Pity poor Libya

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by David Malone
 
Libya has everybody wanting to know what is going to happen in Libya.  And worse, for the Libyans, everyone wants to have a hand in deciding what does happen.
 
Saudi is interested because with the drop in oil output and the price heading above $100 a barrel, Saudi Arabia is feeling the pressure to raise its output to compensate.  It has said it would, but now people are openly wondering if Saudi can make good on its promise and if they really have the reserves they say they have.  Doubt at every turn.

Nations with a direct ‘national interest’ from oil and gas investment include America, GB, France, Italy Spain, Holland and Canada.  Russia is also interested because with Libya in limbo the Russian position as gas supplier to Europe gets closer to an effective monopoly, while China is interested to push into what had been previously sewn up.

In all these countries the power and money of the major oil companies is being deployed to pressure their governments.  Billions have been spent already in ‘bribes’ and investment, and hundreds of billions in future revenue are at stake.

Even countries without a direct interest are still closely focused because if oil climbs above $100 a barrel and stays there then the already dimming prospects for global growth to pull us out of our nation-killer debts recedes further still.  Think of Spain – high oil and gas will kill any feeble prospects they had for growth.  What does and does not happen in Libya threatens our financial and political elite.

Italy, for example, is tied to Libya not only by oil and gas but by banking.  Libya owns 7.5% of UniCredit.  Having assets, if not actually frozen, then in political limbo does nothing for a bank’s credit rating outlook.

Let’s look at the tangle of conflicting agendas and foreign policies which have knotted themselves across each other in Libya.  A knot which has begun to unravel as Gaddafi loses his grip and that most uncertain of political forces shows tentative signs of emerging – democratic self determination – or at least the hope for it.

Some nations would like things in Libya to be resolved quickly so as to get the oil and gas back at full flow.  Spain and Italy head this group.  Others, like France, GB, Holland and the US would like things to flow again but are more concerned that when they do, their companies are still the ones making the profits and running the wells.

Before Gaddafi American oil companies used to rule in Libya.  They got thrown out and their assets were nationalized.  After that the Europeans moved in and consolidated.  Led by Italy, then France and latterly, thanks to Tony ‘how may I slime and fawn upon you’ Blair who made more trips to see Gaddafi and had more pictures taken embracing him than any other leader, Britain.  Britain has been tireless in its pursuit of Libyan oil and is still at it.

And as if by magic BP and Shell signed huge oil and gas deals.  Exxon and Occidental got in there as well but given Tony’s ‘special’ friends you’d expect that too.

It isn’t that Libya has massive reserves, it’s that it has lots of unexplored areas that the oil companies are dying to get the rights to, and the oil is sweet light, low sulfur crude which makes it very sought after.  (Go to this google page and click on the FT article ‘Hunt for top grade crude’.)  Sweet crude is what West Texas crude is and what America finds easy to refine and burn.  It is also what North Sea oil is.  Sweet, low sulfur is both ‘cleaner’ than high sulfur heavier oils and also produces more diesel than the heavy black crudes that Saudi has.

All of which means Libya’s oil is much easier and cheaper to refine, cleaner to burn, and the country also has lots of gas which Spain in particular is looking for.

Having sweet, light, crude not only makes it attractive, it also makes it the same as the West Texas and Brent crudes whose price sets the benchmark.  Fluctuations in these kinds of oil affect the markets.  Hence it is no surprise that once things started to kick off in Libya crude benchmark prices started to shoot up.  And as they go up lots of other things go down, growth estimates being the most central.

Growth estimates have spent the year being revised down, particularly in Europe.  News today is that the airline sector has revised its growth estimates down.  Oil is a major input/cost in almost everything, including the cost of foods.  So as oil goes up the cost of making everything goes up with it.  Those increases either have to be passed on to the consumer or cut from the profit margins of the sellers and producer.  In our present jobless recession/recovery consumers will just buy less if the prices goes up.  So what we are left with is what we are seeing, a margin squeeze.  Where unit sales stay up, but even as the sales numbers are trumpeted the companies are going under.

That’s if unrest continues and oil prices are kept high.  So you might imagine that everyone would be united in wanting a swift resolution.  But it’s never that simple.  A swift resolution is fine but resolved with who as the winner is what matters.

Spain and Italy have been very quiet about Gaddafi, have you noticed?  The fields they own and run and from which they get their oil and especially their gas, are in the west of the country; the part still not in rebel hands and closest to Gaddafi.  Both Spain and Italy are heavily involved in both oil and gas in Algeria.

The BP, Shell, Exxon and Occidental holdings are in the East in the vast offshore ‘Sirt block’, in rebel territory.  And the investment in these fields is huge.  The Sirt basin is larger than Belgium. BP alone was awarded an area 54,000 km square.  BP plans to spend more than $20 billion there.

So does that mean BP, Shell, Exxon and Occidental are all for the rebels?  Well actually maybe not.  Their deals were all signed at enormous cost.  BP had to pay $350 million for what is called signature bonus.  Those deals were with the Gaddafi regime.  And what have those pesky, self determining democratic rebels said?

“This area is controlled by the people,” said Mabrook Maghraby, a lawyer from Benghazi who is now involved with the local committees defending Brega.” (Into which Gaddafi forces have reportedly now fired missiles.)

“If oil contracts were unfair or based on corruption, however, the interim leadership of Libya’s second city Benghazi said they reserved the right to renegotiate them.”

And even more ominously worrying for the oil companies who paid millions to seal the deals, the same article continues, “Jammal bin Nour, a judge and member of the Feb. 17 coalition, told Reuters oil contracts signed by Gaddafi’s government would be respected as long as they were fair, good for Libyans, and not based on corruption.”

Oops.

Now companies and countries who landed the best deals (BP and Shell) won’t want any re-negotiation.  While countries who were not around when those deals were struck but are now very much around (hello China) will be doing everything they can to ensure they are not just re-negotiated but perhaps put back out to open tender.

The US might be somewhere in the middle – got a deal but maybe thinking a better deal could be struck.

GB seems to have sided with the rebels perhaps on the grounds that all ‘our’ interests are controlled by them.  Spain is quiet as a mouse as its ‘assets’ are still under Gaddafi control.  The US is “Wary of arming the Opposition” and is moving the Marine Corps into position perhaps with a view to ‘re-negotiating better terms’ while France and Russia are saying no military intervention without a UN mandate which they can both veto.  France doesn’t want the US muscling in, nor the Brits consolidating their recent gains and is keen to be seen to be a friend of the liberated people.  And Russia?  Well Russia would be best served by Libyan gas being off-line for as long as possible giving them more monopoly power over Europe’s gas supply.

All in all, pity poor Libya.  The debtor nations are desperate for growth and will now fight among themselves in order to get the magic ingredient.