Last updated: 21/06/2011 | 23:24 |  

Natural gas and oil infrastructure in Libya

The conflict in Libya has put in doubt Europe’s energy security policy. With alternative sources of natural gas in a costly dead end, Guillaume Barthe-Dejean argues the West’s stand-off with Gadaffi puts more power in Moscow’s hands

On 19 March a squadron of French Rafale fighter jets pounded forces loyal to beleaguered Libyan leader Muammar Gaddafi near the embattled city of Benghazi. The initial skirmishes were followed by a deluge of fire and steel. Finally spurred into action, US and British naval units blasted 110 cruise missiles over the regime’s anti-aircraft missile systems. Meanwhile, official communiqués and press releases rained down at similar pace. Broadcasters saturated the media space with footage of torched pickup trucks and tanks, Kalashnikov-toting ragtag rebels and the tragi-comical, umbrella-clutching rants of the defiant despot. Meanwhile, the price of a barrel of Brent crude soared to a towering $119.79 on 24 February as traders priced in the growing uncertainty and disruption to oil supplies. 

As with the Tunisian, Egyptian and other Middle-Eastern chapters of the “Arab spring”, the media coverage focused heavily on the social – and increasingly humanitarian – toll of the unrest and its impact on oil prices. Drowned out by the noise, however, another story unfolded largely unnoticed. In short, the intervention in Libya also revealed the rising pre-eminence of natural gas and Tripoli’s pivotal importance for European regional energy security. The latest in a series of powerful catalysts, the recent suspension of Libya’s piped deliveries has tightened natural gas supply in Europe and has cast a shadow of uncertainty over Europe’s ability to diversify its sources of supply. It also looks like the episode has awoken the growling bear from its hibernal slumber, and that Russia will take this opportunity to re-assert its clout in the geopolitical space. 

What is at stake in Libya today, and why is natural gas such a big deal? The ominous backdrop to our story is the tidal pull of irreversible macroeconomic trends. To put it simply, global oil production is peaking in the face of energy demand and natural gas is rising fast as the alternative fuel of choice. The IEA’s (very official) World Economic Outlook from last year made the remarkable admission that world crude production will “never regain its all-time peak of 70mb/d reached in 2006.” In other words, and after years of denying the very concept of “peak oil”, the agency is now intimating that the turning point happened some five years ago. Depleting oil reserves are a geological certainty and, with global energy demand surging, analysts project unsustainable price increases. Barclays Capital believes the barrel of Brent will reach a whopping $185 by 2020.

The development of natural gas, however, is widely expected to fill the forecast global oil supply/demand gap. And this trend is by no means new. Since the oil shocks of the 1970s, sectoral shifts and technological advances have literally halved oil consumption in Euro Area economies from 60 per cent of primary energy demand back in 1971 to roughly 35 per cent today. Natural gas, on the other hand, tripled its market share over the same period and amounts to roughly 25 per cent of today’s primary energy demand. While developing economies of course remain oil-intensive, the demand for gas will nonetheless increase alongside impressive growth rates. Morgan Stanley anticipates China’s gas demand alone will grow by over 200bcm (billion cubic metres) by 2020, which is equivalent to 65 per cent of current global spot capacity.

Exacerbating these long-term trends, however, are a number of catalysts that have turned the spotlights on natural gas and spurred an explosive demand for the resource over the last couple of months. For a start, the world is not quite ready to forget the BP Deepwater Horizon disaster that spilled an estimated 4.9million barrels of oil into the Gulf of Mexico. For all the tergiversations with drilling permit moratoriums, the ecological catastrophe has opened a wedge for the shale and natural gas industries in the US. On 30 March, President Obama went as far as labelling natural gas his “first” option in his blueprint on national energy security – an emphasis that recognises the gas lobby’s newfound congressional ascendancy over coal caucuses.

More recently, the meltdown of the Fukushima nuclear plant in Japan has cast doubts over the viability of nuclear power. In Europe, where the sector represents 13 per cent of energy consumption, the catastrophe has, for example, prompted Germany to temporarily shut down seven of its plants and forced Italy to postpone a public referendum on nuclear power. While the fate of the industry is hanging in the balance, one of the immediate consequences of the tragedy has been a mad dash for gas. With 11 reactors currently offline and 1.3 million people without power, Japan is scrambling for liquefied gas (LNG) and is diverting spot cargoes across the world to make up for the shortfall.

Now, LNG spot deliveries represent the smaller portion of the natural gas market that is non-contracted or predicated on pipeline distribution. As such, it is the only segmentation of the market that is not regionally fragmented and that reflects global market expectations of future price movements. While LNG was in a situation of oversupply during the recession, the economic recovery and Japanese energy crisis tightened the market considerably and exerted an upward pressure on prices; UK futures for May delivery gained more than 20 per cent from over the first two weeks of March. To make matters worse, one of the world’s largest LNG producers, the Qatari RasGas company with a production of 36.3million tons a year, has scheduled shut to down one of its key liquefaction facilities throughout May for maintenance. The last thing the world needed in this context was a key piped disruption in natural gas supply. But that was without reckoning on Colonel Muammar Gaddafi.

Much has been said, of course, about the Libyan oil disruptions. While the regime had until now averted the destruction of its lucrative petroleum infrastructure, Gaddafi has now changed his mind and loyalist troops are shelling the Mislah, Sarir and Naroufah oilfields that supply the key Mediterranean oil terminal of Tobruk. This in an attempt to cut off the Cyrenaican rebels who wrestled control of the port, and sought to export oil through the intermediary of Qatar in exchange for medication, food and perhaps even weapons. Libya’s oil output in early March was halved when workers fled the escalating violence, and these developments are unquestionably worrisome.

