Libya Opens For Investment

Libya Opens For Investment

February 01, 2004

By Nabil Khodadad

Western companies are eyeing Libya as a possible market for investment — particularly in the oil and gas sector — but any investments by US companies will have to wait until sanctions are lifted. Some of the sanctions are expected to come off later this year.

The heightened interest follows the announcement by Colonel Moammar Gadhafi in December that Libya is abandoning its programs to produce weapons of mass destruction and allowing immediate UN inspections of key sites.

President Bush welcomed the Libyan announcement, but cautioned that US sanctions would remain in place until the “crisis” over Libya has been fully resolved. Bush signed an order in January that keeps US sanctions in place, but the president made the following promise in a letter to Congress: “As Libya takes tangible steps to address concerns [over WMD], the US will in turn take reciprocal steps to recognize Libya’s progress.” Although the president did not indicate what would constitute a “tangible step,” the betting is that the US will lift some sanctions this spring to demonstrate its goodwill, while leaving others in place to encourage Libya to continue to comply with its pledge.

The US government is considering easing current sanctions to permit US oil companies to bid on new oil contracts, without any immediate payment, and to permit those US companies that acquired interests in Libyan fields prior to the imposition of sanctions in 1986 to start restoring their equipment in Libya and begin test pumping.

Since Gadhafi’s dramatic announcement, Libya has quickly taken several concrete steps to dismantle its WMD program. First, Libya ratified the nuclear test ban treaty. In signing the treaty, Libya agreed to host a monitoring station at Misratah, Libya. The US has already begun airlifting nuclear-related equipment and material out of Libya. Then in early February as the NewsWire was going to press, Libya became the 159th country to join the chemical weapons convention and agreed to refrain from producing banned chemical weapons and to destroy any stocks it has. According to press reports, plans are underway by Libyan scientists to incinerate tons of mustard gas agent manufactured to fill chemical bombs.

Existing Sanctions

There were originally two sets of sanctions against Libya. Sanctions imposed by the United Nations were lifted last year. Extensive US sanctions remain in place and have extraterritorial reach, meaning that they apply not only to US companies, but also to companies from other countries with ties to the US market.

The US imposed a series of escalating sanctions against Libya in 1981, 1982, 1986 and 1996. The 1986 sanctions, which were adopted in response to the bombing of a Berlin disco frequented by US military personnel, imposed a ban on US trade and commercial dealings with Libya. The introduction of these sanctions led to the departure of US oil companies such as Amerada Hess, Marathon, ConocoPhillips, Occidental Petroleum and Grace Petroleum from Libya. Before their departure in 1986, US companies produced close to one million barrels of crude oil a day in Libya.

In response to the air bombing of a PanAm flight over Lockerbie, Scotland in 1988 in which 270 people, mostly Americans, were killed, the United Nations imposed a ban on flights and sales of some oil equipment to Libya and froze some Libyan assets. After Libya extradited two Libyan suspects in the Lockerbie bombing to the Hague in 1999, some UN sanctions were suspended and the US government tacitly agreed to several visits to Libya by US oil and gas companies that had been forced to pull out in 1986. After one of the two Lockerbie defendants was tried and convicted, Libya reached a $2.7 billion settlement with the families of the Lockerbie victims. In response to the settlement, the United Nations lifted all remaining sanctions against Libya on September 12, 2003. Under the terms of the settlement, each family is entitled to $10 million, of which $4 million was paid after the lifting of UN sanctions and the remaining $6 million is to be paid if US sanctions are lifted and Libya is removed from the list of terrorist-supporting states by May 12, 2004. However, Libya is expected to extend the May 12, 2004 deadline if Congress has not lifted US sanctions because Libya had not fully disarmed by that date.

Despite the complete removal of UN sanctions against Libya, US sanctions remain. The US Libyan sanctions regulations have broad reach. First, all Libyan property or interests in property in the control or possession of US persons are blocked. Second, US persons are barred from entering into any transaction involving Libyan property. Third, imports of goods or services of Libyan origin to the US and exports of technology, goods and services to Libya from the US are banned. Fourth, no US person may purchase goods, directly or indirectly, from Libya for export to another country. Fifth, US persons are barred from granting or extending credits or loans to Libya.

