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Cablegate: Growth of Resource Nationalism in Libya

VZCZCXRO7281
PP RUEHTRO
DE RUEHTRO #0967/01 3191417
ZNY CCCCC ZZH
P R 151417Z NOV 07
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC PRIORITY 2836
INFO RUEHRB/AMEMBASSY RABAT 0511
RUEHAS/AMEMBASSY ALGIERS 0560
RUEHTU/AMEMBASSY TUNIS 0352
RUEHEG/AMEMBASSY CAIRO 0912
RUEHVT/AMEMBASSY VALLETTA 0222
RUEHRO/AMEMBASSY ROME 0335
RUEHTRO/AMEMBASSY TRIPOLI 3260

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000967

SIPDIS

SIPDIS

DEPT FOR NEA/MAG, EEB/ESC/IEC/EPC

E.O. 12958: DECL: 11/6/2017
TAGS: ECON EPET LY
SUBJECT: GROWTH OF RESOURCE NATIONALISM IN LIBYA

REF: A) STATE 150999, B) TRIPOLI 912 CLASSIFIED BY: Chris Stevens, DCM, U.S. Embassy Tripoli, U.S. Department of State. REASON: 1.4 (b), (e)

1.(C) Summary: Libya has a long history of resource nationalism linked to the policies and rhetoric of the Qadhafi regime. Beginning in the 1990's, many of these practices were scaled back; however, the removal of U.S. and UN sanctions and Libya's attendant opening to the world have prompted a resurgence of measures designed to increase the GOL's control over and share of revenue from hydrocarbon resources. End Summary.

INVESTMENT SURGE ...

2.(C) With the lifting of UN and U.S. sanctions, foreign investment has surged back in to Libya over the past three years. -- U.S. companies adopted a number of return strategies, from buying back old concessions (Marathon and ConocoPhillips), winning bids for new blocs (Chevron and ExxonMobil), or a combination of both (Amerada Hess and Oxy). Since January 2005, there have been three Exploration and Production Sharing (EPSA) rounds, in which exploration areas have been competitively bid to foreign companies. These steps have produced a flurry of new work, as the more than forty international oil companies (exclusive of oil service companies) toil to discover marketable quantities of oil and gas. -- Several new "one-off" deals have also been concluded, including massive deals with Shell and British Petroleum, and a 25-year extension of Italian company ENI's oil and gas EPSA's. -- The GOL has also shown a growing interest in developing its natural gas capabilities; an EPSA round for gas will come to a close this December.

... SPARKS NATIONALIST RHETORIC, POLICIES

3.(C) With this inflow of capital, and in particular the return of international oil companies (IOCs), there has been growing evidence of Libyan resource nationalism. The regime has made a point of putting companies on notice that "exploitative" behavior will not be tolerated. In his annual speech marking the founding of his regime, Libyan leader Muammar Qadhafi in 2006 said: "Oil companies are controlled by foreigners who have made millions from them -- now, Libyans must take their place to profit from this money." His son, Seif al-Islam al-Qadhafi, said in March 2007 that, "We will not tolerate a foreign company to make a profit at the expense of a Libyan citizen."

4.(C) Beyond the rhetoric, there are other signs of growing resource nationalism. -- Some IOCs with local subsidiaries have been forced to adopt Libyan names this year, including TOTAL (now officially titled "Mabruk"), Repsol ("Akakoss"), ENI ("Mellita") and Veba ("Al-Hurruj"), although these names have yet to catch on. -- The Libyan National Oil Corporation (NOC) is currently in the process of reworking long-standing oil concessions with several different IOCs (Ref B), in an effort to wring more favorable terms. There is a growing concern in the IOC community that NOC, emboldened by soaring oil prices and the press of would-be suitors, will seek better terms on both concession and production-sharing agreements, even those signed very recently. -- Libyan labor laws have also been amended to "Libyanize" the economy in several key sectors, and IOCs are now being forced to hire untrained Libyan employees. The Libyan National Oil Company (NOC) has recently begun insisting that deputy general managers, finance managers and human resource managers in local offices of IOC's be Libyan. -- The enactment of Law #443 of 2006 obligated most foreign companies to form joint ventures with Libyan companies in order to operate in the country. (Note: This currently excludes IOCs, but includes all foreign oil and gas service companies. End Note).

5.(C) The latest EPSA rounds could well prove to be a testing ground for how far Libya will travel down this path. The intense competition of the bid rounds led to winning bids that TRIPOLI 00000967 002 OF 002 are widely considered by hydrocarbon industry experts to be economically untenable. Chinese and Russian bids that allow companies to book only 7-10% of future production were hailed by NOC Chairman Shukri Ghanem as "very good for us...and "[clearly] also good for the companies, since they submitted the offer".

HARMFUL TO LIBYA'S OWN INTERESTS?

6.(C) There is widespread concern among industry experts, however, that Libya's zeal for deriving maximum financial benefit from oil/gas concessions will adversely impact its energy resource development in the mid- to long-term, as low-bidding companies will under-invest, under-perform and under-produce. The expectation is that some of the companies that submitted unfeasible bids will be forced to abandon their concessions, further delaying the development of Libya's energy infrastructure.

COMMENT

7.(C) Libya needs to exploit its hydrocarbon resources to provide for its rapidly-growing, relatively young population. To do so, it requires extensive foreign investment and participation by credible IOCs. Reformist elements in the Libyan government and the small but growing private sector recognize this reality. But those who dominate Libya's political and economic leadership are pursuing increasingly nationalistic policies in the energy sector that could jeopardize efficient exploitation of Libya's extensive oil and gas reserves. Effective U.S. engagement on this issue should take the form of demonstrating the clear downsides to the GOL of pursuing this approach, particularly with respect to attracting participation by credible international oil companies in the oil/gas sector and foreign direct investment. MILAM 0 11/15/2007 5833 ECON,EPET,LY GROWTH OF RESOURCE NATIONALISM IN LIBYA Libya has a long history of resource nationalism linked to the policies and rhetoric of the Qadhafi regime. Beginning in the 1990's, many of these practices were scaled back; however, the removal of U.S. and UN sanctions and Libya's attendant opening to the world have prompted a resurgence of measures designed to increase the GOL's control over and share of revenue from hydrocarbon resources.

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