IEMed Mediterranean Yearbook 2006


Panorama : The Mediterranean Year


Libya Looks to a Bright Future Post-Sanctions

Gawdat Bahgat

Centre for Middle Eastern Studies
Indiana University of Pennsylvania

In late 2004 foreign ministers from the European Union (EU) and the Mediterranean region decided to name 2005 – the tenth anniversary of the Barcelona Process – the “Year of the Mediterranean.” The goal was to further foster the economic and political cooperation between all involved states. Libya, a member of the Arab Maghreb Union and a founding member of the African Union, has taken decisive steps to consolidate its integration in the global system since 2003. This essay examines the emerging partnership between Libya on one side and the United States and the European Union on the other. Particular attention is given to the important initiatives the two sides took in 2005.

Libya’s Dramatic Transformation

On 19th December 2003, an announcement was made simultaneously in Washington, London, and Tripoli that Libyan leader Muammar Gaddafi had promised to terminate his country’s efforts to acquire and develop weapons of mass destruction and to fully cooperate with the international community in destroying them. This announcement was preceded by equally significant steps to end Libya’s international isolation and pave the way for Tripoli to rejoin the global economic and political system. Most notably, Libya officially accepted responsibility for the 1988 Lockerbie bombing, carried out by Libyan intelligence officers, and agreed to pay financial compensation to the families of the victims of this terrorist attack.

To reward Tripoli for denouncing international terrorism and agreeing to adhere to the norms and rules of the non-proliferation regime, the decade-long United Nations sanctions were lifted. London re-established diplomatic relations with Tripoli that had been severed in 1984, and Washington substantially eased the economic sanctions it had imposed in the late 1970s and reinforced throughout the 1980s and 1990s. These concrete steps to normalize economic and diplomatic relations with Libya were followed by well-publicized direct contacts between Western leaders and Gaddafi. Energy partnership has been at the heart of these consultations.

Libya’s Energy Outlook

Unlike Gulf producers such as Iran, Iraq, Kuwait, and Saudi Arabia, where oil was discovered earlier in the 20th century, oil in Libya was discovered late in the 1950s. Yet, in a short period of time, the oil discoveries were brought on-stream. Thus, by the late 1960s, Libya had become the world’s fourth largest exporter of crude oil. The rush to raise production in Libya reflected not only the world’s growing appetite for oil, but also certain advantages the Libyan oil sector enjoys. First, Tripoli holds huge proven oil reserves – estimated at 36 billion barrels, or 3.1 percent of world’s total. Second, production costs are among the lowest in the world. Third, Libya produces high-quality, low sulphur “sweet” crude oil. Fourth, the proximity of Libya to Europe is a big advantage in terms of ease and cost of transportation.

Given these advantages, it is little wonder that American and European oil companies were heavily involved in exploring and producing oil in Libya. The country’s oil production reached a peak of 3.32 million barrels per day (b/d) in 1970. This high level of production, however, proved unsustainable. Economic sanctions and political isolation took their toll. In 2003 Libya produced 1.488 million b/d – less than half of its production in 1970. This decline can be explained more by political factors than geological ones. From the outset, the post-1969 revolutionary regime had tense relations with the U.S. government and American oil companies operating in the country. Eventually, in the mid-1980s, these oil companies completely withdrew from Libya. For most of the 1990s, comprehensive international sanctions were imposed on Libya by the UN Security Council. Bilateral sanctions in the 1980s and multilateral ones in the 1990s deprived Libya’s oil industry of the spare parts, new equipment, modern technology, management techniques, and foreign investment badly needed to maintain and upgrade its production capacity. Despite this hostile political environment, a competent Libyan National Oil Corporation (NOC) and a handful of European oil companies kept oil production going over the years, although at a level greatly reduced from that of the booming late 1960s.

Diplomatic re-engagement with Libya and the easing of sanctions have been followed by serious efforts by international oil companies to resume their oil exploration and production operations in the country. Since mid-2004, the entire Libyan hydrocarbon sector has seemed poised for promising development, fuelled by foreign investment.

Oil Partnership with the United States

U.S. oil companies have been involved in Libya’s oil industry since the discoveries of Libyan oil in the late 1950s and early 1960s. Some of the largest oil fields were found in concessions held by independent U.S. companies. Marathon, Amerada Hess, and Conoco (now ConocoPhillips) formed the Oasis Group that, with the NOC, achieved world-class commercial oil discoveries in Libya’s Sirte Basin in 1962. The outcome of this partnership was a steady and substantial increase in Libya’s oil production. However, the ongoing political tension between Washington and Tripoli interrupted this mutually profitable partnership. In January 1986, then-U.S. President Ronald Reagan issued an executive order imposing unilateral sanctions against Libya. U.S. companies’ assets in the country were put in “suspended animation.” In order to protect their concessionary interests, five U.S. firms signed a Standstill Agreement with the NOC. Under this agreement, the U.S. companies retained the original rights and obligations in the fields they operated, while NOC became responsible for the development of these fields until the return of the U.S. firms.

