By Greg Peel

One unfortunate soul at the end of his tether self-immolates in protest in Tunis and the next thing we know a modern-day collapse of the Berlin Wall is underway. A butterfly flapped its wings. Chaos ensued.

Let's rattle off the list: Morocco, Tunisia, Algeria, Libya, Egypt, Jordan, Yemen, Oman, Bahrain, Iraq and Iran, with Saudi Arabia adopting preemptive concessions. That's pretty much all of MENA (Middle East and North Africa).

You might find Iraq a curious inclusion here (a) because it hasn't really come up in media reports and (b) if it does, who can tell the difference anyway? Iraq is just one suicide bomb blast after another, with oil facilities included as targets, and has been continuously “post” war. Yet as we speak Iraq, too, is experiencing large-scale protests along the same lines as its neighbours.

Were we to choose two “poster” nations for the uprisings to date, they would be Egypt and Libya. The former for its relatively swift and relatively peaceful transition and the latter for exactly the opposite. When protests first began in Libya, financial markets saw another Egypt and as such were not overly concerned. Now that the body count is mounting and no swift resolution seems imminent, the story has changed. Oil is trading over US$115/bbl.

Recent research reports from analysts suggest a pervading view that the oil price spike will still prove only a temporary phenomenon. Even Fed chairman Ben Bernanke has suggested as much to Congress. The bottom line is that whatever form of government may arise in the various oil producing centres, that government would not be foolish enough to cut off its only income source and as such have no funds to address the social dissatisfaction that put it in power in the first place. Ergo, prices will eventually slip back to more manageable levels.

Not all the MENA nations are significant oil producers. Egypt, for example, is not, but then initial concern was over passage through the Suez Canal. In assessing the “escalating risks of Libya and beyond,” the Danske Bank analysts have concentrated on Libya, Algeria, Oman and Iraq as posing a bigger threat than financial markets are currently suggesting. These nations are considered to be riskier to the global oil balance than the larger producers of Saudi Arabia and Iran given a particular underlying theme – that of total reliance on foreign investment in the oil industry.

Foreign oil companies have evacuated their staff from Libya and Libya now “remains out of the global oil market equation,” says Danske. While Gaddafi may eventually fall at the hands of a mobilising opposition from the east, the reality is the country is plagued by tribal and regional divisions and outside of the 42-year government there are no strong national institutions which could step in and fill the void. Egypt's military, by contrast, abandoned its leader pretty quickly and is maintaining a caretaker interim government. But, again, Egyptian governmental aspirants are not looking at vast amounts of petrodollars up for grabs. Greed is a very distorting emotion.

Libya has no parliament, no parties and no NGOs, and the military is weak and fractured, notes Danske. The chances of foreign companies returning quickly to Libya under some fragile ruling body, to again risk investment funds and lives, are not great. And let's not forget the underlying reasons for popular dissent. With poverty, unemployment, lack of social services and entrenched corruption as catalysts, the people are really just saying “our country makes millions from oil and we see not a cent”. Yet Libyan oil is produced and sold in a joint venture between foreigners (49%) and the government agency (51%).

Danske notes Libya's oil taxes and royalty rates are already among the highest in the world. Were a new popular government to take control, there's every chance an insistence on greater “equality” would lead to higher charges still. At some point it would no longer be a viable proposition for foreign investment. The long period of international sanctions has left the Libyan oil industry sadly underdeveloped and those sanctions were lifted less than a decade ago. There are plans for significant production expansion, which means significant infrastructure expansion, but that relies on foreign investment.

So somewhere between the risks associated with returning to a country that is likely to remain highly volatile post-Gaddafi, and the risks that some new power would undermine investment anyway, lies a whole lotta reasons why Libya's oil industry may be dead and dead for quite some time yet.

There are many similarities between Libya and Algeria. Algeria's long and bloody civil war ended only in 2002 and terrorist attacks continue today. Given Algeria's oil fields lie far from population centres, Algeria's oil industry managed to stay relatively immune from the war and foreign companies have been confident enough to operate there since the government took steps to ensure the protection of oil infrastructure. For that reason Danske suggests Algeria may not be as much of a threat to loss of global production as Libya.

However, while the Algerian government took steps to offer social reform packages to the masses when the country was one of the fist to follow Tunisia, the people are still not satisfied and more protests are being planned in Algiers. Algeria's producing oil fields are in decline, notes Danke, and new fields are waiting to be opened up. Again, this requires foreign investment. Again, there has already been concern that the existing government has been insisting on a greater and greater slice of the pie. Were unrest to escalate once more, again it might be quite some time before it is worth the risk to foreign companies to return.

A much bigger threat is Iraq, suggests Danske. The Gulf Wars have left this major oil producer shattered and unsafe. As Danske notes:

“The rehabilitation and expansion of the Iraqi oil industry faces major logistical and technical challenges. Years of neglect, under-investment, and field mismanagement appear to have permanently damaged the reservoir of super-giant fields, particularly Kirkuk. Problems extend well beyond the state of the Iraqi oil fields. Export capacity is constrained and limited, meaning that any substantial production increase will need to be accompanied by major upgrades to the export system. Thus, clearly, attracting direct foreign investment has assumed centre stage in the government’s strategy to revamp the oil sector.”

Foreign companies have been toughing it out in the fragile and volatile environment post-war so far, but were the situation to escalate from simple sectarian terrorist acts to full-scale MENA-style protests (which have started) leading to a fall of the already tenuous administration, then it becomes a different matter. Would Obama send in more troops again while fighting a deficit battle at home? Or take the opportunity to claim “democracy” and withdraw once and for all?

Lower on the list is Oman, which has a disjointed collection of oil reserves that are among the most costly in the region to tap. Sophisticated technology is required and no prizes for guessing who provides the funds. The Sultan of Oman has also moved to head off protests with social package offerings, but nor are Omanis satisfied with such crumbs.

The bottom line is thus: even if the governments of all of the above nations were to fall and some form of democratic or otherwise powers be installed, and even if those powers are intent on maintaining oil production, the ongoing risks and costs to foreign investors could mean production in these countries is gone – lost for the foreseeable future.

To date, Saudi Arabia and other OPEC nations have been drawing upon spare capacity to make up the shortfall. But spare capacity is limited, notes Danske, and rapidly diminishing as each day passes with production in Libya, for one, shut down. There is certainly not enough spare capacity available to counter more permanently lost production across the region.

And then we come to Nigeria – Africa's biggest oil producer and producer of some of the lighest, sweetest crude the world has known, and highly covets. Nigeria is sub-Saharan and thus not a MENA member, and is not suffering from popular unrest a la MENA members. It does, however, suffer from its own longstanding political unrest nonetheless.

Every now and then global oil markets respond to attacks by rebels on Nigerian pipelines, but these have become less frequent of late. Attacks are mostly centred around election periods. As Danske suggests, “Holding office in the oil region is such a lucrative affair that few politicians are willing to risk having the electorate decide their fate”. Attacks on infrastructure escalated significantly both before and after the last two elections and despite an amnesty since signed between top militia leaders, Danske does not see this as any impediment to fresh production disruption at the next.

Which is on April 9.

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