Libya & Egypt Energy Advisory

Stay away from Libya, where a conflict between rebels and the government threatens to spiral into an all-out civil war for control of the country’s oil wealth and the appointment of a new prime minister, parliamentary and presidential elections promises to get very messy.  Presidential elections in Egypt, which are planned for April—and for which there is really only one candidate—are not likely to present an elixir for the country’s critical energy problems.

Libya

Rebels who have control of three of Libya’s key export terminals are wrangling for negotiations with the government now that the US has stepped in to intervene with a North Korean-flagged oil tanker that was illegally loading oil at the port of Al-Sidra. The US Navy’s intervention in this matter could potentially help work towards negotiations between the rebels and the government, as the intervention signals that the US will intervene to stop illegal oil exports from Libya’s ports. At the same time, the incident has been extremely embarrassing for the government in Tripoli and has led to the sacking of Prime Minister Ali Zeidan, which could also work to bring the rebels to the negotiating table.

•    Illegal oil exports: Last weekend, the US Navy took control of the North Korean-flagged oil tanker from armed rebels near the coast of Cyprus, and is escorting the tanker toward Libyan territorial waters. The US Navy has promised to hand the tanker and its 21 crew members over to the Libyan authorities in the next few days. The new modus operandi for the rebels controlling Libya’s ports is to have vessels turn off their transponders so they can’t be recognized, and then enter the ports on the authority of the rebels and start loading tankers. In the case of the North Korean-flagged Morning Glory currently under US Navy escort, rebels loaded $33 million worth of oil. The US intervention signals to the rebels that they’re not going to get far beyond Libyan waters with their loot, but this is only putting a bandage on a gaping wound. The overriding problem is that the people represented by the rebels understand that the revolution that overthrew Gaddafi has not meant that the country’s vast oil wealth is being distributed in any better manner than it was before the revolution. They want their piece of the oil pie, and would use it to strengthen their bid to achieve autonomy for eastern Libya.

•    Messy politics: PM Zeidan has been fired, and the Libyan General National Congress (GNC) has given the rebels two weeks to hand over control of the export terminals in the east, or they will be taken by force. After losing a vote of confidence in parliament, Zeidan is temporarily being replaced by Defense Minister Abdallah al-Thinni. Zeidan has since left for Germany. We don’t expect any clearer results with al-Thinni, though the temporary replacement might open a window for negotiations with the rebels. At the same time, al-Thinni will only last a couple of weeks, because that’s all the GNC has given him until they appoint a new prime minister. But the government is running side operations at the same time, trying to close in on the ports. On 11 March, a government-aligned militia (Misratan) forced rebels from their bases in Sirte. There will be no negotiations with the rebels until these military operations are ceased. It is in this atmosphere that the GNC plans to hold parliamentary elections in June--which is required due to the no-confidence vote against Zeidan—and then presidential elections. Beyond this, the issue of presidential elections is still up in the air as it needs to be decided whether a president will be directly elected by the people or in a vote by the GNC.

•    Protests: On 8 March, protests at the Sharara oilfield in southwest Libya were halted, but will resume in two weeks if demand are not met. Production at the field resumed on 9 March, but at only less than one-third of the 350,000 bpd capacity.

Egypt

Tensions are being heightened further in Egypt as presidential elections near and security forces come under increasing attack, while energy woes mount.

•    Egypt’s energy crisis is prompting a lot of talk about having companies switch to coal as early as September this year, despite restricting environmental regulations. Reports suggest that many factories have already begun switching their internal infrastructure to accommodate coal.

•    Artificially low subsidized fuel prices have led to demand outstripping supply in recent years, and we are now seeing this hit the critical stage.

•    Presidential elections will be held in a matter of months, and General Abdel Fattah al-Sisi—of Muslim Brotherhood-crushing fame—will find that energy will be one of his key boogeymen as he vies for the presidency. Sisi enjoys enormous popularity, but energy issues and shortages will present him with a grave challenge. Specifically, we do not believe Sisi will be up to the challenge of fixing Egypt’s energy problems, which will require very unpopular reforms that hit at subsidies. At a time when demand is soaring and supply is dwindling, there is low confidence—from an industry perspective—that Sisi has what it takes to create a strategy for developing the country’s major natural gas reserves, which is vital as production from mature fields is declining. According to the government’s own forecast, consumption will outstrip output for the first time in July. With the subsidies in place, Egyptians have no incentive to reduce consumption, and moves to strip subsidies could bring the protesters back out in full force, this time against Sisi.

•    The LNG Conundrum: Egypt has continually failed to do what needs to be done to directly import LNG and there has been no movement on a tender for a floating LNG import terminal that was put up in October 2013.

•    E&P: There is some optimism over exploration and development in the Nile Delta. Germany’s RWE has confirmed positive results from an appraisal well in the North West Khilala field, which is an onshore field in the Nile Delta. RWE tested the flow rate from the well at about 1.5 million cubic feet per day. At the same time, Emirati-based Dana Gas is planning to overhaul its el-Wastani natural gas plant in Egypt to increase production by 25%. Dana Gas also signed the first deal for offshore exploration in the Nile Delta in February.