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Cablegate: Libyan Sovereign Wealth Fund Agrees to Buy Canadian Oil Firm Verenex

VZCZCXRO9369
PP RUEHBC RUEHDE RUEHDH RUEHKUK RUEHROV
DE RUEHTRO #0778/01 2741646
ZNY CCCCC ZZH
P 011646Z OCT 09
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC PRIORITY 5316
INFO RHEHAAA/NSC WASHINGTON DC
RUEHEE/ARAB LEAGUE COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0030
RUEHGA/AMCONSUL CALGARY PRIORITY 0008
RUEHVT/AMEMBASSY VALLETTA PRIORITY 0454
RUEHRO/AMEMBASSY ROME PRIORITY 0620
RUEHTRO/AMEMBASSY TRIPOLI 5863

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000778

SIPDIS STATE FOR NEA/MAG; STATE PLEASE PASS USTR; COMMERCE FOR NATE MASON; ENERGY FOR GINA ERICKSON; PARIS AND LONDON FOR NEA WATCHERS E.O. 12958: DECL: 10/1/2019

TAGS: EPET EINV LY CA EFIN PGOV ECON

SUBJECT: LIBYAN SOVEREIGN WEALTH FUND AGREES TO BUY CANADIAN OIL FIRM VERENEX REF: A) TRIPOLI 148; B) TRIPOLI 517 TRIPOLI 00000778 001.2 OF 002

CLASSIFIED BY: Joan Polaschik, DCM, U.S. Embassy Tripoli, Department of State. REASON: 1.4 (b), (d)

1.(C) Summary: After many months of delay on the part of the Libyan government, Canadian oil exploration firm Verenex has reached a tentative sale agreement with the Libyan Government's sovereign wealth fund. A final agreement should be concluded by October 20. After that, the shareholders of Verenex will have to approve the deal, and how the largest shareholder, Vermillion Resources Ltd (at 45 per cent), will vote is unknown. Verenex has been the most successful oil explorer in Libya since foreign companies started returning five years ago. China's recent effort to purchase Verenex was nixed by the Libyan National Oil Company, and Libyan Government interference resulted in a 30 percent drop in Verenex's sale price. While the Verenex sale is relatively small (approximately $ 300 million US dollars), the Canadian company's experience is an example of Libya's worsening business environment. End summary.

VERENEX SEES 30 PER CENT DROP IN SALE PRICE AS RESULT OF NEW DEAL WITH LIBYAN INVESTMENT AUTHORITY

2.(C) Jim McFarland (strictly protect), CEO of Canadian oil exploration firm Verenex, confirmed to Econoff that the Libyan sovereign wealth fund --the Libyan Investment Authority (LIA)-- would purchase Verenex Energy after the Libyan government did not approve a Chinese company's offer to acquire Verenex. The Canadian firm's assets in Libya have yielded the most positive exploration results since Libya welcomed back international oil companies five years ago (Ref A) . The China National Petroleum Company International Ltd (CNPCI) had offered to purchase Verenex in a deal estimated at 400 million U.S. dollars. However, the proposed sale required the approval of Libya's National Oil Company (NOC) under the terms of Verenex's Exploration and Production Sharing Agreement (EPSA) with the NOC, and contained a clause allowing the NOC to pre-empt any bid that had been offered. The CNPC offer would have paid Verenex $ 10.00 Canadian dollars (approximately $ 9 USD) per share in a deal valued at $ 500 million Canadian dollars (400 million USD). In addition, CNPC would have paid the NOC a cash bonus of $ 47 million Canadian dollars. CNPC dropped its proposed offer earlier this month. McFarland's prediction that the GOL aimed to drive down the share price by dragging out the resolution of the sale appears to have come true (Ref B). In this latest development, the LIA will only pay $ 7.09 Canadian dollars ($ 6.57 USD) per share amounting to $ 315 million Canadian dollars. McFarland said the Libyans had set $315 million Canadian dollars as the maximum price they would pay to acquire Verenex. In the end, the LIA deal stands to be about 30 percent less than the Chinese proposal, a loss that has upset some shareholders.

THE DEAL SHOULD CONCLUDE BY OCTOBER 20 BUT SHAREHOLDERS MAY NOT AGREE

3.(C) McFarland said Verenex had signed a Memorandum of Understanding (MOU) with the LIA and that the LIA had hired UK lawyers to assist with the financial and legal due diligence of the company. He said this work should be finished by October 20. The next step will be to obtain shareholder approval. The views of Verenex's main shareholder, Vermillion Resources Ltd., which owns about 45 percent of Verenex stock, are not known. However, the only other option for the shareholders would be to force the company to take its case to international arbitration. McFarland commented that arbitration, while always an option, is unlikely as it would take several years to conclude thereby dragging out the process even longer.

WHY IS THE LIBYAN INVESTMENT AUTHORITY (LIA) BUYING VERENEX?

4. (C) The Libyan Government's choice of the LIA as the state-owned entity that will buy Verenex is an interesting one. A possible buyer could have been the NOC itself which already owns many oil companies, such as Sirte Oil Company, Zuetina, and Hrouj. (In earlier conversations, McFarland had speculated that the NOC subsidiary, AGOCO, that originally owned Verenex's assets in Area 47 of the Ghadames Basin, might be trying to get back the area now that oil had been found). xxxxxxxxxxxx opined that a sale directly to the LIA, instead of the NOC, may enable Libya to more easily sell Verenex to another company. Other industry insiders in Tripoli speculate the LIA will indeed turn around and sell Verenex to another International Oil Company (IOC) and TRIPOLI 00000778 002.2 OF 002 in effect, "flip it." McFarland hinted to Econoff that this might be a possibility, saying he was not sure of the LIA's "end game" and whether they would sell the company. No specific buyers have yet been identified. The Argentine Ambassador told us that LIA is trying to entice an Argentine company to work with LIA as the operator for Verenex, as LIA does not have the capacity to continue operations on its own.

5.(C) Comment: While the Verenex sale to the Libyan government is relatively small (approximately $ 300 million US dollars), the Canadian company's experience is an example of Libya's worsening business environment. Some energy executives have attributed the recent downward trend in the business climate to the growing confidence that has resulted from Libya's increased presence on the international stage. One energy executive explicitly linked Libya's toughening stand vis-`-vis the international oil companies to Libya's assumption of leadership roles in the United Nations and African Union, noting that Libya may feel that it now has the international standing to play hardball with foreign companies. End comment. CRETZ

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