If you look at the bigger picture, however, Libya only produces 2 per cent of world oil. Despite familiar fears surrounding OPEC’s excess capacity and strategic reserves, the Libyan shortfall in oil supply has already largely been compensated for by Saudi Arabia. In any case, the oil market today is truly global, commoditised and fungible, which means there are no key dependencies on supply. Far less attention has been devoted, it seems, to the interruption of Libyan gas piped deliveries. On 22 February, Italy’s ENI announced it was suspending all gas transit through the Greenstream pipeline which connects Melitah in Libya to Gela in Sicily (see map attached). Despite ENI’s efforts to play down the disruption, the pipeline pumps 11bcm of gas to Italy annually, which represents roughly 12.5 per cent of Italy’s total gas consumption.

When you look at the numbers on an EU-wide scale, Libya’s gas exports in 2008 came in fourth position. In absolute volumes, of course, they pale in comparison to that of Russia, but that is precisely what is at stake in the struggle with Gaddafi. For unlike the integrated oil markets which have a truly global reach, the bulk of gas deliveries to Europe operate on a piped regional basis that flow directly from a very limited number of (mostly authoritarian) suppliers. To put it another way, any disruptions from Libya ultimately translate into increased reliance on Russian gas. And those who remember the cold winters of 2005, 2007 and 2008, will know that increased reliance on Russian gas implies coercive disruptions linked to Russian foreign policy objectives. This is perhaps what the head of ENI Paolo Scaroni had in mind, when he acknowledged that, “We can buy oil from many sources, and there is not an issue of security of supply… With gas, the issue is more sensitive.” As expected, and within hours of the Greenstream disruption, Gazprom had already increased its daily 63mcm deliveries to Italy by 30 per cent, reaching 81.1mcm on 24 February.

This is a formidable reversal of fortune for the Medvedev administration – not a month before the crisis, Putin was in Brussels seeking a waiver from the EU’s impending energy liberalisation package. Threatened by the prospects of ceding ownership of Russian pipelines on EU turf, the incensed premier threatened a not-so-subtle price increase. Despite the bravado, however, there was a sense the Commission would not yield to the pressures and that Russia would effectively be paying the price for the Russo-Ukrainian standoff of 2009. With spot prices now rising steadily above Gazprom contracts, however, the Libyan crisis now affords Moscow much greater leverage and the threats no longer sound so hollow. Moscow is clearly the big winner as Libya descends into chaos – while the disruptions in gas supply are quietly increasing its market share, the value of its piped exports, spurred on by tightening LNG markets, continues to rise. Gazprom was up nearly 18 per cent on the Moscow stock exchange in March.

For European policymakers and consumers these developments are a concern. Crucially, and ever since international sanctions were lifted over the Libya, the country had emerged as an unhoped-for alternative source of gas supply. Deliveries via the Greenstream pipeline had, for example, doubled since the 2004 inauguration, and Libyan LNG deliveries from the Marsa el Brega terminal now accounts for 1.5 per cent of total Spanish gas imports. According to the BP statistical review, Libyan proven natural gas reserves currently stand at 52tcf (trillion cubic feet), a figure that could more than double given 75 per cent of the country’s reserves remain unexplored. This means Libya may one day surpass Norway, which today provides an (unproblematic) quarter of the EU’s gas needs.

More generally, the stalemate in Libya and the propagation of regional instability could jeopardise the delivery of key Euro-Mediterranean gas integration projects that, according to the EU, could provide a whopping 77 per cent of all additional gas needs by 2030. Indeed, Libya constitutes the only missing link in the construction of a “Med Gas Ring” linking Egypt to Algeria, itself a building block to the “Mediterranean Union” project that will one day bind the Mediterranean to the Maghreb and Mashrek. Moreover, Libya is a strategic cornerstone to a vision that transcends the Barcelona process and that could unlock energy corridors from sub-Saharan Africa. Should the violence in Libya spread to neighbouring Algeria, for example, it could significantly delay or discourage the 4,128km-long Trans-Saharan pipeline project that seeks to connect the Nigerian Warri gas fields directly to European consumers.

These mammoth gas projects did not just pay lip service to former authoritarian regimes. With fast-declining Norwegian gas fields and the political costs associated with Russian gas, their completion represents a pivotal objective that would do much to break the EU’s regional encirclement on the gas market. As such, and while the political calculations surrounding the military intervention in Libya are layered and respond to different intersections of national interests, European leaders are anything but oblivious to the criticality of the natural gas supply for European energy security. As with other key concerns surrounding the intervention (namely human security, regime change and oil), it nonetheless remains to be seen whether the Coalition will resolve the issue or simply make things worse.

Should the unthinkable scenario unfold and Gaddafi survive NATO’s wrath, this will herald a period of great turbulence on the European gas market via the Italian conduit. It is unlikely the regime will forgive Berlusconi’s “betrayal”, in which case gas resources will likely be redeployed to sympathetic consumers such as India or China. Should the Coalition prevail, however, post-Gaddafi scenarios will largely depend on whether the West gains an actual foothold in the country (as opposed to bombarding it from thousands of feet above). Another determining question remains whether the incoming regime will be sympathetic to the West after its ambivalence towards Gaddafi. Should European powers be invited to do the dishes and play a role in post-war reconstruction, resources and investments will likely be deployed to grow Libyan piped and LNG supplies. But then once again the West will need to foil the bear –as of course Gazprom took a chunk of the market under Gaddafi.

Guillaume Barthe-Dejean holds an MSc in International Relations from the London School of Economics. He contributed to the Armed Conflict Database at the International Institute of Strategic Studies (IISS) and formerly worked in Public Affairs at Lehman Brothers. He has been actively involved with the World Economic Forum annual meeting in Davos over the last four years, and is currently pursuing a career in banking.