Update on Libyan Oil Production

March 9, 2011

The trajectory of Libyan oil production remains concerning. Estimates of current shut in production vary from a low of 500,000 barrels/day (b/d) to over 1 million, from a total production of 1.6 million barrels/day (mmb/d). Company withdrawal of expatriate production workers appears to be a major contributing cause of the production decline, not damage to producing fields, although other factors are in play. Though Libya is a small producer, its oil is highly prized in the Mediterranean basin by Italian, French, and other regional buyers, as well as in northwest Europe for use by heavy, sour-based refiners as a blending crude.

Libyan export terminals appear still to be able to accept export cargoes, but with fighting around Ras Lanuf—home to the largest refinery and the country’s largest oil export facility—tanker owners are likely to be hesitant to commit tankers to begin loading in the face of potential harm to ships and crews. In addition, there are reports of buyers being unable to decide who to pay, and some may be having trouble obtaining insurance coverage.

Foreign buyers of Libyan oil, primarily refiners, as well as spot and forward traders, appear to have bid up global market prices of the higher-quality sweet crudes, similar to those produced by international oil companies (IOCs) in Libya, as they try to cover demand for future refining activities or purely to speculate by betting on continuation, if not spreading, of current market disruption to other suppliers in the Arabian gulf.

Refiners’ efforts to cover their crude needs from alternative suppliers reflect the shortage of Libyan crude oil, which is attractive for its higher production of gasoline and diesel for the major consuming markets. These alternative, and generally similar, sweet crudes are from Algeria and Nigeria in the Atlantic Basin and Azerbaijan in the Caspian. The increased demand for these crudes comes at a time when parts of Nigerian production are already shut in. The increased demand reflects requirements from European and probably Asian buyers. Nigerian crude is purchased by select U.S. refiners, who are competing to maintain supply of the higher-quality crude oils prized at this time of the year.

Not surprisingly, sweet crude prices in Singapore are also up, reflecting in part China’s refinery requirements for higher-quality sweet crude. Chinese companies are estimated to import about 11 percent of Libyan production—or close to 200,000 b/d. Chinese refineries were historically dependent on domestic sweet crude to charge their refineries. It would not be surprising if Chinese traders are contributing to the price run-up as they seek to cover forward requirements with purchases of alternative European and African sweet crudes.

Seasonal factors contribute substantially to the price run-up, as refiners have begun producing gasoline and diesel for the summer driving season in the Northern Hemisphere following normal seasonal maintenance.

For those refiners lacking deep conversion capacity, Libyan and related sweet crudes are used to blend with less attractive crude oil to reduce sulfur content and to increase production of higher-end transportation fuels for the summer driving season.

All of these factors contribute to the general increase in global oil prices, particularly for the higher-valued crude oil.

U.S. officials have indicated that the United States may draw from the Strategic Petroleum Reserve to address current high crude oil prices. Saudi Arabia also indicated it may increase production to meet the shortage.

Unfortunately, current high prices are not related to the current shortage of global crude oil supplies. Rather, some market participants appear to believe that the political trouble in Libya may increase, as well as spread to the other major producers with excess capacity, leading to a major physical shortage in global crude supplies and a further increase in prices—and that any crude that may come to the market as a result of increased production, or from the U.S. Strategic Petroleum Reserve, may not be of the appropriate quality or sufficient quantity to meet current demand.

Alan S. Hegburg is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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