The Bottom Line

Why the Oil Companies Decided Qaddafi Has to Go

By JEAN-PIERRE SÉRÉNI

The few people Colonel Muammar Gaddafi did business with regarded him as unpredictable, inconsistent and temperamental. President Ronald Reagan described him in 1986 as the “mad dog of the Middle East”, sent the Sixth Fleet to bomb his country and imposed a strict oil embargo. Gaddafi was a pariah, yet 20 years later, he had put Libya back among the world’s top crude oil exporters, thanks mostly to US oil giants.

Clearly he must have behaved more rationally in his dealings with the oil sector than in other domestic and foreign policy initiatives, perhaps because he was less involved. International oil companies also learned how to operate – and make a lot of money – in Libya’s unstable, even hostile, business environment.

Libya became independent in 1951, as the product of a union between waning British imperialism and a Saharan Muslim order, the Senussi, whose leader became Libya’s king. Libya had long been known as the “empty kingdom” and was destitute, since its only export was scrap iron collected from Second World War battlefields.

Explorations by Italian geologists in the 1930s, continued by US army experts, suggested that there might be oil under this vast country of 1.7m sq km. Libya’s 1955 Petroleum Law broke with the usual Middle Eastern practice of granting concessions to a single company, such as Anglo-Iranian in Iran, Aramco in Saudi Arabia and the Iraq Petroleum Company in Iraq. Libya instead offered many concessions, limited geographically and, in duration, to five years. Once oil was struck, this proved a wise decision.

Some 10 companies joined the initial oil rush, and in 1961 oil was shipped for the first time from the terminal at Marsa el-Brega. In less than five years, production passed an unprecedented million barrels a day, and 19 companies, including Exxon, Shell, BP and ENI, were operating there; by 1968 there were 39. This new model for oil exploitation gradually went global.

Playing the oil companies

When Gaddafi took power in the coup of 1969, he was determined to get a higher price for his crude. On the advice of Saudi Arabia’s first oil minister Abdullah al-Tariki (the “red sheikh”, sacked by King Faisal for his outspokenness), he played one oil company against another, pitting the biggest, Esso, against a small independent, Occidental. He cut their daily production by half to try to force them to pay his government a higher price. Esso was able to replace its losses with production in other countries, but Occidental had no wells outside Libya. It was in a weak position, especially since the world’s seven biggesplus the US company Gulf Oil, and the European/UK companies Royal Dutch Shell and BP.refused to let it have a single barrel. “It has put all its eggs in one basket,” the Libyan negotiators sniggered. The company accepted the price increase. With the Suez Canal closed, the Achnacarry cartel followed suit in September 1970, and at a stroke, prices and taxes rose by 20 per cent.

Other oil exporting countries learned from this that it is better to deal with several operators than one, and to balance the majors with smaller companies without alternative resources. After that, independent and European state oil companies broke into the global oil scene.

Gaddafi and his Revolutionary Command Council, taking their cue from Egypt’s president Gamal Abdel Nasser, were determined to make the nation wealthy again. But they also had to consider bad precedents, too, such as the Iranian prime minister Mohammad Mossadeq, removed from power by the CIA in 1953 because he had dared to take on the Anglo-Iranian Oil Company; and the Algerian president Colonel Houari Boumedienne, who nationalized French-owned oil wells in 1971 only to be subject to a costly embargo.

Libya’s actions were surefooted. The shah of Iran’s soldiers occupied Abu Musa and the Tunb islands in the Gulf in December 1971, just before British forces withdrew from the region. To punish Britain for allowing this to happen, the Libyan government nationalized BP’s assets. The pretext was flimsy but the stakes were high: BP owned the majority of the Sarir oilfield, the biggest in Libya. After a stormy legal battle, an agreement was signed restoring complete control of the oilfield to Libya. Every confrontation ended the same way: foreign technicians were harassed, work on platforms slowed and productivity was badly hit. Gulf, Philips, Amoco, Texaco, Socal and others abandoned the oilfields, and Libya, in disgust. The Libyan National Oil Company (NOC), which had been formed on the US model, had no trouble taking them over, and in a decade, national revenue quintupled, reaching $10,000 per capita in 1979.

