ANALYSIS: Confusion reigns over Libyan contracts

Uncertainty over E&P contracts may hold back Libya's oil sector

As corruption probes get underway, foreign companies may be facing an additional review of their Libyan contracts. GETTY IMAGES
As corruption probes get underway, foreign companies may be facing an additional review of their Libyan contracts. GETTY IMAGES

A little over two months ahead of Libya’s first national elections, the structure of Libya’s oil industry is as uncertain as the composition of its first parliament.

Eni and Total have admitted they are under investigation by America’s Securities and Exchange Commission over their oil deals in Libya.

The Wall Street Journal reports that, according to a US regulatory filing, in June last year Eni received a formal judicial request to submit documents related to its activity in Libya from 2008 to 2011 to the SEC.

"The subpoena is related to an ongoing investigation without further clarifications nor specific alleged violations in connection to 'certain illicit payments to Libyan officials' possibly violating the U.S. Foreign Corruption Practice Act," Eni said, confirming that it received a second request in December last year.

Eni is the largest single foreign oil producer in Libya, with output nearing pre-war production of 244,000 barrels of oil per day (bpd). The Italian firm, which has been active in Libya since 1959, also runs the 8 billion cubic metre-a-year Greenstream gas pipeline from Libya to Italy. 13% of Eni’s pre-war group revenue was attributable to Libya.

Total said in its annual report to the SEC last week that "in June 2011, the SEC issued to certain oil companies - including, among others, Total - a formal request for information related to their operations in Libya."

Dow Jones reports that both Eni and Total say they are co-operating with the SEC.

Libyan graft probe

Libya is holding its own corruption probes into Gaddafi-era oil contracts, after the National Transitional Council announced the inception of an NTC Oil Committee in October last year. The NTC said that the Committee is independent of the oil ministry and national oil companies, and will seek to identify graft in deals struck under the Gaddafi regime, with the power to end, amend or renegotiate current contracts if corruption is unearthed.

Salem Qanan, who sits on the NTC's Oil Committee, told Reuters that the government had requested documents from the NOC. "There are some suspicions over some contracts that were made by the NOC and foreign companies which seem to have been influenced by Saif al-Islam Gaddafi," he told Reuters yesterday.

Saif al-Islam Gaddafi was viewed as Colonel Gaddafi’s heir apparent. While assiduously nurturing an image as reformer, he turned out to be the most resilient of Gaddafi’s sons, and is now set to stand trial for war crimes, either at the International Criminal Court or a tribunal in Libya. Saif is reported in leaked diplomatic cables to have periodically raided oil shipments to finance his personal activities.

The Wall Street Journal reports that the Libyan general prosecutor's office has since asked for documents related to foreign companies from both the national oil company and foreign firms. It is not clear whether the prosecutor’s office is acting in conjunction or in parallel with the NTC Oil Committee.

NOC's marketing manager, Ahmed Shawki, told the WSJ that NOC and its dealings with foreign companies in general, are "under investigation from the general attorney”.

In a letter seen by the WSJ, the prosecutor’s office is seeking documents related to oil transactions between NOC and international traders Vitol Group and Glencore International. Eni and Total are also under investigation. The probe is reportedly aimed mainly at Gaddafi-era transactions but also during the civil war up to the present. No specific allegations have yet been made.

Glencore and Vitol

During the Libyan civil war last year, Glencore gained ground in the Libyan oil market. On 5 September, Reuters reported that the NTC signed a deal to supply fuel to the rebels at a time when the country’s refining was off-line. Glencore then took its first lift of Libya’s Sarir-grade crude on 11 October.

Vitol’s role in the Libyan conflict has attracted political controversy in the UK due to the company’s links with Alan Duncan, a member of the British government who headed up a secret ‘Libya oil cell’ as part of NATO’s support for the NTC. Until 2009, Duncan – a former protégé of infamous oil trader Marc Rich – worked at Vitol and Arawak Energy, a wholly-owned subsidiary, and is a friend of Vitol CEO and Conservative Party donor Ian Taylor.

