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Libya crisis to shape energy investment

Libyan Industrial Park At TwilightThe threat of disruption to energy supplies from Africa and the Middle East is likely to benefit Russian producers, according to regional specialists.

Whether Muammar Gaddafi remains or an international coalition tries to reconfigure the country, events in Libya will act as an impetus to the East-West energy corridor, according to Dr. James Coyle, a political and energy analyst.

"'There will be a real need to replace Libyan energy in the European market and that replacement will probably be Saudi oil and Russian natural gas," he said in an interview.

Strategically Libya played a role in both Russian and EU plans to ship natural gas to Europe. Just three years ago, at the peak of the last energy price boom, Gazprom offered to buy Libya's entire output of oil and gas. The logic was to secure a new source of gas to increase sales to Europe and to compensate for Russia's own diminishing reserves.

The deal didn't happen, although Russia's non-committal attitude to intervention in Libya may help its relations with a future Libyan government.

Other countries had their eye on Libya. Beyond Russian, other energy groups active in Libya include British, US, Italian, French and Spanish firms.

Libya was to have supplied one branch of the European- and US-sponsored Nabucco gas pipeline project to create a new east-west energy corridor bypassing Russia. Now, however, the US Treasury has prohibited US companies from dealing with Libya's National Oil Company, including investment and purchases of crude, while the European Union may follow suit.

Energy security

The crisis also throws into question the concept of energy security. This is a theme of European and US policy advisers who argue for a combination of green and geographical alternatives to oil and gas supplied by Russia.

Russia now looks like a rather stable supplier compared with what's happening in Algeria, Yemen and even Syria, Bahrain and Saudi Arabia.

Coyle also says disruption to Libyan supplies won't hurt Russia's plans to diversify its list of gas suppliers.

After talking with Libya in 2008, Russia struck a deal with Azerbaijan to supply gas for selling on to Europe. Volumes this year are expected to reach 2 billion cubic metres.

"Russian policy appears to concentrate on discovering new reserves in Siberia and in maintaining a monopoly on the delivery route for Central Asian gas," said Coyle.

There is still room for a future deal with Libya, he adds, as Azerbaijan and Turkmenistan cannot increase supplies to Russia in the short term.

Balancing risk

The Libyan crisis may yet lead oil companies and consumers to reconsider how they balance risk.

Some 13 countries in the Middle East and Africa produce more than 28 million barrels per day, or about a third of global consumption. Those countries that have seen significant anti-government protests ­ including Algeria, Egypt, Yemen, Tunisia, Libya and Iran ­ together produce more than 9 million barrels a day.

Duncan Goodwin, energy sector manager at Martin Currie, says the crisis could lead companies to boost investment in exploration and production. Spending was already expected to grow by 10 to 15 per cent this year, and the money could go to less exposed regions like Brazil, Venezuela and Russia.

That geographical decision will be made with alternative types of energy in mind, so Canada's oil shale industry, for example, could get a boost.

The long term impact of the Libyan crisis will depend on how badly the country's energy infrastructure is damaged.

"In the case of Iraq, eight years of war with Iran, 15 years of sanctions, two allied bombing campaigns and an invasion decimated the industry," said Coyle. "If both sides remain conscious of the need to protect the Libyan nation's patrimony, the long-term damage to the energy industry should be minor."

Pressure at the pump

Oil prices remain elevated as Libya's civil war and further protests in the Middle East boost fears of cramped supply.

The drop in oil demand that followed Japan's earthquake has proved temporary, with the country already ramping up its refining of imported oil.

In the northern hemisphere the summer driving season is approaching, and that's led some traders to forecast a supply crunch and even higher prices by midyear.

Drivers have faced sudden price increases in the past few weeks and politicians have been quick to step in. Prime Minister Vladimir Putin demanded petrol retailers slash prices and the British government cut petrol taxes to quell protests.

Although Libya meets only 2 per cent of the world's oil consumption, compared to 11 per cent from Saudi Arabia, it is of top quality, used for transport fuels.

Much of it goes to Europe. More than 20 per cent of the oil imported by Austria, Ireland and Italy comes from Libya, according to the International Energy Agency.

And that's just oil: Libya has the potential to be a key gas supplier to the EU. Gazprom, BP and Exxon Mobil are among the companies exploring for gas.

With three-quarters of Libyan oil output suspended, Saudi Arabia has pledged to fill the gap. Companies that monitor oil shipments, however, say tanker flows fell in March ­ and some doubt the kingdom's ability or willingness to boost production enough to bring prices down significantly.

Oil futures have jumped 20 per cent this year. They remained stubbornly high at the start of this week, with London's Brent crude futures above $115.

Many think they'll go higher.

US bank JP Morgan sees prices rising as far as $130 in the second quarter ­ the highest since 2008.

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