Libya Oil Office Disruption Hearkens Renewed Risk

For more than a week, armed men have prevented workers from entering the headquarters of one of Libya's leading oil producers, claiming they had protected the company and deserved compensation for it, local oil officials say.

The conflict, which has so far not affected Libya's oil output, highlights the brittle nature of Libya's oil recovery. Some experts and officials warn that insecurity increasingly threatens the Libyan comeback, which until now has progressed more rapidly than initially expected.

Any setback in Libya's oil rebound may drive oil prices up after output swiftly rebounded in the North African country, helping calm markets rattled by Iran supply fears.

Arabian Gulf Oil Co., the country's largest oil operation with over a quarter of its production, is threatening to shut its fields if protesters continue to picket at the entrance of its Benghazi headquarters.

"After Thursday, if there is no solution, we will stop production," the company's spokesman Abdeljalil Mayouf said Tuesday, adding it will become unable to pay its wages and contractors.

Since toppling strongman Moammar Gadhafi in August, the new regime has swiftly brought back production close to its prewar level of 1.6 million barrels—a critical achievement for in a country that relies on oil for 80% of its revenue.

But cracks are starting to show up in this success story as the new regime struggles to ensure security. Some of the former fighters who have protected oil interests during the course of the recovery contend they are owed compensation from Arabian and other oil companies.

In another recent incident, former fighters entered the offices of Repsol SA's joint-venture Akakus Oil Operations uninvited in the eastern city of Tripoli, saying they had not been paid in six months for protecting its wells in the Southern desert, said Najeeb Tantush, operations manager at the company.

Last week, the oil ministry even took the rare step of warning against attacks on oil officials—citing Akakus and Agoco. The incidents are leading "to losses directly and indirectly for the government," it said.

Though some Libyan oil officials are skeptical insecurity could halt production, experts say the rising tension is deterring international oil companies from bringing back all their expatriates on the ground. That means Libya could fail to replace every barrel it produces, they say.

Insecurity "is one of the primary reasons that IOCs have restricted their personnel to Tripoli and have not brought expatriates," said Geoff Porter, an independent consultant who advises the companies on Libya.

Without IOCs bringing back staff "production may well stagnate just below precrisis levels, worse, it risks slipping backward," U.K. bank Barclays said in a note Thursday. Libyan oil industry still depends in large part from foreign skills and equipment to drill wells for basic maintenance or exploration.

In addition, Barclays noted that with Libya's war damage compounded decades of underinvestment to make its oil industry vulnerable to technical failures.

"Temporary fixes have allowed Libyan output to resume swiftly but we believe current production levels are simply not sustainable," it said.

(Source: Wall Street Journal)

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