Another Light Crude Outage

Jim Brown
 
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Just as Libya jumps to the front of the headlines on the potential for restarting production in the months ahead another country takes center stage again with a light crude outage. Brent prices continue to hold at $110 due to tight supplies.

Libyan oil production has been the topic of hundreds of news articles this week and probably hundreds more before the weekend. Unfortunately all those analysts, reporters and writers can't accelerate the return to production for Libyan oil. The Libyan oil minister said today it could be 9-12 months before Libya returns to any meaningful level of production. The minister claims the first priority of the NTC is the safety of the people, food, medical supplies and fuel. In order to do this the NTC has to actually form a government and all the bureaucracy that goes along with it.

The NTC only has limited control over the rag tag group of rebels that routed the government forces. Once the fighting ends those tens of thousands of rebels will return home with their plunder and a large number of automatic weapons and ammunition. The potential for another uprising if the new government does not work out as they hoped is very great.

There are 140 tribes in Libya and getting them all to agree on anything is going to be a major task. Most are hostile towards the others because of centuries of fighting for sustenance in a desert of sun and sand.

Some analysts are predicting the return of 300,000 bpd of production in 3-6 months from fields that have been in rebel hands since the start of the war. After those 300K come back online the rest could take several years to restart according to multiple analysts.

That means light sweet crude will remain in tight supply. Current inventories in Europe and Asia are being drawn down every week despite increased production by several OPEC nations.

In this current environment of supply shortages our old problem area of Nigeria has flared up again. Shell was forced to declare Force Majeure on Nigeria Bonny Light crude again on Tuesday. Shell said there had been several pipeline "incidents" and the Force Majeure would last through October. Shell was forced to shut down its Adibawa pipeline after saboteurs blew up supply lines. At lease six attacks were reported on a 21-mile stretch of the Okordia-Rumuekpe pipeline. Nigeria is Africa's biggest oil producer and the fifth biggest supplier of light crude to the USA.

Attacks by MEND rebels from 2006-2009 forced Nigeria to lose more than 28% of the country's production. In 2009 the government gave the MEND rebels amnesty and paid them to disband and disarm. After two years of relative peace the rebels are starting to make new demands of the new government. Also a problem are thieves. Stealing oil for resale in Nigeria is a common practice. Thieves cut into the pipeline and siphon off the oil into waiting trucks. Villagers also line up to fill containers of their own. Pipeline explosions are not uncommon when sparks setoff fires at these cuts in the line. Last year a couple dozen people were killed when they cut into a natural gas pipeline thinking it was an oil pipeline. Villagers were lined up with their containers when the organizer made the cut into the pipeline and all were incinerated.

Shell did not say how much production was impacted by this current shutdown but declaring a force majeure through October suggests the damage was extensive.

Nigeria's light crude is roughly equivalent to the light crude from Libya that is in short supply. This additional supply drop was one more factor in Brent prices holding at $110 on Wednesday.

Did you ever stop and consider that we are always only one explosion or one civil war away from a crude shortage? This is especially troubling since most of the major oil producing countries we depend on are the ones which are the most unstable. Nigeria, Venezuela, Libya, Egypt, Kuwait, etc. In a perfect world production would flow unabated from all sources but in our current world nearly every source has some political or economic problem preventing normal from ever being what we would consider as normal.

I don't expect this to improve in the future. As oil prices rise and supplies decline there will be more opportunity for terrorism disruptions, political changes, resource nationalism and plain old hoarding. Once countries realize peak oil has actually arrived they will begin to hold back production for future use. When that happens oil shortages on the open market are going to escalate very quickly. This will be one price bubble that will not pop.

Jim Brown

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