Category Archives: Emerging markets

Libyan oil will fail to deliver despite unity government

Libya nominated a unity government yesterday after a lengthy UN-brokered negotiation, aimed at harmonising the embattled country that is currently being run by two rival governments.

But sadly political stability is still far away for this resource-rich country, which is having to fight the aggressively expansionist militant group Islamic State.

As such, it seems unlikely that the North African country, which has the largest oil reserves in the continent, will be able to return production to its 2011 peak of around 1.6bn barrels a day from its current levels of under 400,000 barrels.

With brent crude dipping to 12-year lows this week and hovering at around $28.30 a barrel yesterday evening, an absence of Libyan output will be of no matter to the market. But it is everything to Libya’s financial stability and its peace.

When I edited a Middle East-focused trade mag, I remember chatting to an insurance company CEO in Dubai shortly after Gaddafi had been toppled in 2011. The CEO, and a number of other UAE delegates, had been invited on a trip to Libya to boost trade. At the time, there seemed everything to hope for – I even wrote a feature along the lines of Libya’s oil reserves being the next big thing. But the awaited period of political stability and harmony failed to arrive, with competing armed forces taking control of oil fields even before IS came on to the scene.

Libya relies on oil for around 90 per cent of its revenue, so an unproductive Libyan oil sector means a financially weak Libya. A power vacuum and a struggling economy are manna to IS, which is destroying Libya’s oil fields, rather than taking them over like it did in Iraq and Syria. Whether this is a plan to weaken the country further in order to take control, or simply stage one of a plan to devalue the oil assets before pouncing on them, is debatable.

Either way, Libya is in dire straights. RBC Capital Markets research earlier this month called the country a “wild card” that could potentially add substantial quantities of oil to an already saturated market this year, but I think the term wild card is far too optimistic in this case. For wild card suggests a possible return to the stability needed for Libya’s oil sector to prosper – which would be incredible in the current climate.

Firstly, the new, nominated government needs to win acceptance – the fact that two out of the nine members of Libya’s Presidential Council have already rejected it shows just how divided the country is.

Secondly, to make progress on energy security in the face of low revenues, a divided government and attacks from a number of rebel groups, not just IS, will be a long and arduous process.

Thirdly, a growing number of oil fields have been destroyed by IS, meaning work would need to be done to return them to an operational standard.

Of course, situations change quickly and perhaps 2017 could present a more promising year for Libya and its oil reserves. But the longer it remains in flux since the demise of its tyrannical ruler, the less likely it seems.

Desperately seeking financing: Nigeria in trouble

How do you solve a problem like Nigeria? Long touted as the jewel in Africa’s crown in terms of economic potential, the country’s bad debts and a domestic liquidity crunch are showing no signs of abating as long as the low oil price persists.

Brent crude futures edged down to around $43.63 yesterday evening, which is not a million miles away from August’s six-and-a-half year low of $42.23. I’m pretty bearish on oil and wouldn’t be surprised to see the price slide wayyy down over the coming months – the underlying pressures just aren’t going away.

The Nigerian economy, which is heavily dependent on oil, can’t break even at these prices and its currency has crashed. The central bank is rationing its foreign currency reserves, causing major problems for companies who borrowed in dollars and need to pay off their debts.

Multinational oil companies such as Shell and Chevron had already sold off their assets in Nigeria to local firms, who borrowed money to buy them and are now the ones saddled with this bad debt.

With such limited liquidity in Nigeria, it’s the international market who is providing the refinancing – mainly banks and private equity. And a well-placed source tells me that he expects more London listings for Nigerian companies, who can’t raise money on the teeny Nigerian stock exchange.

Will institutional investors come to rescue Nigeria from its debt debacle? It’s not the safest bet, but I expect that there is money to be made for those willing to take a long (long, long…) view.

Meanwhile Nigeria is facing a major fuel crisis. Despite its plentiful oil reserves, the country imports its petrol as it does not have the capabilities to refine it. Importers are now withholding petrol after an alleged payment dispute with the government, causing lengthy queues of angry motorists at petrol stations.

Nigeria needs to get a grip on its resources and build some refineries. Of course, to do this it needs reliable power generation, another problem the country is yet to address. And is unlikely to do so as long as its liquidity woes continue.