US oil firms return to a chastened Libya — it’s energy business as usual

David Everett looks at plans for US investment in Libya’s oil and gas sectors, with the big private firms back

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By  David Everett Published  December 4, 2005

After nearly 20 years of sanctions from the United States and United Nations (UN) that hampered its development in so many ways, Libya is poised to return to play a major role in the international scramble for oil. “There are many, many people who are descending into Tripoli to talk to the same people we’re talking to,” said Clarence Cazalot, the chief executive of Marathon Oil, Houston, Texas, during a brief overnight trip for a business conference and a private meeting with the Libyan prime minister. Libya is slightly larger than Alaska, mostly desert, with lots of oil underneath. How much oil is anyone’s guess because only a fourth of the country has ever been explored for it, but Brazil’s Petrobras and Oil Search Limited intend to find out. Awarded a contract in the first Libyan tender for the prospecting of 25 oil and gas sites, this consortium intends to invest at least US $21 million in this project. Petrobras, which owns 70% of the enterprise, will serve as the “leader and operator.” In 1958, oil was discovered in the country whose official name is the Great Socialist People’s Libyan Arab Jamahiriya, and it joined that elite clique of countries who had discovered they could gain the wealth of a King Midas, or even a Bill Gates, by pumping the gunky “black gold” from under the desert floor. A decade later in 1969, an army colonel named Muammar Al Qaddafi led a group of army officers in a successful coup. Several US firms had helped Libya develop its oil industry in the 1960s and early 1970s, the major ones being ConocoPhillips, Marathon Oil, and Amerada Hess. At its peak in 1970, Libya was producing 3.3 million barrels per day (bpd). However, Qaddafi allegedly used the oil wealth to aid subversives and terrorists abroad. Various acts brought sanctions upon Libya by the UN and the United States, with the latter ordering all of its citizens, including those working in the oil fields, to leave Libya, and banning the import of Libyan oil. In December 2003, having watched the United States invade Iraq allegedly in the pursuit of nuclear and chemical weapons, Libya announced that it had agreed to end its programmes to develop weapons of mass destruction, and to permit international inspectors to witness the dismantling of this arsenal. It was a far cry from the days when US and Libyan planes fought dogfights over the Mediterranean, and US President Ronald Reagan, just before he ordered the bombing of Tripoli, which killed Qaddafi’s baby daughter, said of him: “We know that this mad dog of the Middle East has a goal of a world revolution.” Today, the US government wants its oil companies there. Peter Zeihan, senior analyst at Houston-based Strategic Forecasting, a private intelligence service, said: “Libya has almost become a normal nation again.” But the real excitement in the petroleum west came over the impending return of the prodigal Libya — and its oil fields — to the family of nations. “We were issued a waiver by the US allowing us to visit Libya and engage in discussions with Libya on extensions to our license agreements. And those discussions are ongoing,” said Paul Weeditz, spokesman for Marathon Oil Company During the years of sanctions, the Libya oil fields suffered from a lack of maintenance and lack of access to replacement parts or to the technical advances made in the industry. The decreasing efficiency brought on by protracted sanctions had led to a steady drop in the country’s oil output from 3.3 million bpd in 1970 down to 1.4 million bpd today — of which 1.2 million barrels are exported. There are great expectations for finding more oil, raising the prospect of huge long-term increases in production and reserves. Marathon, Amerada Hess, and ConocoPhillips form the Oasis Group: US oil companies that were issued permits in 1955 to develop Libya’s Waha oil concession. Their output in Libya peaked in 1969 at over 1 million-bpd of oil. Many companies are anxious to return to the oil facilities they had developed and once managed, but some executives urge caution. “You can’t simply flip a switch,” said Casey Olson, a vice president at Occidental, the fourth-largest oil company in the United States. “It’s a step-by-step process.” Olson was one of the oil executives who traveled to Libya under a special waiver from the State Department. He said Libya had missed out on most of the industry’s technological advances of the past 20 years and had a lot of catching up to do. Most of the Oasis Group’s oil concessions in Libya expire this year, and the oil companies have asked for lease extensions from the Libyan government to prevent the permits from falling into the hands of European companies whose countries have no bans on investment. “We’re optimistic that the Libyan government will respond favorably to an extension,” Weeditz said. “While it could be an important aspect in the future growth of our company, any operations in Libya would depend on US permission,” said Amerada Hess spokesman Jay Wilson. The Oasis Group and Libyan government share the Waha concessions; ConocoPhillips and Amerada Hess together share a 32.66% stake; Marathon, an 