British Prime Minister David Cameron invited Taylor to a private dinner at Downing Street on 2 November. Later that month Glencore and Vitol won deals to supply Libya with refined oil products until the end of the year. At one stage, the Libyan rebels were thought to owe $500 million in fuel payments to Vitol alone.

Vitol, however is a longstanding partner of the Libyan oil industry, and took the rebels’ side early in the war, long before it was clear whether rebel fighters would succeed in overthrowing the Gaddafi regime. In April 2011, Vitol shipped the first ‘rebel’ Libyan crude, lifting around a million barrels for eventual delivery to US refiner Tesoro. No specific allegations against Glencore or Vitol have been made in Libya, and the SEC investigation continues.

Change of contracts?

Foreign oil companies may be as worried by the possibility of amendments to – or even wholesale renegotiations of - the oil contracts between them and the NOC, as by investigations into alleged corruption in dealing with the Gaddafi regime.

As yet, the NTC Oil Committee has not published terms of reference, and it is not clear whether its wide remit ends with investigating corrupt transactions, or with a wider review of the suitability of all extant contracts to the new Libyan state.

Oil companies in Libya were last forced to renegotiate extensions to their current oil deals with the NOC in 2008, taking lower revenue shares and committing to large upfront costs. Eni also ceded a 25% stake in Greenstream to the Libyan national oil company (NOC) in 2010.

According to a memo from US diplomats in Tripoli obtained by Wikileaks dated 4 June 2009, Eni, Petro-Canada, a European consortium headed by Spain's Repsol, and a consortium headed by Occidental signed renegotiated agreements under similar terms with the NOC in June-July 2008. Those companies cumulatively paid the NOC USD 5.4 billion in upfront bonus payments as part of the renegotiation process, and saw their share of oil revenues fall from 50% to 27%.

In a move partly designed to assuage the fears of foreign oil companies, in late November 2011, a former Eni executive, Abdurrahim Ben Yazza, was appointed by the NTC as oil minister. Ben Yezza once served as chairman of Eni Oil Co, a joint venture between the Italian energy company and Libya's NOC. He also once had a consulting job with Eni and in 2005 helped it land a deal for the rights to drill for oil in Libya.

Contradicting a previous statement by interim prime minister Abdurrahim al-Keib, Ben Yazza has stated that all Gaddafi-era oil contracts will be honoured, a claim undercut by other Libyan politicians who say the issue will not be decided until after elections in June and the subsequent settlement of a new Libyan constitution.
Al-Keib had told reporters the contracts would be re-examined, a position echoed by deputy oil minister Omar Shakmak.

"First we need to evaluate the outcome of the existing agreements and contracts," Shakmak told Reuters on 28 March. "At this stage, we need to have some more studies and involve all the people with experience in the oil industry."

There are also hints of wider reviews by other government figures.
"The investigation is part of due diligence and a routine process to make sure there were no irregularities either with the old regime or the new one," NOC marketing manager Ahmed Shawki told Reuters.

Risk and reward

These latest developments present oil companies active in Libya with the prospect of substantial political risk.

However, while there is likely to be strong political incentives for new Libyan politicians to demand that revisions are made to existing oil contracts, technocratic figures such as Ben Yazza will be wary of pushing revisions too far.

“While trumpeted by Eni as a success, the deal carries serious negatives for the company, and may pave the way for the imposition of similar, not altogether positive arrangements with other foreign oil and gas concession holders,” a leaked diplomatic cable dated 26 October 2007 says, reporting that Eni riled other oil companies by agreeing to $150 million of social spending in the country as part of its deal. This was before Eni gave further ground.

There are signs that, without a full complement of foreign oilfield staff, oil workers at Libya’s fields will be unable to sustain stable production at pre-war levels. The costs of further exploration or enhanced oil recovery in the Libyan desert will be high, and hard to achieve. The NOC needs internationals to ensure Libya’s oil industry can at last meet its potential.

The Wikileaks cables also reveal that Libya’s oil industry was chaotic, subject to kleptocratic raids by the Gaddafi family and ad hoc private haggling from the NOC.

While foreign oil companies may be reluctant to see the depredations of dealing with the Gaddafi family see the light of day, a chance to strike transparent deals with a stable government may make such disclosures a price worth paying.

 

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