Bacteria in Libyan oil could permanently alter crude make-up

LONDON (ICIS)–Possible issues with the quality of Libyan crude following a long-standing blockade could change regional price spreads in Europe and the Mediterranean and affect the much-needed global supply of sweet crude.

• Bacteria could make sweet light grades more sulphurous
• Newly sulphurous exports could alter market dynamics in Mediterranean
• Libyan authorities desperate to resume production
• Some wells could be permanently closed due to residue clogging them

Libya’s National Oil Corporation (NOC) has warned that bacteria in its oil infrastructure could permanently affect the chemistry of its crude, which has so far been perceived as a favourite for high yields of IMO-compliant fuel oil.

PRICE IMPACT
The bacteria can increase the levels of sulphur in the crude grades’ make-up. This could turn some of Libya’s sweet light output into a sourer crude, which fetches lower prices on the market.

The bacteria surfaced amid the five-month long blockade on Libya’s oil export pipelines and ports, which was part of its ongoing civil conflict.

“Some of the damage done to us [during the blockade] is permanent and irreparable,” said NOC’s chairman of the board of directors, Mustafa Sanallah.

“Libyan crude is desirable because of its low sulphur content and high middle distillate yield,” said Ajay Parmar, senior analyst at ICIS. “These characteristics allow sellers of this crude to command a premium versus Brent. The potential for sulphate-reducing bacteria growth on unused wells is a serious problem and will be of concern to producers of Libyan crude.”

If the sulphur content of its crude is found to have significantly increased, Libyan crude may well lose its premium against Brent, Parmar added. “This could be good news for simple refiners on the Mediterranean – historically, the main outlet for Libyan crude – as they will be able to continue to take advantage of the good yields but at a cheaper ­­price.”

THE THREAT OF BACTERIA
According to NOC, the oil production reservoirs that were closed were subject to mechanical, structural, chemical, and microbiological changes. This has led to early production of water and the loss of oil wells completely.

Sanallah added that the liquids in the reservoirs – such as oil, condensate, and water, which have settled in a chemical equilibrium with each other – could mix and form thick emulsions that limit the oil production from the reservoir. This could force the closure of some wells.

“We are concerned about the growth of bacteria that will change the properties of oil in some fields. The value of Libyan oil lies in the fact that its sulphur content is low, and these bacteria will raise the level of sulphur, making it less valuable,” he said.

Libya produced an average of 1.2m bbl/day up until January of this year. The country had extensive plans to increase this over coming years to ensure a higher revenue for its conflict-ravaged economy. In late 2019, NOC announced plans to try to reach an output of 2m bbl/day within a few years.

However, this latest setback could put another hole in these plans.

REGIONAL IMPACT
This bacteria outbreak could impact the supply of sweet crude for IMO compliant fuel oil, and permanently alter regional spreads for Libyan crude. At the end of 2019, crude grades with a high yield of IMO-compliant fuels such as those in Libya and neighbouring Algeria, as well as Azeri Light from Azerbaijan, were fetching record prices. This stemmed from the increased demand in the lead-up to IMO 2020’s introduction.

NOC put the current loss of state income at $6.5bn due to the blockades. The company and the Libyan government have been desperate to return to previous levels of exports from the country.

Recent market comments indicated that Libya was likely to have to accept much lower prices for its crude when production resumed at normal levels. This was due to the risk premium added as confidence in the market was still low. Buyers would be unwilling to pay higher amounts for the grades, even if it was sweet and light, due to the possibility of terrorism and unrest interrupting its flow out of the country.

These pressuring signals would follow an already-bearish international picture, which has seen demand crash to historically low levels. Economies around the world were shut down due to the coronavirus pandemic, with some demand returning as lockdowns eased, but refineries were still struggling to find appetite for regional cargoes. This lowered demand meant that all grades were experiencing lower prices due to an oversupply.

Multiple light, sour grades in the Mediterranean and Arab Gulf regions are already sold on the market. Es Sider, one of Libya’s premier grades, currently has a sulphur make-up of 0.37%, whereas Kirkuk is at 2.23%. The grade’s chemistry would have to change substantially to match this. Kirkuk is delivered via pipeline from Iraqi Kurdistan into the Mediterranean market at a port in Turkey.

Saudi Arabia production of just one sour grade, Arab Extra Light, matches Libya’s entire oil production of 1m bbl/day.

The higher sulphur content of any future exports could see Libyan grades lose their premium to other grades. Before the blockade, Libyan grades fetched a premium on the market to Dated. However, like other sulphurous grades, this could change.

For instance, Kirkuk was trading at -$6.85/bbl to Dated during April, at the height of the demand slump, against Es Sider’s $0.00/bbl.