Oil Firms Eager to Turn the Tap Back On in Libya

By James F. Peltz

Dec. 6, 2004 12 AM PT

Times Staff Writer

With Libya coming in from the cold, the race for its oil is heating up.

Eighteen years ago, the last U.S. oil companies were ordered out of Libya when Washington placed sanctions on the government of Col. Moammar Kadafi, whom President Reagan called the “mad dog of the Middle East.”

Now President Bush’s administration has opened the door for oil giants to reclaim a tantalizing prize: a huge, untapped source of crude.

The U.S. companies’ efforts carry risks, and it’s unclear whether they will be able to wrangle favorable terms from the mercurial Kadafi. But major oil discoveries are hard to come by these days, as tight supplies have lifted prices to near record highs, and Libya stands as a rare source of available crude that can’t be ignored.

“It’s like kissing a porcupine,” said Scott Maberry, an attorney with law firm Fulbright & Jaworski, which is helping some companies in their Libyan efforts. “You can do it, but you’ve got to be careful. But people are highly motivated in this case.”

Indeed, executives of several major oil producers and Libyan officials are meeting today in Tripoli, the Libyan capital. Among them are two major California oil companies, Occidental Petroleum Corp. of Westwood and ChevronTexaco Corp. of San Ramon.

Occidental has been considered a front-runner to resume operations ever since the Bush administration began lifting most U.S. trade sanctions against the North African country this year, citing Libyan reforms. The company was a leading U.S. producer in Libya before the sanctions, and its huge discoveries there in the 1960s transformed Occidental -- then run by Armand Hammer -- into a major oil company.

Hammer’s successor, Occidental Chief Executive Ray Irani, has visited Libya twice this year to meet with Kadafi and other officials. Executives of Marathon Oil Corp., ConocoPhillips and Amerada Hess Corp. -- known as the Oasis Group, the other major U.S. operator in Libya before the sanctions -- also have been negotiating in Tripoli. Industry leader Exxon Mobil Corp. is interested in investing too.

“Whether the price of oil is $25 or $30 or $40, Libya is an extremely attractive spot,” said Stephen Chazen, Occidental’s chief financial officer. “Libya for us is the best chance of a significant boost in production.”

That won’t happen overnight. The companies first have to iron out revenue-sharing agreements with Libya that would cover the cost and risk of their expansion there, while providing a profit. Some executives have speculated that the first of those contracts could be announced this month.

It’s also likely to take at least a year for the U.S. companies to modernize existing facilities in Libya to pump substantially more oil, analysts said. Libya currently produces about 1.6 million barrels of oil daily. (By comparison, Saudi Arabia’s output is about 9.5 million barrels a day.)

Libya -- more than four times the size of California -- sits atop proven oil reserves estimated at 36 billion barrels by the U.S. Energy Department. That’s more than Nigeria and Mexico, and, at today’s prices, Libya’s reserves have a market value of $1.6 trillion.

The high quality of Libya’s oil -- a light, “sweet” oil in the industry’s parlance -- appeals to U.S. companies. “It flows easily and it’s low in sulfur,” which makes the oil cheaper to produce, refine and transport, said Poe Leggette, another Fulbright & Jaworski lawyer involved in the companies’ Libyan efforts.

U.S. light crude for January delivery closed Friday at $42.54 a barrel on the New York Mercantile Exchange. That extended its recent, sharp slide from a closing high of $55.17 a barrel reached twice in late October.

For Libya, the return of U.S. companies with leading-edge exploration and production technologies offers the means to dramatically bolster its economy.

Oil accounts for 95% of Libya’s exports. Its oil minister, Fathi ben Shatwan, said in April that his country hoped to attract $30 billion in foreign investment by 2015 to modernize and expand its oil infrastructure, so that the country can hike its production to 3 million barrels a day.

“The whole economy is centered around oil” and yet Libya’s oil facilities “are very antiquated,” said Robert Armao, president of the U.S.-Libya Trade and Economic Council in New York.

Oil exploration in Libya began 50 years ago, and by the mid-1960s there was a rush by foreign companies for rights to drill there. Among them was Occidental, then a fledgling producer.

Occidental suddenly became a major player with the discovery of several big fields, and its daily production climbed as high as 660,000 barrels a day. That’s more than Occidental’s total average production of 544,000 barrels a day worldwide in the first nine months of this year.

In 1970, Kadafi and Libya became key players in changing the world’s oil economics.

Kadafi took greater control of Libya’s oil industry, ordered Occidental and other U.S. operators to cut production and pushed for higher prices. That set the stage for a shift in power away from oil companies to oil-exporting nations and the Organization of the Petroleum Exporting Countries.

By the time Occidental left in 1986, its Libyan fields were producing about 157,000 barrels of oil a day, 40,000 of which went to Occidental. The rest went to the Libyan government under the terms of their contract.

When the companies withdrew, they and the Libyan government agreed to freeze their contracts and put production in Libya’s hands. Both sides say U.S. companies still have contractual rights to the fields they operated.

To be sure, the U.S. companies can’t simply march into Libya and pump at will. The country is a member of OPEC and is subject to voluntary production quotas set by OPEC. The cartel’s members often pump more oil than their official quotas allow, but the quotas still could limit how much crude the U.S. companies could produce.

Occidental’s Chazen and others said Libya’s quota of 1.45 million barrels a day should rise as more oil is found. But he said U.S. companies “would have to abide by the wishes of the government of Libya” concerning oil production “in a quota-constrained environment.”

Then there’s Kadafi.

After his rise to power in 1969, Kadafi’s support of terrorism turned Libya into a U.S. enemy. In April 1986, Reagan ordered American aircraft to bomb Libya in retaliation for a terrorist attack on a West Berlin nightclub that killed two U.S. servicemen. He ordered U.S. oil companies out of Libya that same year.

Libya also was blamed for the 1988 bombing of a Pan American World Airways jetliner over Lockerbie, Scotland, which killed 259 people on the plane -- including 189 Americans -- and 11 people on the ground.

In 2003, Libya formally accepted responsibility for the Pan Am bombing and offered $2.7 billion in compensation to the victims’ families. That paved the way for the United Nations to lift its sanctions against Libya.

Later that year, Kadafi also promised to dismantle his chemical, biological and nuclear-weapons programs. The Bush administration then began easing U.S. sanctions, clearing the way for the U.S. oil industry.

Despite warming relations, U.S. officials have said Libya remains on the U.S. list of state sponsors of terrorism. White House officials in September expressed concern about allegations of Libyan involvement in a plot to assassinate Crown Prince Abdullah of Saudi Arabia.

Regardless of the risks, the potential for new, massive oil discoveries in Libya makes U.S. companies eager to return.

In a recent report, Sharif Ghalib, senior energy advisor at research firm Energy Intelligence Group, called Libya’s petroleum sector “a success story in the making.”

“Libya,” Ghalib said, “will have a ready audience for its opening.”

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Field day

With vast oil resources, Libya is poised to become a key player in the world market. Occidental Petroleum hopes to start pumping oil from fields in Libya for the first time since U.S. sanctions forced Oxy to leave the country in 1986.

In 2003, Libya was No. 15 in production ...

(In millions of barrels a day)

1. Russia: 9.1

2. S. Arabia: 8.7

3. U.S.: 5.6

4. Iran:3.7

5. Mexico: 3.4

6. China: 3.4

7. Norway: 2.9

8. UAE: 2.3

9. Canada: 2.3

10. Venezuela:2.3