Moody's says the price surge will offset lower output by oil producers
Oil prices are expected to remain high because of disruption of supplies from OPEC producer Libya due to the current internal conflict and this will offset lower output by key firms, Moody's investor service has said.
In a report sent to Emirates 24/7, the rating agency warned that a spread of unrest to more countries in the Arab region could further push up crude prices and this could threaten the fragile global economic recovery.
"The current supply disruption caused by the loss of production in Libya, and the threat of contagion to other producing countries in MENA, are likely to keep oil prices elevated and volatile in the short term," it said.
"This should boost the operating profitability and cash flows across the sector, and provide oil companies with additional flexibility to carry out their investment programmes....in the case of issuers with material exposures to Libya, we would expect the financial impact from production losses to be mitigated by higher oil prices, especially in light of the punitive fiscal regime that already depresses the profitability of the upstream activities carried out by IOCs in this country."
Moody's said it believes there is little visibility at this stage on the long-term implications that a change in political regime - if it were to occur - may have on the IOCs operating in Libya, a key OPEC member.
But it warned that measures ranging from the introduction of tougher fiscal terms to expropriation could jeopardise the positions of some IOCs within the Libyan oil sector, as could international sanctions imposed on Libya.
The report said that if companies' resource bases and future production profiles were undermined, it would also heighten the event risk associated with the search for alternative growth avenues.
"However, at this stage, with fighting still ongoing in Libya, the outcome of the conflict remains unclear. Any potential contagion across MENA that leads to more severe supply disruptions as OPEC's spare capacity gets further eroded is likely to result in a new surge in oil prices," it said.
"This would arguably pose a real threat to the global economic recovery, which to date remains fairly uneven and fragile in Europe in particular. A meaningful decline in demand in the context of a double-dip recession could then trigger a severe correction in the oil price, which would in turn affect financial results across the sector."
According to the report, the risk of potential oil supply disruptions in Tunisia and Egypt, where anti-government protests first began, appears to be receding following leadership changes and the subsequent decline in tensions.
However, anti-government protests appear to be ramping up in Yemen where clashes are taking place on a daily basis in the capital Sanaa, it said.
It noted that Total and Hunt Oil companies hold interests of 39.6 and 17 per cent respectively in Yemen LNG, the largest project in the country, whose production is directed towards the export markets.
To date, there has been little apparent impact on oil and gas production or on Yemen LNG, which is located in a remote area, is heavily guarded and has its own port facilities, Moody's said in its five-page report.
"While a permanent loss of production from Yemen would be a setback for Total, the effect would be relatively limited given the scale of the company's global portfolio of upstream production and LNG projects," it said.
"In contrast, any sustained disruption in gas supplied to Yemen LNG would have a much more negative impact on Hunt Oil's credit rating, given the project's proportionately large share of Hunt's reserves, investment and future production."
Turning to international oil firms operating in the region, Moody's said it believed that while the ongoing anti-government unrest in parts of the Middle East and North Africa (MENA) is creating considerable uncertainty for those firms, the current events are likely to have only a "limited" impact on its credit ratings within the sector - at least in the near term.
"This is because we expect the loss of hydrocarbon production to be more than offset by the surge in oil prices stemming from concerns over the supply disruptions occurring in Libya," it said.
"We believe that IOCs could potentially face greater long-term credit implications as a result of the imposition of economic sanctions on Libya, the deteriorating security environment in the event of a prolonged civil war and the introduction of tougher terms for foreign producers."
It said that at this stage, much uncertainty surrounds the potential outcome of the ongoing conflict in Libya. "However, given that Libya is heavily reliant on revenues from oil exports, we would expect its government to have a strong interest in rapidly restoring full production."
© Emirates 24|7 2011
