The International Effects of Libyan Unrest on Energy

Protests continued in Libya on Feb. 21, including demonstrations and reports of violence in the capital city. The ongoing unrest has not yet affected the country's energy sector, but as tensions mount, foreign firms involved in Libyan energy projects have begun evacuating staff. Libya is a mid-tier oil producer with production of approximately 1.8 million barrels of crude oil per day, more than 90 percent of which is exported, with roughly 90 percent of that going to Europe. Energy production accounts for around 95 percent of export revenue and 80 percent of government fiscal revenue. Libyan crude is of relatively high quality, which allows it to be used as feedstock in nearly all of the world's refineries. This is both good and bad. It is good because the refineries that can run Libyan crude can run most of the world's crude streams (the global crude stream is declining in quality, but for now most of the world's oil production remains relatively high quality). It is bad because it is the sort of crude that is in high demand globally, so the loss of Libyan exports would most likely affect crude oil prices disproportionately. Geographically, Libya's energy industry is bifurcated between its eastern and western basins, with a thin majority of the total being produced in the east, where protests have been most vigorous. However, to balance that, nearly all of the country's natural gas exports originate in the west, where Libyan leader Moammar Gadhafi's power base lies. (There is very little offshore production.) Italy is Libya's top consumer for both types of energy; it absorbs all of Libya's piped natural gas exports and one-third of its oil exports. No energy output has been adversely affected by the protests yet, and the two cities that have experienced the most protests, Benghazi and Al Bayda, contain limited energy infrastructure. Two different Libyan tribes have threatened to halt oil exports if the army does not cease firing on protesters. Most notable was the threat issued by a leader of the Zuwayya tribe, which has members living all across the country. In a Feb. 20 interview with Al Jazeera, Sheikh Faraj al-Zuway issued a "warning from the Zuwayya tribe" that they would halt the flow of oil in certain areas within 24 hours. In the interview, al-Zuway emphasized the vulnerability of "southern oil fields" to an attack by his tribe, presumably a reference to the Elephant field in southwestern Libya. Foreign firms have been trying to re-enter Libya en masse since U.S. and U.N. sanctions were lifted several years ago, but contract negotiations have become bogged down in seemingly endless renegotiations. As such, energy output has only increased by about 15 percent in the past six years. Nonetheless, the Libyan national oil company is neither large nor in possession of deep technical expertise, and as instability mounts, several foreign firms have begun evacuating staff. Libyan energy output obviously will be severely affected by their absence. However, there is one energy firm that is likely willing to stomach a lot more violence than most. (click here to enlarge image) Italian energy giant ENI — Italy's largest industrial conglomerate, which is approximately 30 percent state-owned — stands to lose the most in the unrest in Libya. ENI produces around 250,000 barrels of oil equivalent per day in Libya, approximately 15 percent of ENI's total global output. It has also recently agreed to invest a further $14 billion in the country. ENI also operates jointly with the Libyan National Oil Corp. the $6.6 billion Greenstream natural gas pipeline and plans to increase the line's capacity from 11 billion cubic meters (bcm) per year to 12 bcm by the end of 2012. The relationship between ENI and the Libyan government is close. The Libyan sovereign wealth fund owns a 2 percent stake in ENI and has, over the past two years, considered raising its stake to 10 percent. The Libyan sovereign wealth fund also owns around 5 percent of the largest Italian bank — and one of the largest European banks — UniCredit and 2 percent of the Italian defense-aerospace industrial conglomerate Finmeccanica, which is the second-largest Italian industrial conglomerate. ENI is known for doing business with unsavory regimes that other European energy firms eschew. It was one of the first European energy companies to begin doing business with the Soviet Union. This relationship has served it well, as it is still one of the closest European companies with Gazprom. ENI started doing business with Libya in 1959 and never looked back, not even when the rest of the world avoided Gadhafi's regime due to his outspoken support for various Palestinian militant organizations in the 1970s and 1980s. This relationship largely followed from Rome's relationship with Tripoli, which included Italy's 30-year direct colonial rule of Libya that ended in 1943. Relationships with Moscow and Tripoli are a core part of ENI's company strategy. Italian domestic production of natural gas, which peaked at 18.4 bcm in 1994, is falling fast and was at around 8 bcm in 2008. Meanwhile, natural gas consumption crossed 20 bcm in the 1970s and kept growing, hitting 77.7 bcm in 2008. An upstart domestic rival, Edison, is attempting to bring in natural gas from Azerbaijan and the Middle East via its trans-Adriatic sea pipeline Poseidon. Thus, ENI's strategy is to monopolize sources of natural gas in Russia and Libya via its close links to their governments — a strategy supported by ENI's strong ties with the Italian government. A change in Libya's regime could put this strategy — and the billions spent on Libyan energy infrastructure — at risk. This explains why the Italian government has thus far not condemned the events in Libya, unlike many of its fellow European governments. Italian Foreign Minister Franco Frattini on Feb. 21 said, "Europe shouldn't intervene, Europe shouldn't interfere, Europe shouldn't export [democracy]." Frattini also specifically said he was concerned with the possibility that Libya could be split into two, specifically saying Rome was concerned about the "self-proclamation of the so-called Islamic Emirate of Benghazi."