Trouble starts

Politics were the problem. The US State Department published its first list of state sponsors of terrorism in 1979, and Libya figured prominently, because of its support for radical Palestinian groups. The US soon closed its embassy in Tripoli, and banned US citizens from buying Libyan crude. Then in June 1986, all trade with the Jamahiriya (Gaddafi’s new national term, from the Arabic words for republic and the masses) was declared illegal. When Pan Am flight 103 was blown up over Lockerbie on December 21, 1988, and the French UTA flight 772 was attacked in November 1989, international sanctions were imposed on Libya, affecting the oil industry. These added to problems such as the fall in the global price of crude, the expense of big construction projects and some disarray in the domestic economy. (That was the result of attempting to follow the recommendations of the Green Book – Gaddafi’s long and abstruse anarcho-collectivist tract, the “guide of the Revolution” preaching a third universal theory, halfway between capitalism and Marxism.)

Even though NOC easily found new markets in Europe, Turkey and Brazil to replace lost outlets in the US, the embargo ended its plans to develop oil exploration, petrochemicals and natural gas; these were put on hold for lack of western capital, technology, expertise and equipment. There were networks to bypass the embargo through Tunisia and Egypt, but it was expensive to pay off criminals on both sides of the Mediterranean. A nail or a screw cost five or six times as much in Libya after 1986. The oilfields were getting old, and it was essential to restart exploration if production was not to halt.

The period 1992-99 was difficult: economic growth slowed to just 0.8 per cent a year and per capita income dropped by 20 per cent. Discontent also grew, and there were uprisings in eastern Libya (Cyrenaica) and several attempts to overthrow the regime. Gaddafi had no choice but to give in. He handed over to the UK the Libyan intelligence agents accused of the Lockerbie bombing, and paid generous compensation to the families of the 270 victims (and a little less to the 170 victims of the UTA flight). After 9/11, Libya supported the US “war on terror”, and in 2003, a few days after US tanks entered Baghdad, Gaddafi publicly renounced any ambition to develop nuclear weapons.

On November 13, 2003 the last international sanctions were lifted, and Libya’s oil industry revived. Gaddafi wanted to double production rapidly, to over 3m barrels a day (the same as Iran), and make Libya an influential member of Opec, the cartel that sets oil prices. In August 2004 NOC auctioned 15 exploration licenses, starting an oil rush.

In all, 120 companies were interested, including several US and British oil giants that had left Libya in 1986 without being nationalized; 11 of the 15 blocks were given to US companies (Occidental, Amerada Hess, ChevronTexaco). Gaddafi’s strategy was again to favor US companies over European ones such as Total, despite the fact it had supported Libya through the period of sanctions. International oil companies were impatient to get into Libya even though the contracts were harsh: $133m to be paid on signing, and a minimum of $300m to be spent on exploration. In return companies would keep at most 38.9 per cent of production, more likely just 10.8 per cent.

So why is there such a lasting, mutual fascination between Libya and oil companies, big and small, given that conditions there are so difficult? Libya’s crude is excellent in quality, and its oilfields are close to Europe’s refineries, among the biggest in the world. Libyan oil currently represents around 15 per cent of consumption in France, although less than 10 per cent in the European Union. But the main reason is that the balance of power has shifted. In 1960 the British and US oil majors controlled most of the production outside the communist world. The national companies of producer countries have replaced them. They now own their mineral resources, and control access, even if they still need international companies to prospect for new oilfields.

Looking for oil is risky and expensive, so it requires huge capital and technical expertise. National oil companies have neither. Most of the money they earn is spent elsewhere (the Gaddafi family, with six sons and one daughter, takes more than its share) and their sphere of activity remains confined within their borders. So despite expulsions, revolution and nationalisation, the renewal of ties is inevitable, with or without Gaddafi.

Translated by Stephanie Irvine

Jean-Pierre Séréni is a journalist.
This article appears in the Apriledition of the excellent monthly, Le Monde Diplomatique, whose English language edition can be found atmondediplo.com. This full text appears by agreement with Le Monde Diplomatique. CounterPunch features two or three articles from LMD every month.