BP (NYSE: BP) Caught in Libyan Oil Crisis

Brian Hicks

Written By Brian Hicks

Posted November 11, 2013

Moammar Gadhafi was one of the most unwieldy leaders in the world community. He made blustering yet entertaining speeches at the UN, and he was one of the most defiant heads of state against Western geopolitical interests, which is why he was removed to begin with, regardless of what the media and the government espoused about saving innocents.

Gadhafi was overthrown with the help of NATO because he did not play ball with the West.

libya oilThere’s no question that Gadhafi was a terrible leader and a petty dictator, but removing him was the wrong thing to do.

Aside from the immoral position of interfering in another country’s affairs, the NATO-backed toppling of Libya’s government only created more instability in the region and made citizens within that country less safe.

Libya’s murder rate went up 500 percent since Gadhafi’s downfall. And the country’s native black population has faced ethnic cleansing at the hands of the NATO-backed rebels – a group once deemed so noble by the media.

Thefts and other forms of violent crime are commonplace in a society that has been left with a weak central government and a general lack of security. And this instability has spread to the nation’s energy industry.

You would think Gadhafi’s regime would be resistant to the idea of a heavy foreign presence in Libya – but not so fast.

Despite Gadhafi’s defiant stance, he was willing to work leaders from the West because he knew he needed them. Libya relies on energy income for 60 percent of its GDP. Income from oil and gas is instrumental in maintaining social and political stability.

And as the revolution went on, Gadhafi threatened to replace Western companies with those from Russia and China. Bottom line: stability is always good for business.

Despite Prime Minister Ali Zeidan’s projection as a strong central body, the nation is really ruled by factions of militias and tribal leaders vying for power. This is why companies like BP (NYSE: BP) are making a slow and steady exit.

The British energy giant is in negotiations with Libya’s National Oil Co. to sell its operational stake in two blocks in the Ghadames to the state-owned company’s subsidiary, Arabian Gulf Oil Co. BP has cited security concerns as reason why the company no longer wants a heavier stake in the country.

The Western company holds an 85 percent stake in the Ghadames blocks, which could be transferred back to the government in the form of a farm-in agreement if talks are successful.

The 2007 deal with BP marked a milestone in the nation’s energy history. It took place at a time when Gadhafi was trying to lure more foreign companies to the region, and for a time it worked – until the civil war.

But BP’s decision to back away will come as a blow to the current administration’s efforts in trying to revamp the country’s oil fields.

Libya’s oil production is over 300,000 bpd – a far cry from the nation’s once prosperous 1.6 million bpd under Gadhafi. The shortages in production can be attributed to attacks on energy infrastructure and worker protests.

Libya Problems

Libya’s government is having a hard time integrating its sporadic militia groups. These groups have seized various terminals in the east and attacked oil and gas facilities throughout the country. Yet there is no single goal of these groups.

Some want a separate state in the east, where most of the energy projects are, while others are dissatisfied with the corruption and lack of representation from the central government.

The problem is that Zeidan is not powerful enough to challenge these groups, since his government relies on militia members to maintain as much order as possible. In an effort to assimilate militia groups and prevent future attacks, Zeidan has promised to end payments to these groups effective Dec. 31 of 2013, and he has issued a stern warning against attacking energy infrastructure.

The central government is trying to get a handle of matters by expanding the country’s Petroleum Facility Guards and giving militia members more jobs within this organization.

But the PFG has failed to prevent attacks to energy facilities, and factions have been warring against each other for control. Essentially, there is no light at the end of the tunnel when it comes to the nation’s energy security.

The situation has gotten to the point where the central government is urging oil companies not to do business with militia groups that have seized control of energy assets.

With worker strikes and attacks in the east, Libya has managed to press on by relying on operations in the west as of late, but this will only go so far.

Libya has descended into a fractured state based on factionalism and power-grabbing, and the central government is losing control over the country’s economic affairs.

Middle East Investment

At the moment, Libya has too many problems for any sound investments. OPEC production numbers have suffered over the years because Libyan production has been so low.

Libya is essentially going through the same ordeal as Iraq; both nations have shown the potential for oil production, but both are bogged down by corruption and political in-fighting.

Libya’s problems have had little impact on the U.S. other than through the world financial markets, but Europe is more concerned with the problems, since Libya is a major source of energy.

And despite the problems, Italian company ENI (NYSE: E) has been able to maintain its natural gas export operations from Libya to Italy without interruption.

Investors with assets in the region would be better off looking to Algeria instead. Algeria is going through its own social and political problems, but it has largely managed to fend off major problems. And the nation is trying to develop its massive shale gas reserves.

Iraq is another investment potential despite the dangers, although companies are being forced to choose between the central government and the Kurdish provisional government in the north. Royal Dutch Shell (NYSE: RDS-A) is doing business with the central government, developing the country’s oil-rich Majnoon oil field, and is playing a role in the development of associated gas, which will be crucial in propping up the country’s failing energy grid. Exxon Mobil (NYSE: XOM) has sided with the Turks and Kurds but has been caught in political squabbling nonetheless.

But more stable countries in Central Asia, like Uzbekistan, Azerbaijan, and Kazakhstan, are trying to increase energy output.

You can also try your lot at shale oil production in North America. It is less risky than investing in Central Asia, and production numbers are going strong.

When it comes to the Middle East, you are caught between a rock and a hard place, since instability has plagued just about every corner of the region due to the Arab Spring and geopolitical interference from the West.

And given the grim outlook of Libya’s social and political ills, a Gadhafi regime does not look so bad at the moment.


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