Libya leans towards resource nationalism

Wednesday, Nov 04, 2009

Libya has never been an easy environment for international oil companies. With its opaque political system and its own brand of socialism devised by Muammar Gaddafi, the leader for the past forty years, the country has always been something of a challenge to foreign investors lured by its huge oil reserves - the largest in Africa.

Oil companies from around the world rushed into Libya after 2004 when international sanctions were lifted and the country was finally able to open up its vast under-explored terrain. But so far new finds have been modest, and dealing with the authorities has become increasingly complicated.

In the last two years companies have been unsettled by a pronounced trend towards resource nationalism. This has included the imposition of tough conditions including the renegotiation of contracts with the likes of Eni, Petro-Canada, Repsol and Total to halve the foreign partner's share of produced oil.

The feeling of uncertainty for investors deepened even further in the last two months because of a series of dramatic developments pointing to a power struggle within ruling circles over control of the crucial oil and gas sector - the country's main source of revenue.

One such development was the announcement in October of the establishment of a new supreme energy council which is being seen as an attempt to wrest the hydrocarbons sector out of the orbit of Saif Al Islam, the reform-minded son of Colonel Gaddafi, and bring it under the influence of more conservative elements in the regime.

The council, which has been given considerable executive and regulatory powers, is to be chaired by Al-Mahmoudi al-Baghdadi, the prime minister, who is regarded as a conservative.

A seat on it has been reserved for the security agency headed by Mutassim, another of Mr Gaddafi's sons and a perceived rival to Saif who has often been mentioned as a successor to his father. Mutassim is said to be close to conservative circles and some observers believe he is a more likely future ruler than Saif.

Another worrying sign for the companies has been the resignation in September of Shokri Ghanem, the reformist head of the country's National Oil Corporation. His surprise reinstatement six weeks later has been welcomed by investors, but many question marks continue to hang over who will control the industry and how the new council will operate.

As head of NOC, Mr Ghanem was Libya's most senior oil official. A former prime minister and a close collaborator of Saif, he is widely credited with having improved the atmosphere for international companies.

Mr Ghanem never announced the reasons for his resignation though that is understood to have been linked to his frustration with aggressive resource nationalism being pushed by sections of the regime. He has also refused to comment on the circumstances surrounding his return, so it is not clear yet if that is a result of a compromise between the two sides within the power elite.

"I suppose his return is some kind of rebalancing done at a very high level in the regime," says Samuel Ciszuk, Middle East and North Africa energy analyst for HIS Global Insight. "Of course the oil companies have been very unhappy and quite vocally expressing their fears. But then again if this is a rebalancing of the powers, then we are just back to square one with the very slow-moving problematic Libyan oil industry being hampered by two factions trying to work off their differences."

Mr Ghanem is also reported to have been angered by the way Libya handled Verenex, a small Canadian exploration company which had found oil and wanted to sell itself to CNPC the Chinese state oil company.

In February Libya said it would exercise its right to pre-empt the sale, but it did not make a formal offer for six months in what was seen as a clear attempt to pressure the company to drop the price. The deal finally went through in September with the country's sovereign wealth fund, the Libyan Investment Authority, agreeing to pay $316m for Verenex - a price that is around 30 per cent less than CNPC had offered.

"I think Verenex has had a very detrimental impact [on Libya's reputation] because when it was in their interest to break a contractual agreement they did it." says Mr Ciszuk. "They misused their sovereign position. They had the right to pre-empt the sale but with that comes the commitment to match the offer."

Susan Mance, North Africa analyst at Wood Mackenzie says the Verenex affair will be seen as a warning by smaller exploration-driven companies not to go into Libya.

"Larger companies will still consider Libya an attractive destination," she says. "But it may well act as a deterrent to smaller companies. For exploration-driven companies which have no intention of going into the development phase, the Verenex experience highlights the above ground risks in business in the country."

Companies are also waiting to see if the authorities are serious about implementing a recent directive signed by the prime minister and requiring all joint ventures with foreign participation to appoint Libyan heads. Oil companies in Libya operate as a joint venture when they go into the production phase.

Much will depend on the nature of the deal which has allowed the return of Mr Ghanem and on the role the new council will play. Recent reports that Saif Al Islam is to be given his first official position suggest he is gaining ground. The exact powers of the new post have yet to be made clear, but it seems likely that conservatives and modernizers in Libya will continue to vie for influence for a long while yet.

By Heba Saleh, North Africa correspondent