In the following two decades, the Standstill Agreement has survived the extreme political tension between the two states. Since the mid-1980s, the NOC and its subsidiaries have maintained production at these fields, albeit at much lower levels. With the lifting of UN sanctions in 2003 and the easing of U.S. sanctions, American oil companies were allowed to resume their operations in Libya.

Exploration Licences

 Libya is eager to increase its oil production. Indeed, the NOC announced that it wants to produce 2 million b/d by 2007. In order to achieve this goal Tripoli acknowledges its need of foreign investment to modernize its energy infrastructure. In early 2005 Libya held an exploration licence round. International oil companies showed great interest in the country’s largely un-explored and under-utilized hydrocarbon resources. Four factors have heightened foreign investors’ interest in Libya’s oil: high oil prices; certainty of proven reserves; availability of new acreage that had been off the market for years; and scarcity of opportunities to explore for oil in other parts of the world.

More than 120 companies had applied for the auction acreage. Of the 15 blocks, 9 are onshore and 6 offshore. Three U.S. companies – Occidental Petroleum Corp., ChevronTexaco Corp., and Amerada Hess International Ltd. – won interests in 11 of the 15 permits. Other successful bidders hail from Australia, Algeria, India, Brazil, Indonesia, and Canada.

These licences are based on an exploration and production-sharing agreement (EPSA). Prior to 1973, foreign oil companies worked in Libya under concession arrangements. Since then the EPSA has become more common. Under an EPSA, the government, through the NOC, retains exclusive ownership of oil fields while signatory oil companies are considered contractors. Three rounds of EPSA contracts were held – one in 1974, another in 1980 and a third in 1988, with some differences regarding recovery of development and production costs. EPSA contracts usually involve an initial exploration period, during which companies assume exploration costs and risks and are required to invest specific sums in exploration. If a discovery is made, the EPSA continues in force for a set period (usually 20 to 30 years); output is divided between the NOC and the contracting company. The 2005 licensing round was based on a more attractive model called EPSA-IV. Under this revised formula, contracts are awarded on the basis of competitive bidding, instead of closed-door negotiations. International companies carry all exploration and appraisal costs, as well as training costs for Libyan nationals, during a minimum exploration period of five years. Thereafter, capital expenses for development and exploitation, as well as operating expenses, are borne by the NOC and the investor according to their primary agreement. The hope is that the EPSA-IV will attract more international oil companies to Libya.

Relations with Europe

Libya enjoys a unique relationship with Europe. These special ties are based, at least in part, on historical experience and geographical proximity. Several European countries have extensive trade relations with Libya; nearly all Libyan oil is sold to European countries, including France, Germany, Italy, and Spain. Furthermore, European oil companies maintained their Libyan operations after their U.S. rivals left in the 1980s.

Prospects for continuing close cooperation between Europe and Libya remain strong, given the growing European dependence on imported oil and gas supplies and the European policy of diversifying its suppliers. For the past two decades, the North Sea’s oil and gas deposits satisfied a big proportion of European energy needs. The North Sea currently seems to have passed its peak; it can no longer fulfil the widening gap between Europe’s rising oil and gas consumption and its declining production. As such, Europe is growing more dependent on foreign supplies. Russia, Norway, and Algeria already are major energy providers to the EU, and the EU is now showing great interest in Libya. Libyan oil and gas can be shipped easily to Italy and Spain, and from there to the rest of Europe. Indeed, Italy and Spain are positioning themselves as potential gas conduits to northern Europe.

Since the early 2005 Libya’s natural gas exports to Italy have increased. The NOC is a partner with the Italian company Agip in a joint venture called the Western Libya Gas Project (WLGP). The goal is to produce 10 billion cubic meters a year over a 20-year period. Most of this gas will be exported to Italy via the Green Stream pipeline that was inaugurated in late 2004 to connect Libya and Italy through Sicily. This is the first such scheme to utilize Libya’s vast untapped gas reserves. It is also the biggest foreign investment in Libya’s energy sector since UN sanctions were suspended in 1999, and it further cements Agip’s strong relationship with the NOC.

To sum up, in the mid-2000s, Tripoli relations with both Washington and Brussels have substantially improved. Economic and diplomatic relations have been restored. The Council of the European Union lifted the arms embargo that had been in effect since 1986 and decided that a technical mission to Libya should be conducted to examine arrangements for combating illegal immigration. The Council also decided that an act of solidarity with those infected with HIV/AIDS at the Benghazi Hospital be implemented as soon as possible. The Council finally decided to closely follow the human rights situation in Libya and negotiate a fisheries agreement with Tripoli. These issues are likely to dominate relations between the two sides in the rest of the decade.