8.33% stake. Occidental Petroleum, not a member of Oasis, also holds concessions in Libya that were gained in 1966. Before it left in 1986, this company’s output reached 170,000 bpd. When the US ordered an exodus from Libya of its citizens, the US-built parts of the oil infrastructure seemed ripe for nationalisation. Although the Libyan government threatened nationalisation if the Americans didn’t return soon, the threat was never carried out. The Libyans ran the US firms under their original names and even refused other foreign firms access to the US-built sections. Clearly, the Libyans fully expected the Americans would someday return to the shores of Tripoli, and the Libyans wanted it to be a soft landing. The investment climate in Libya is encouraging, and the Libyan officials are bandying about ideas such as privatising the sectors and oil fields already familiar to the US operators. The sweet smell of profits for all is in the air. Libya relies heavily on the revenues from oil, which comprises almost all export earnings, and one-quarter of the gross national product. Libya has several things going for it. In 1971, its plant at Marsa el Brega made it the second country in the world to produce liquefied natural gas (LNG). With sanctions lifted, equipment can be installed to separate liquefied petroleum gas from the condensing gas, an improvement that could quickly triple Libya’s LNG exports to the plant’s annual 1.3 million tonnes nameplate capacity. Libya has been through no wars — Iraq has been through three wars, one still going on — and Libya has no insurgency to discourage investors. But it has an authoritarian government seen to be riddled with incompetence and corruption. Transparency International, an independent organisation that monitors corruption, ranked Libya 108th out of 145 countries, tied with Albania, Argentina, and the Palestinian Authority. Libya has a backward bureaucracy out of synch with the new international aspirations of the government. When Yukiko Omura, a high-level representative from the World Bank, arrived to deliver a speech here, she was denied entry at the airport because of problems with her visa. “That’s not such a good start,” a Europeptic business executive said. “They should be courting her, not deporting her.” Quadaffi is without doubt a Middle East strongman who has provided stable government for decades where foreign firms have always had dealings with the same ruler. But oil investments are long term, and Quadaffi is in his sixties. It is assumed that one of his sons will replace him one day. Two things may well override these shortcomings: for instance, this observation from Clarence Cazalot, the CEO of Marathon Oil in Houston: “One of the most critical issues facing the oil industry today is access to new oil reserves, and Libya represents tremendous resources.” Then there is the indisputable fact that under the Libyan desert there is lots of oil. Qaddafi has appointed an US-educated economist as prime minister, allowing him to loosen the state’s grip on everything, privatise government-run companies, and let market forces shape the economy. These policies are a complete reversal of its 1969 ideology, when Qaddafi scared Henry Kissinger, US secretary of state, so much that he ruled out a regime change in Saudi Arabia, saying that they may end up with something worse, and a Colonel Qaddafi might take over. “It was clear that the government’s ways weren’t successful anywhere,” said Shukri Ghanem, the prime minister, who is perceived as a godsend to the citizens who want a better life and to the foreigners who want better access to the great oil reserve. But this same man is perceived as a traitor by the regime’s revolutionary die-hards and the “don’t rock the boat” bureaucrats. Even with the backing of Qaddafi, Ghanem, who holds a doctorate from the Fletcher School of Law and Diplomacy at Tufts University in Medford, Massachusetts, admits that his plans face stiff opposition from a hostile band of security services and revolutionary committees, over which he has little control. “Some people have privileges which they hate to see changed,” said Ghanem. “Lots of people prefer the status quo to having a shot in the dark.” Libya’s National Oil Company estimated that it has received help since the 1990s from European oil companies such as Italy’s Eni, Spain’s Repsol, and France’s Total, altogether accounting for about 20% of the country’s oil production. But what the company really wants is US $30 billion in investments to expand and modernise the nation’s oil industry, drill new wells, and build pipelines and refineries. And it wants the US $30 billion to come from the US oil giants. Libyan officials said that they should be able to attract big US energy companies and increase the share of foreign involvement to 50% of Libya’s oil output. To do so it is offering something that is becoming increasingly rare in the energy world: a percentage of oil found, and input at the planning level, as oppose to a fixed fee for a specific job, which is what many other countries offer. “Libya has a big room for increased production,” said Ghanem. “Libya is west of Suez and closer to the United States” than Persian Gulf oil producers. And he might have added — it’s just a hop across the Mediterranean pond from a continent of gas guzzlers.

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