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Libya recently issued a warning to U.S. oil companies, giving them one year to resume business or lose their operating licenses. Tripoli wants to pressure Washington to suspend or lift unilateral sanctions. Failing this, Libya is laying the groundwork for the expropriation of U.S. concessions and their resale to Asian, European and Russian oil companies.
Libya’s foreign minister, Mohammed Abdel Rahman Shalgam, announced on Sept. 2 that U.S. oil companies have one year to resume operations in the country or risk losing their licenses to do so, Reuters reported. Several American oil companies still hold concessions in Libya despite suspending operations 15 years ago due to an economic embargo imposed by the United States in response to Libya’s support for international terrorism.
Tripoli’s ultimatum is aimed at forcing Washington to end these unilateral sanctions. But despite pressure from American oil firms, Washington recently extended both the economic embargo and the 1996 Iran-Libya Sanctions Act and isn’t likely to relent within the next 12 months. The Libyan deadline will, however, lay the groundwork for future investment by Asian, European and Russian oil firms in formerly U.S.-controlled fields.
A day before Shalgam issued the warning, Libyan leader Moammar Gadhafi announced his government wants to normalize relations with the United States. Tripoli needs U.S. cooperation in order to raise the country’s investment ratings, gain loans from international lenders such as the International Monetary Fund and the World Bank and finally be relieved of U.N. sanctions.
Libya’s oil sector is ripe for development. The OPEC member’s crude is very attractive to investors because it is high in quality, low in sulfur and can be produced for as little as $1 per barrel. Moreover, Libya’s oil market is largely untapped, with 29.5 billion barrels in proven reserves but only 25 percent of oil and gas fields under contract.
Investment in the country’s petroleum sector has risen dramatically since 1999, when the United Nations suspended its sanctions. But although many foreign oil firms are involved in exploration and production – including Britain’s Lasmo, Spain’s Repsol-YPF, Italy’s Agip-ENI, Austria’s OMV, Germany’s Wintershal, France’s TotalFinalElf and Sweden’s Lundin Oil – the scale of foreign investment remains far below Libya’s expectations of more than $10 billion by 2010.
To meet this goal, the government needs the United States to drop its sanctions. The embargo increases the risks – and in turn the cost – for other investors because U.S. companies, including finance corporations, can be penalized for any business ventures in Libya. Any foreign oil firm wishing to invest in Libya must have cash on hand for the entire operation or be wholly reliant on institutions with no American ties, and this limits investment and financing options.
The 1996 sanctions act also allows the U.S. government to penalize foreign businesses with more than $40 million invested annually in Libya’s energy sector. But Washington has not followed through with such penalties, due to possible political ramifications, as any action against a foreign company would increase tensions with the government in that firm’s home country.
In addition to the lack of investment, Libya also needs U.S. involvement in order to rehabilitate its decrepit oil infrastructure. U.S. oil firms Amerada Hess, Conoco, Grace Petroleum, Marathon and Occidental Petroleum controlled the lion’s share of Libyan concessions until 1986, when they were forced that year to cease operations.
Most important, however, Libya wants an end to U.N. sanctions. Although sanctions were officially suspended by the United Nations in 1999, they have not formally been lifted, and as long as they remain in place Libya cannot receive international financing. The government also has little chance of winning investment in non-oil sectors. The resumption of U.S. involvement would represent a vote of confidence for Libya’s economy as a whole.
Washington, however, isn’t likely to concede to Libya’s latest efforts. U.S. President George W. Bush extended the Iran-Libya Sanctions Act in August for an additional five years. The act cannot easily be abandoned because it is a key element of Washington’s policy of containing nation states in the Middle East.
The loss of oil concessions will come as a major blow to U.S. oil firms, four of which – Hess, Conoco, Marathon and Occidental – together produced about 400,000 barrels per day prior to 1986, according to the U.S. Energy Information Administration. Despite the 15-year absence, U.S. oil firms are eager to return. In late 1999, executives from four such companies traveled to Libya to assess remaining assets there.
Earlier this year Libya also contacted these firms to inform them that their concessions were at risk. In its eagerness to develop its petroleum sector while world oil prices are high, Tripoli is now negotiating with other international oil firms. Wintershal has reportedly already sought permission to drill in formerly U.S.-owned oil fields. Libya isn’t likely to immediately resell all of the U.S. concessions, but it may parcel out one or two in order to demonstrate its seriousness.
The one-year deadline gives both nations, and the respective oil companies involved, sufficient time to negotiate. Both of the U.S. sanction measures against Libya come up for review periodically. In the interim, Washington will try to use economic and political leverage in dealing with foreign firms and their respective governments to prevent the loss of U.S. oil concessions in Libya.
