Coalition forces over Libya are not trying to kill Gaddafi, or to co-ordinate air strikes with the rebels, the Pentagon said on Sunday.
Assuming that’s true…
We could get a long war. In that case, FT Alphaville will go back to something we asked before. Between Gaddafi and the rebel forces, who could get enough cash to build a military advantage and retain loyalty — and where could they get it from?
Right now, we reckon the question could be about to affect the oil market’s view of Libya’s lost production even more.
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Who gets the oil money?
In another way in which Security Council resolution 1973 would have repaid close reading by the market last week, the Libyan National Oil Corporation was added to the international freeze on Gaddafi financial assets for the first time:
European Union officials will discuss adding the NOC to the asset freeze later this week. For now, the company remains off the UK Treasury’s list of entities whose assets have been frozen in British jurisdictions (turn to pages 120 and 121, click graphic to enlarge):
Watch out for this, as it’s a specific combination of the NOC and the central bank which perhaps makes a difference, we think.
Before the war, the NOC took stakes in western oil contracts to explore and produce in Libya. A 50-50 joint venture with Eni to oversee natural gas production destined for Italy for example, or numerous relationships via NOC subsidiaries.
Additionally, the company handles refining and exports, and thus, cash flows that progress on to the central bank and also the Libyan Investment Authority. Without fresh oil money, the central bank has been putting retired paper money back into circulation, to make up for cash sucked out towards mercenaries and other military payrolls.
Despite war damage, it’s noteworthy that the regime has recaptured some refineries including ports and terminals recently, including Ras Lanuf. Here’s a related map via Samuel Ciszuk of IHS Energy:
Goodbye to that last remaining cash source now?
If so, it will affect a bit more than Gaddafi’s funds.
Initially, we thought that freezing NOC and central bank assets will close off any trading of oil for cash between the Gaddafi regime and Chinese or Indian buyers who aren’t as worried about reputational risk as their western counterparts. It’s been one source of revenue since the war began, but it’s also one that’s questionable if the UN’s is now involved. That’s one last conduit of Libyan oil to world markets that could go, finally taking purchases of high-quality crude offline.
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Those western oil contracts
In the longer term… the NOC’s contracts with western oil companies look exposed. It’s actually unclear whether the contracts themselves (made under Libyan law) come under a freeze on assets in western jurisdictions. Even so, they have a long-term value to the companies concerned, which explains concern that the NOC will nationalise the contracts in retaliation for a western refusal to return.
Freezing the NOC’s assets makes return a little difficult. It also might disabuse some companies of the notion that it’s possible to deal with the NOC without dealing with Gaddafi.
And in a truly long war — that might prove very tricky for the exploration potential Libya once presented.
One last complication though. Despite what the Pentagon says, as coalition air strikes destroy more and more of Gaddafi’s weapons, perhaps it might yet be easier for rebels to strike west and retake infrastructure. They both really need some cash and aren’t exactly restricted by financial sanctions — only instability.
Might access to Libyan oil decide the conflict just yet?
Related links:
Oil companies fear nationalisation in Libya – FT
Libya says may give oil deals to China, India – Reuters
Navigating the Gaddafi asset freeze – FT Alphaville
Freezing Gaddafi’s billions – FT Alphaville