Analysis: Europe's refiners struggle to replace Libyan oil

LONDON/DUBAI (Reuters) - The loss of Libyan oil is a heavy blow to European refiners who face a costly struggle to replace the easy-to-refine crude because of a shortage of matching grades.

Violent revolt in Libya as Muammar Gaddafi clings to power has shut down as much as three-quarters of its output, according to some estimates.

Concern the disruption could escalate drove Brent crude futures to nearly $120 a barrel on Thursday, a new 2-1/2 year high, which has already wiped out the profits of some European refineries for making gasoline.

So far, there is no overall lack of oil in the world. Inventories are high and OPEC has an estimated 5 million barrels per day (bpd) of spare capacity.

The producer group has said it is willing and able to release oil on to the market but has so far made no formal change to its output.

Even if OPEC decides to act, many European analysts and traders say the crude most readily available from other OPEC nations is not the kind of light, sweet oil Libya can ship to aging European refiners.

"You are going to have to pay a premium for other crudes. If there's any sort of time constraint and you want them in a hurry you'll have to pay up to get in front of the next guy," said Rob Montefusco, a London-based oil trader at Sucden Financial.

Europe imports around 80 percent of Libya's 1.3 million bpd of exports, according to consultancy Facts Global Energy (FGE). The oil is destined chiefly for France, Germany and above all Italy, which buys around 400,000 bpd of Libyan crude. Its dependency is particularly high as it has many older plants.

LIGHT CRUDE, BUT FURTHER AWAY

Saudi Arabia, the world's leading oil exporter, has light crude, and senior sources said it is able to supply more to replace Libyan barrels. How much of it might be available to make the journey to Europe is unclear, however.

The kingdom has asked European refiners to specify the quantity and quality of oil they want, the Financial Times quoted a Saudi official as saying.

"There is the whole variety of different crudes available. It covers everything," said Sadad al-Husseini, an oil analyst and former top official at oil giant Saudi Aramco.

Capacity increments that have taken Saudi Arabia's overall production to 12.5 million barrels per day have included high quality light oil.

Saudi Aramco said on Monday its Khurais oilfield was pumping around 1 million bpd and could produce up to 1.4 million bpd. That alone could in theory make up for lost Libyan exports.

Some analysts say events in the Middle East and North Africa are moving so rapidly that OPEC may decide not to take any formal output decision until more clarity emerges, although Saudi Arabia can always unilaterally add crude to the market.

"If anything, the chances of an intervention have slipped back. All this fog is going to have to clear first," said Paul Horsnell of Barclays Capital.

ALTERNATIVES

In the medium term, oil of a similar quality to Libyan crude and trading in the Europe-bound physical market could get a boost from replacement demand. But in the short term, it may be difficult to find spot cargoes, because crude typically trades 21 to 40 days ahead, depending on the origin, traders said.

Oil from top African exporter Nigeria is a potential substitute in the longer term, but militant attacks on its infrastructure have hobbled its output.

A loading programme for March shows Nigerian exports will fall to an 11-month low of 1.91 million bpd, which is already above its implied OPEC target.

"Nigeria could in theory make up some of it and get to 3 million bpd, but it would be impossible to make up all of Libya's exports," said Holly Pattenden, head of oil and gas at Business Monitor International.

Saharan Blend from Libya's neighbor Algeria is good quality and could match the requirements of some refineries, but the country is already producing more than its implied OPEC target of 1.2 million bpd, according to a Reuters survey.

European refiners including Petroplus, Saras and Tamoil said they would seek to replace Libyan barrels through spot purchases but would have to pay more.

Azeri Light crude sold into the Mediterranean is an option, but it typically is more expensive to both buy and ship.

Other light European grades have shown some early signs of strength, and North Sea differentials turned positive for the first time in a month.

The additional costs will add to endemic problems for European refiners.

They have long been under strain from weak demand growth because of growing competition from natural gas, and the leap in Brent crude prices has obliterated refining margins for light products such as naphtha and gasoline.

"Italians will be the most affected by the disruptions. The most likely place refiners will turn to is Azeri barrels, but it's unlikely to be available immediately in large quantities," said an oil products trader operating in the Mediterranean.

The International Energy Agency has emergency stockpiles and will consider the problems of Italy and the other consumer nations it represents. But it has also said it would look first to OPEC to replace lost Libyan barrels.

(Additional reporting by Ikuko Kurahone in London, Simon Webb in Singapore and Reem Shamseddine in Khobar, Saudi Arabia; editing by Jane Baird)