Kadafi’s Pledge May Give Boost to Occidental

Libya’s surprise pledge to abandon major weapons programs could give a big boost to Los Angeles-based Occidental Petroleum Corp., which was forced to abandon lucrative oil fields in the North African nation when U.S. sanctions took effect 17 years ago.

Libyan leader Col. Moammar Kadafi announced Dec. 19 that his country would give up its pursuit of nuclear, chemical and biological weapons and allow international inspectors to dismantle its facilities.

Opinions differ on whether Kadafi’s pledge will be enough to prompt President Bush to end economic sanctions against Libya, but there is agreement on this: If sanctions are lifted, Occidental would be among the biggest beneficiaries.

“I would bet heavily on Occidental if and when the sanctions are lifted,” said Fadel Gheit, an Oppenheimer & Co. oil analyst who does not own any stock in the company. “These guys were proactive and were trying to bring the two parties together. They will have to be rewarded for their effort.”

Occidental says it has drilling rights to Libyan fields with estimated potential reserves of 4 billion or more barrels of oil and natural gas equivalents. At the end of 2002, Occidental’s worldwide proven reserves (excluding Libya) were equal to 2.3 billion barrels.

Altogether, Occidental and four other U.S. firms forced to leave Libya in 1986 were producing more than 1 million barrels a day from the country’s oil fields. When the companies exited, they and the Libyan government agreed to freeze the contracts and put production in the hands of Libyan entities. Both sides say the U.S. companies still hold contractual rights to the fields they operated.

Occidental shares have seen a modest bump from Kadafi’s announcement, rising 70 cents in trading this week to $41.85 a share. On Wednesday, the stock rose 52 cents on the New York Stock Exchange.

Although Occidental executives are optimistic, they are not going so far as to include Libyan production in their multiyear forecasts.

“Things look very hopeful that the two countries are moving in the direction of a rapprochement,” Occidental spokesman Larry Meriage said. “We’re interested, certainly, in returning to Libya.”

The State Department applauded Kadafi’s move but has been guarded about the lifting of sanctions.

“This is a big step forward, but it is not the breakthrough that is going to result in lifting the sanctions,” said a State Department official who asked not to be named. “We’re just at the very initial stages of going down that road.”

Libya became a worldwide pariah in the 1980s, when Kadafi emerged as a vocal supporter of terrorist attacks against Western targets. The United States first banned imports of Libyan oil and some exports to Libya in 1982, but those sanctions were greatly expanded four years later in response to the bombing of a Berlin disco.

Another wave of international bans hit Libya after a bomb felled Pan Am Flight 103 over Lockerbie, Scotland, on Dec. 21, 1988, killing 259 people on the plane and 11 on the ground. The United Nations Security Council imposed various sanctions in 1992 and ’93 to pressure Tripoli to hand over two Libyans for trial in the Lockerbie bombing. Those bans were suspended in 1999 after Libya turned over the suspects and then formally lifted three months ago, after Libya agreed to compensate victims’ families.

Meanwhile, Occidental and other oil companies found themselves caught in the crossfire. In the summer of 1986, the company was ordered to pack up and move out of Libya. It did so, leaving the oil field projects in the hands of a subsidiary of the state-owned National Oil Corp., which has been operating them since, according to Occidental.

The four other U.S. firms that were working in Libya and ordered out were Grace Petroleum Co. and the members of the Oasis Group, made up of Marathon Oil Corp., Amerada Hess Corp. and ConocoPhillips, according to the federal Energy Information Administration.

With the U.S. companies restrained and Libya in need of generating revenue, oil firms from Europe and elsewhere gained a strong presence in the country, developing and producing petroleum and natural gas in fields not subject to U.S. agreements. Eni of Italy is the leading producer in the country now, but companies from Spain, Austria, France, Germany, Australia and Canada also are active.

Still, the Libyan government has said it is eager for the Americans to return, in part because U.S. companies are considered among the best at prodding more oil out of fields that are headed toward depletion and because U.S. involvement should stimulate the country’s overall production and revenue.

Libyan Foreign Minister Mohammed Abderrahmane Chalgam told reporters this week that the country’s oil fields produce 1.5 million barrels a day but that he hoped to double that output by 2020.

“If the American companies are permitted to go back in, and they do go back in, the first step is to talk to the Libyans about the terms,” said Jim Placke, a senior associate at Cambridge Energy Research Associates, an industry consulting firm.

Although Occidental and other companies say the old contracts are still in force, circumstances have changed substantially during their 17-year hiatus.

Some of the groundwork necessary to revive the pacts may already have been laid. Meriage, the Occidental spokesman, noted that the State Department had allowed oil company representatives to travel to Libya “to discuss possible future arrangements in the event that sanctions were lifted.”

When the company departed, its Libyan fields produced about 157,000 barrels of oil a day, 40,000 of which went to Occidental, Meriage said. The rest went to the Libyan government under the terms of their agreement. The company’s worldwide production in 2003 is expected to total 535,000 barrels a day.

“We know that production, through natural depletion, has declined very significantly since the time we left,” Meriage said. Investing money and applying new technology, he said, could help reverse those declines.

Work like that would be worth it for smaller oil companies such as Occidental and Amerada Hess, whose annual production figures are dwarfed by the likes of Exxon Mobil Corp. and ChevronTexaco Corp., said Irene Haas, an analyst at Sanders Morris Harris

“I think it could be meaningful for Occidental,” said Haas, who rates the stock a “buy” and does not own it. But she added: “This is by no means straightforward for these U.S. companies.”

Occidental, in particular, has a strong and lengthy relationship with the Libyans. It was a bit player in the oil industry when it arrived in Libya in 1966, but it vaulted into the spotlight with the discovery of a 1.5-billion-barrel oil field called Augila. That was followed by others.

“Almost overnight, we became a major player in the international arena,” Meriage said. “It made Libya a major player ... just because of the sheer volume of those discoveries.”

In addition, the company has been successful in increasing production at a succession of declining oil fields, including one in Qatar.

Occidental may need that edge. If sanctions are lifted, experts say, there will be plenty of bidders drawn to Libya by the country’s ambitious production goals and proximity to energy-hungry Europe, as well as the high quality of its oil.

“There’s a great deal of potential locked up in Libya,” Placke said. Firms such as Occidental, however, “know more about those reservoirs than anyone else, including the Libyans.”