Interruption in Libyan oil supply: A cause of concern or bluff only

Contrary to the wishes of US fund managers price of crude oil could not be jacked up. The United States caused a war like situation in Ukraine to keep oil prices at an elevated level. When the strategy failed US supported forces in Libya caused virtual shut down of production and loading facilities.

I have preferred to term this strategy a bluff only because Libya’s share in global oil markets is paltry. Export or no export is hardly of any consequence. Dissemination of such reports by the Western media facilitates the fund managers to drive the market and make windfall profit.

 Reportedly, Libyan National Oil Company (NOC) has declared force majeure on another key Libyan oil field, the 300,000 bpd Al Sharara, amid protests that had shut down production at two ports and the El Feel oilfield on Sunday.

NOC said, “A group of individuals put pressure on workers in the Al-Sharara oil field and forced them to gradually shut down production and made it impossible for the NOC to implement its contractual obligations”. 

The NOC said it was “obliged” to declare a state of force majeure on Al Sharara “until further notice”. 

Al-Sharara is Libya’s biggest oilfield, and the move effectively suspended all Libyan oil production and exports. 

On Sunday, the NOC said that loadings of crude oil at two Libyan ports had been suspended amid anti-government protests that were interfering with oil industry operations.

Loading from the Mellita terminal was suspended following a shut down in production at the El Feel oil field, with the NOC stating that individuals were preventing the field’s workers from continuing production. 

Also on Sunday, the NOC shut down operations at the Zueitina export terminal over protests calling for the resignation of incumbent Prime Minister Abdul Hamid Dbeibah.  

The NOC has been eyeing a ramp-up in production to 1.4 million bpd for Libya, but a new political battle is setting the stage for potential return to civil war. Libya has been producing around 1million bpd since the beginning of this year. 

Two rival governments have now emerged in Libya, with incumbent Prime Minister Deibah refusing to step down for newly sworn-in eastern Prime Minister Fathi Bashaga, who last week said his forces would take over the capital Tripoli peacefully. 

The latest protests that have led to force majeure appear to be engineered by supporters of the Bashaga to gain control of the oil industry from supporters of the incumbent Dbeibah. 

Early on Monday, the initial force majeure declarations pushed oil prices higher, with Brent trading above US$111 per barrel.

With the latest force majeure declaration for Al-Sharara, oil prices are pushing higher still, with Brent at US$113 at the time of writing and WTI above US$108. 

 

Drying US oil pipelines

According to a Reuters report, pipeline companies in the United States went on a construction spree throughout 2018 and 2019 to handle blistering growth in crude production that touched a record 13 million barrels per day (bpd). 

However, the coronavirus pandemic crushed both fuel demand and oil production, and neither has recovered fully, leaving many pipelines unused.

Major pipeline companies are exploring ways to ship other products in those lines and considering selling stakes in operations to raise cash.

The coronavirus pandemic upended the global energy supply system and worldwide fuel demand. Gasoline consumption in the US is now estimated to be past its peak and as refiners process less crude, producers are not filling pipelines used to transport it.

By the fourth quarter, total utilization of the largest oil pipelines from the Permian is expected to drop to 57%, consultancy Wood Mackenzie said. The nadir during the last market bust in 2016 was roughly 70%.

The US crude output is currently about 11 million bpd, and is not expected to grow much until 2022. But more pipelines were already set to come online, growing the gap between production and capacity covered by long-term contracts to a record over one million bpd in February, according to energy research firm East Daley Capital.

"We do not expect to be at pre-COVID production levels by end-2022," said Saad Rahim, chief economist at Commodities Merchant Trafigura.

The top three Permian pipeline companies are offering discounts to entice shippers and stem the fall in volumes. Companies rely on long-term contracts that require customers to ship a certain volume of oil or pay a penalty. Now companies are renegotiating those agreements at lower rates when they are close to expiring, to keep their customers.

Magellan Midstream Partners LP’s transportation and terminals revenue slid 9% to about US$1.8 billion in 2020, the lowest since 2017. The Company has only enough long-term contracts to fill its 275,000-bpd Longhorn pipeline to 70% capacity over the next six years, Magellan said.

With more pipelines adding to competition, Magellan expects daily volumes on Longhorn to drop to an average 230,000 bpd this year versus 270,000 bpd in 2020. A Magellan spokesman said the company could use its marketing arm to buy space on the Longhorn line and sell it to ad-hoc buyers.

Plains All American Pipeline LP’s transportation revenues fell about 13% to $2 billion in 2020, and warned that earnings could suffer further if production declines. Plains did not comment for this story.

Pipeline companies can make some money even when oil is not flowing through pipelines. Producers pay what are known as deficiency payments - penalties for not shipping oil. Still, those payments are small. Plains reported $71 million in deficiency payments in 2020, less than 4% of its overall transportation segment revenue.

Some companies are considering retrofitting pipelines to ship liquids besides crude, such as renewable fuels.

Enterprise Products Partners LP’s co-Chief Executive Jim Teague recently told analysts that he was fielding queries from a petrochemical company that needs pipeline transport and storage for potential hydrogen projects.

Enterprise’s crude pipelines and services revenues plunged 35% in 2020. In February, it said it has long-term contracts to ship about 1 million bpd through 2028 and beyond, compared with average volumes of 2 to 2.2 million bpd over the past two years.

The company did not comment for this story.

As pipeline companies have struggled, investor returns have suffered. The Alerian MLP index, which tracks the performance of midstream companies, is down 24% since the beginning of 2020, compared with a 27% return for the S&P 500.

“A lot of companies had to cut their dividends,” said Rob Thummel, senior portfolio manager at TortoiseEcofin. “It has created some skepticism on the investor base about the sustainability of the sector.”