The US sanctions were extended to foreign persons when Congress adopted the “Iran and Libya Sanctions Act” in 1996. The 1996 statute had a limited life. Congress extended the sanctions in it for another five years in July 2001. The statute requires the US president to impose at least two out of a menu of six sanctions on foreign companies that make investments of more than $40 million in one year in Libya’s petroleum sector or violate UN prohibitions against trade with Libya (which UN prohibitions are no longer relevant since UN sanctions have now been lifted).

The six sanctions from which the president must choose are the following. He can bar foreign companies that invest in the Libyan petroleum sector any loans, credits or credit guarantees from the US Export-Import Bank. He can deny them licenses to export military or militarily-useful technology from the United States. He can order US banks not to lend them more than $10 million in a single year. He can bar any foreign bank that finances petroleum sector investments in Libya from acting as a primary dealer in US government bonds or as a repository for US government funds. He can bar the company from any US government contracts. And he can prevent goods or services from the foreign company from being imported into the United States by invoking powers under the “International Emergency Economic Powers Act.”

What constitutes an “investment” in the Libyan petroleum sector is broadly defined. It includes entry into any contract to develop Libyan petroleum resources or any supervision or guarantee of performance of such a contract, any purchase of an ownership interest in Libyan petroleum resources, and any entry into a contract to share profits or royalties with respect to any such development project. However, the purchase of petroleum products or other goods from Libya by foreign persons is not prohibited.

The President has the power to waive sanctions under the Iran and Libya Sanctions Act if such waiver is “important to the national interests of the United States.” Although both the Clinton and Bush administrations have conducted informal reviews of several projects in Libya, the US has not imposed sanctions on any foreign company under the 1996 statute for doing business in Libya. This is because most projects in Libya represent continuations of investments made prior to the enactment of the 1996 law.

Crippled Oil Sector

The sanctions have crippled Libya’s oil industry by impeding investment and competition even though Libya offers upstream opportunities that are unrivaled anywhere in the Middle East. Over the last two decades, Libya has watched its oil production plummet from about 3.0 million barrels a day to its current production of about 1.4 million barrels per day, or about 2% of world supplies. US sanctions have also blocked about $1 billion in assets that the Libyan government claims are held in US banks.

Compared with Iraq’s reserves of 113 billion barrels, Libya’s reserves of about 40 billion barrels appear modest. However, many analysts believe that this reflects a lack of exploration. The petroleum consultants Wood McKenzie believe that Libya is “highly under-explored” and would benefit from more advanced drilling techniques that would improve recoveries at existing fields. For example, from 1995 to 2002, Libya had just one fourth the number of oil wells drilled in Egypt and two thirds the number of wells drilled in Algeria. While Libya’s petroleum production has plummeted, Libya has watched its neighbors Algeria and Egypt develop their LNG capacity in a market that is forecast to grow dramatically over the next several decades.

Future Opportunities

Libya is seeking more than $30 billion in foreign investment in its upstream, downstream and petrochemical sectors over the next six years. It plans to lift its current production from about 1.4 million barrels per day to more than 2 million barrels per day by the end of this decade. The Libyan government is revising its oil and gas law, and Libya’s National Oil Corporation is drafting a new model exploration and production sharing agreement, in each case with the aim of creating a more attractive and stable investment regime for foreign oil companies. Later this year, the National Oil Corporation also plans to launch a licensing round for 10 blocks.

US oil executives have been encouraged by recent developments in Libya. Herman Cohen, a former US assistant secretary of state, said, “US companies are salivating to get back in there.” So far, the National Oil Corporation has held on to US oil and gas interests left behind and has not awarded them to other companies. The 50-year leases of the Oasis Group, a consortium of Amerada Hess, Marathon, and ConocoPhillips, on its Libyan fields are due to expire in 2005 and the group is reportedly keen to extend them. Other US oil companies have also expressed an interest in returning to Libya. Not only would the lifting of US sanctions assist Libya in increasing its production of crude oil, but it might also allow Libya to develop its natural gas reserves and resume its efforts to export LNG.

While US companies continue to be barred from investing in Libya, European and Australian petroleum companies such as Total, ENI, Repsol-YPF, OMV, RWE Dea and Woodside have been active. In the second half of 2003, the National Oil Corporation issued such companies licenses to 17 blocks. The return of US petroleum companies to Libya would bring greater competition and much more capital for Libya’s oil and gas industry.