Global oil prices surged on Tuesday as lethal political clashes spread through Libya, prompting several international energy companies to remove their employees or shut down production in the oil-rich North African country.
Both Brent and U.S. crude oil rallied to 2.5-year highs on Tuesday. Benchmark West Texas Intermediate jumped $6.73, nearly 7 per cent, to $92 per barrel on the last trading day for the March contract on the New York Mercantile Exchange. Most of the trading already has switched to the April contract, which climbed $5.90, or 5.9 per cent to $95.59 per barrel, the highest since Oct. 2, 2008.
Brent crude, which is delivered around the world and is considered a better reflection of global demand than WTI, added $1.26 at $107 per barrel on the ICE Futures Exchange. Brent is considered to be more sensitive to possible disruptions of Middle East oil supplies, while large U.S. stockpiles of crude are one of the reasons for the lower WTI prices.
Libya churns out enough oil to meet 2 per cent of the world's daily demand and is a major supplier of energy for Europe, producing roughly one-fifth of Italy's consumption, for example. Libya's eastern region of Cyrenaica, which hosts 90 per cent of the country's exports, is home to the heart of the revolt.
The price of oil is rising not only because of speculation that Libya's production will be hampered, but also out of fears that political unrest will spread to neighbouring oil-producing states.
"The biggest concern is current contagion spreading to Saudi Arabia," said Michael Hewson, a market analyst at CMC Markets. "Markets hate uncertainty and will act first, think later."
Energy companies have responded swiftly to the protests, which are threatening to topple Moammar Gadhafi after four decades of power. Britain's BP PLC is suspending its drilling plans in Libya as its contractors leave the country. Norway's Statoil ASA is closing its office and sending expatriates home, while Australia's OMV GA, Germany's RWE AG, and the Netherland's Royal Dutch Shell PLC are among those that have pulled out some staff. BASF AG said will cut production in Libya by as much as 100,000 barrels a day, or about 6 per cent of the country's output.
Among the world's top oil producers, Libya's output is about 1.6 million barrels a day, most of which is exported.
Two major Canadian companies also operate in Libya, which is a member of the Organization of Petroleum Exporting Countries. Suncor Energy Inc. inherited oil assets in Libya and Syria when it merged with Petro-Canada in 2009.
A Suncor spokesman said the company has "contingency plans" for all of its operations, including Libya.
"We do have plans under way right now to ensure that people are safe, and that can include moving them out of the country and we are taking a look at that," said Suncor's Brad Bellows. "We are monitoring and responding to events there. In the interest of the safety of our people, we do not provide status updates or details about our contingency plans." A Suncor employee working in Libya told her family that the company has decided to send employees home, according to the CBC.
Meanwhile, Montreal engineering giant SNC-Lavalin Group Inc. has "managed to secure the safety" of all its employees while suspending work on some projects, spokesperson Leslie Quinton said in a statement.
Suncor earlier this month was upbeat about its prospects in Libya and Syria, highlighting how quickly political instability can affect oil and gas companies operating in the region.
"I'm delighted to tell you that in both countries, operations are normal and that we see no disruptions of the type that we're currently seeing on TV in Egypt," Rick George, Suncor's chief executive, said on the company's fourth quarter conference call on Feb. 2.
Mr. George also cheered success in Syria, noting it started producing oil there in the fourth quarter, albeit only about 1,000 barrels a day. "We'll be adding more wells to that as we go through 2011, as we bring this oil rim that's around the gas field into production. So that'll continue to improve as we go forward."
Suncor's Mr. Bellows said he did not have information about the state of operations in Libya. Suncor is partnered with the Libyan government on a project that produces about 50,000 barrels of oil a day.
Suncor is focused on oil sands projects and has been jettisoning projects that do not fit with this plan. Analysts had expected Suncor would eventually move to sell its Libya holdings, but Mr. George a year ago said selling its properties in Libya and Syria was not a priority.
Moves by global energy companies to pull employees out of Libya and suspend operations demonstrates the heightened difficulty of working in North Africa and the Middle East. Should Suncor decide to sell its assets, political unrest could cloud the process.
"I've been following oil issues for 30 years and had not seen anything like what is happening now since the 1970s," said Davide Tabarelli, head of Nomisma Energie, an energy think-tank. "In the 1970s, it was all concentrated in a few countries, we had war with Israel. Now it's worse."
Protests in Egypt and Tunisia pushed out their respective leaders, while clashes continue in Bahrain and Yemen.
Calgary's Nexen Energy Inc. has operations in Yemen, and is negotiating to continue work there.
Marvin Romanow, the company's chief executive officer, was confident Nexen could continue there unscathed. "We don't see any reason why we can't continue to operate there," he said Thursday during a conference call. "We've gone through a civil war there. We've gone through many changes that have occurred in the country, and through all of that, we've conducted a safe and steady operation.
"We have an extraordinary capability to understand what's happening in the country, and we keep our eyes and ears open all of the time."
With files from Reuters
Carrie Tait