharan Blend, the Algerian grade, jumped to a two-year high of $2 a barrel more than Dated Brent in October, compared with a discount of 40 cents in July, according to state-owned Sonatrach. The traded price of the grade could decline by 30 to 40 cents if Libya restores full production, according to Ul-Haq at KBC.

CPC Blend was mostly bid at 85 cents to $1.15 a barrel more than Dated Brent over the past two months before dropping to a 25-cent premium on Jan. 8, according to a Bloomberg survey of traders and brokers monitoring the Platts pricing window. It could fall by another 50 to 60 cents a barrel because of the extra Libyan supply, the KBC analyst estimates.

African Oil

Prices for West African grades also could be curbed relative to Brent oil, according to Olivier Jakob, the managing director of Zug, Switzerland-based Petromatrix. Extra shipments from Libya, combined with more output from South Sudan, Nigeria and Iran could add more than 3 million barrels a day to supply, ABN Amro estimates.

Cheaper crude would aid European refineries, many of which were built decades ago to maximize gasoline output and have been hurt by falling overseas demand for their products. U.S. imports of the fuel from Europe dropped to about 280,000 barrels a day in the first nine months of last year, from a daily rate of 320,000 barrels in 2012 and 390,000 in 2008, according to the International Energy Agency in Paris.

Europe also faces falling demand for fuel at home and competition with new plants in Asia and the Middle East, including Saudi Arabia’s 400,000 barrel-a-day Jubail facility.

Simple refineries in Europe have been losing money from processing Brent crude into fuels since February 2013. More sophisticated plants made about $2 to $4 a barrel over the past 12 months, which is at least $9 a barrel less than competitors on the U.S. Gulf Coast, data compiled by Bloomberg show.

Italian Plant

Saras SpA, which operates a 300,000 barrel-a-day plant in Italy, reported an adjusted net loss of 89.4 million euros ($122.4 million) for the first nine months of 2013. The company lost 16.4 million euros in the same period a year earlier. Its Sarroch refining complex is the second-biggest on the northern Mediterranean coast.

“We need to see some normalization of crude flows, in particular in the Mediterranean area, which is facing an unprecedented shortage of crude,” Dario Scaffardi, executive vice president and general manager of the company, said by phone Jan. 8 from Milan. “I certainly hope that Saras’s refinery will start making money this year.”

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--With assistance from Robert Tuttle in Doha, Maher Chmaytelli in Dubai, Grant Smith and Lananh Nguyen in London, Rakteem Katakey in New Delhi, Saleh Sarrar in Tripoli and Mariam Sami in Cairo. Editors: Alaric Nightingale, John Deane