Libya to Resume Oil Production, Markets Eye Jackson Hole

Post-Gaddafi Libya could begin pumping oil in the next few months, as rebels secured oil infrastructure around Tripoli and edged closer to taking complete control of the country. However, oil markets are shifting their attention to concerns that the US might undertake further fiscal stimulus.

Libyan rebel fighters gather on the outskirts of Ajdabiya prior to a failed attempt to take the town from Mforces.
Patrick Baz | AFP | Getty Images
Libyan rebel fighters gather on the outskirts of Ajdabiya prior to a failed attempt to take the town from Mforces.

Transitional National Council (TNC) forces surged into the Libyan capital on the weekend, taking much of the city. By Tuesday evening they had overrun Muammar Gaddafi's, Bab Al-Aziziya compound, although the leader himself is yet to be found.

Libyan oil production was just shy of 1.6 million barrels per day in February, before the uprising swept across the country, leading to six months of civil war. Production in May was down to 60,000 barrels per day, according to the International Energy Agency (IEA).

"The medium-term outlook is that they probably have the potential to produce more than the 1.6 million, so it's a very bullish scenario for anyone who is ready to invest in Libya," Johannes Benigni, managing director of JBC Energy, told CNBC Wednesday morning. "The reality factor is, everyone knows that Libya was easier to run in a dictatorship than in a democratic or semi-democratic environment, and those guys first have to prove that they are able to bring back stability."

The TNC, headed by Mustafa Jalil, appears to be relatively cohesive at the moment, but the rebels are composed of a complex mix of political, tribal and social alliances that analysts worry may not hold once their common enemy is beaten.

Benigni said that he expected that Libya could pump 400,000 barrels per day by the end of the year, but that in the best case scenario it would be 12-18 months before it returned to pre-war levels.

Goldman Sachs had forecast average output of 250,000 barrels per day in 2012, with a potential to increase to 585,000 barrels per day by the end of the year if rebels were to take control of infrastructure in the west of the country. The rebellion, which began in the east of the country, rapidly seized parts of the Libyan oil industry. Goldman's predictions were based around output from those eastern facilities.

In a report issued on Tuesday, however, the bank said that the seizure of western oil assets increases the likelihood that output could ramp up more swiftly.

Analysts have been struggling to obtain reliable information on the state of much of the Libyan oil infrastructure. A report from Exclusive Analysis, the risk forecasting firm, said that exports would be likely to resume from the east within three months and from the west within six to nine months.

Gaddafi's forces have sabotaged pumping stations, export terminals have been damaged in the fighting and pipelines have become clogged and need maintenance, the report said.

Anthony Skinner, principal political risk analyst at Maplecroft, wrote in an email to that the transitional government has attempted to reassure existing investors that contracts will be honoured, and some companies have said that they would return as soon as the situation stabilized.

BP , Royal Dutch Shell , ENI , OMV and Total were among the Western oil companies operating in Libya before the war began. The Russian national hydrocarbon company Gazprom, as well as China's CNOOC and Sinopec were also present, though their status is "ambiguous", Skinner said. While companies from those countries that supported the NATO no-fly zone over Libya may see that the TNC remains receptive.

"The position of investors from countries that have been more reluctant to place their full weight behind the rebel movement or did so more recently is more tenuous, however," Skinner said.

China and Russia abstained from voting for the UN Security Council resolution backing military action.

"Rebel leaders have promised to honour all the business contracts that were signed between investors and the Gaddafi regime in Libya and even requested Beijing’s assistance in the reconstruction process. Yet Mustafa Jalil maintains that the NTC would favor governments which extended their support to the rebel movement over those which did not, placing China and Russia in an ambiguous position," he said.

Oil prices moderated over the weekend on hopes of more supply, but rapidly climbed back up. Brent crude was trading at just over $109 per barrel, with analysts and traders watching the Jackson Hole economic summit in the US for signs that the US government might undertake a third round of quantitative easing (QE3).

"Supply and demand factors are not the driving forces today in the market," Benigni told CNBC. "Everyone who deals with supply and demand has already factored in that demand, especially in North America and Europe, will not be as great as one would have hoped for. People are anticipating that economic outlook is not that great, so overall from that point of view, expectations are not the driving force."

QE3 would put a floor under the oil price, keeping it above $100 per barrel for the foreseeable future, Benigni added.

"The question of interest rates and cheap money is probably more important to the oil market and the commodities sector than what's happening in Libya right now," he said.