Will A New Libya Usher in The European Energy Revolution?
by David Fessler, Investment U Senior Analyst
Tuesday, October 25, 2011: Issue #1628
There’s a plan, considered grandiose by its critics. If successful, the project could fulfill much of the current and future energy needs of Europe, North Africa and the Middle East. It’s located smack in the middle of one of the most inhospitable places in the world: the Sahara Desert.
Libya’s participation is critical to the success of the intercontinental plan. Whether it ultimately becomes a reality depends on many factors.
Muammar el-Qaddafi’s reign has ended. That’s a good thing, especially for those forced to endure his totalitarian nightmare for nearly 42 years. The transitional government must now transform itself into something that all Libyans can live with. And one of the largest energy exporters to Europe will need to change its ways in order to fulfill its plan to implement a radical renewable project.
But this won’t happen overnight.
What About Libyan Oil and Gas Production?
The speed at which it does happen will matter, especially to the resumption of energy production. When will Libyan oil and natural gas production resume its rate prior to the country’s uprising?
The reality is, it’ll take at least a year or two, or maybe even three – and an estimated $3 billion of capital – for oil and natural gas production to return to pre-civil war levels.
History tells us that even three years could be wildly optimistic. When the United States invaded Iraq in 2003, oil output dropped almost immediately from the 2.4 million barrels per day (mbpd) before the invasion to around 100,000 bpd. It only just returned to pre-invasion levels in Q2 2011, a delay of eight years.
On the plus side, Qaddafi was a dead man walking for weeks. That reduces oil company and investor concerns that the country could become another Iraq. Most of the country was securely in rebel hands even before Muammar met his demise.
The odds are increasing that the resumption of Libya’s contribution of two million barrels of oil per day to the global oil supply will be sooner rather than later. Initial indications point to a relatively smooth process. Oil and gas companies are already starting to trickle back into the country.
On the downside, there was a significant amount of damage to oil infrastructure at both production and port facilities. Many of these repairs will take years, and they’re just beginning to get underway.
Libyan Natural Gas Production: Already Ramping Back Up
Natural gas is a slightly different story from oil. Libyan natural gas exports to Italy have resumed through the 32″ Greenstream Pipeline.
This 340-mile pipeline crosses the Mediterranean Sea, and is jointly owned by the Italian oil and gas giant Eni S.p.A. (NYSE: E) and the Libyan National Oil Corporation.
It connects onshore gas-producing fields at Wafa and offshore fields at Bahr Essalam with Libyan gas processing facilities at Mellitah. The Italian end terminates on the island of Sicily at Gela.
Roughly 80 percent of gas produced by Libya was historically exported to Italy, where it represents 10 percent of Italy’s total gas usage. Since February, when supplies were halted due to the uprising, Italy started buying gas from Russia to make up the difference.
It recently resumed buying from Libya, albeit at a much-reduced rate than before the uprising. You can see that in the graph below from the EIA. As things continue to return to normal, you can expect Italy to buy less from Russia and more from Libya.
The revenue will provide a much-needed source of capital for Libya to begin reconstruction of its oil and gas infrastructure, and its infrastructure at large.
A New Chapter and a Potential Bonanza in the Desert
Libya is about to begin a new chapter in its history. It’s potentially a new democratic nation in the making. Rebuilding its energy infrastructure is key to the resumption of economic growth. But there’s an even bigger reason to do so on the horizon.
It could turn Libya into a North African energy powerhouse (no pun intended). I’m talking about Libya’s role in the Desertec concept.
Desertec proposes to generate electricity in North Africa, the Middle East and Europe. Participating nations would all be tied together in one large grid. More energy falls on the deserts in North Africa in six hours than the world consumers in a year.
The place is virtually uninhabitable, yet it’s relatively close to the major population centers of Europe and the Middle East.
Take a look at the conceptual map below, and you get an idea of the size of the undertaking.
Ultimately, over €400 billion would be spent on concentrated solar power plants, wind farms and a super grid of high voltage DC lines. This network will connect the various sources to major population centers.
It’s estimated that Desertec could provide Europe with as much as 15 percent of its overall energy needs. African nations would receive much needed capital to create jobs and foster economic growth.
Houston, We Are Probably Going to Have a Problem
The biggest problem Desertec faces has nothing to do with technology and everything to do with the geopolitical environment. The Middle East is traditionally a hotbed of armed conflict, social unrest and high unemployment.
Cooperation between European, Middle Eastern and North African countries will certainly be challenging. This is especially true at the moment, as a number of countries are involved in civil wars and potential government upheavals.
Damage to existing infrastructure is high on the list of targets under these types of situations. Still, the project has merit, and Tunisia is well on its way to reform and Libya is just beginning the process.
The rest of the Arab world is keeping an eye on their ability to succeed. Desertec’s ultimate implementation could have an incredibly positive effect on the economies of North African and Middle Eastern nations.
Who Benefits?
Two companies immediately come to mind. The first is ABB Limited NYSE: ABB). This Zurich-based company is one of the largest European manufacturers of high voltage transmission equipment. The Desertec project will require nearly 5,000 miles of new transmission lines constructed and others upgraded.
ABB will be a prime beneficiary of the transmission line construction and upgrades that will go on for decades under the full implementation of Desertec.
The second company is First Solar, Inc. (Nasdaq: FSLR). First Solar joined the Desertec consortium over a year ago, and was the first photovoltaic company to do so.
Stephen Hansen, Managing Director of First Solar’s European sales and customer service unit for Europe, the Middle East and Africa had this to say about First Solar’s participation in Desertec: “The challenges of energy security and global warming demand bold solutions and Desertec certainly provides an ambitious vision.”
For now, Desertec is just a great plan for producing carbon neutral energy. Its implementation depends on cooperation and understanding between countries with vastly different beliefs and political agendas. We’ll keep a close eye on the project to see if and when it moves into the implementation phase.
Good investing,
David Fessler
Article by Investment U
