LIBYAN MARKET TESTS INTERNATIONAL OIL AND GAS COMPANIES

UNCLAS SECTION 01 OF 03 TRIPOLI 000979

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR NEA/MAG, COMMERCE FOR NATE MASON, PARIS FOR ESPOSITO,
LONDON FOR TSOU

E.O. 12958: N/A
TAGS: ECON EINV EPET ENRG LY
SUBJECT: LIBYAN MARKET TESTS INTERNATIONAL OIL AND GAS COMPANIES

REF: A) TRIPOLI 511 B) TRIPOLI 912


1. (SBU) Summary: Although an alluring market for the oil and
gas industry, Libya is an exceptionally difficult place in which
to operate. In their daily operations, international oil
companies (IOC's) face numerous challenges on visas, staffing
and taxation issues, and their profit margins are comparatively
narrow. The situation is likely to worsen in coming years, as
Libyan authorities seek to extract additional concessions from
energy companies operating in the country to maximize Libya's
profits, even at the expense of continuing to attract further
participation by reputable IOCs in the critical oil and gas
sector that is the nation's lifeblood. End Summary.


2. (SBU) The results of Libya's latest Exploration and
Production Sharing (EPSA) bid round, which is focused on natural
gas, are due to be released December 9, and the country appears
to be moving ahead with plans to develop its oil and gas
industry. The National Oil Corporation (NOC) has implemented
three successful EPSA bid rounds since January 2005, and has
also concluded lucrative one-off deals with major international
oil companies (IOCs) to develop new territories (ref A). The
third (i.e., most recent) EPSA round, has attracted almost 60
companies from more than 25 countries as operators and
investors. With more than forty IOCs already operating in Libya
and oil prices at record highs, it would seem that the sector is
the place to be in Libya; however, IOCs describe it as an
extremely challenging environment that consistently tests their
patience and financial limits. What follows is a summary of
some of the most pressing difficulties they face; Post will
outline challenges faced by oil service companies septel.

NOC TAKES A HARD LINE


3. (SBU) In addition to renegotiating existing agreements to
extract additional concessions (ref B),the NOC is taking a hard
line in a number of other areas. The general sense in the GOL
appears to be that the NOC holds all the cards. NOC Chairman
Shukri Ghanem put it a bit more diplomatically at the recent
World Energy Congress in Rome, where he said the NOC is in a
position to dictate policies that reflect "changing conditions"
in energy markets. The fierce competition among IOCs to enter
the Libyan market and book reserves has fed the NOC's perception
that it is a seller's market. It has also led to the reality
that Libya features some of the smallest profit margins in the
world for IOCs. One senior IOC official, whose company produces
oil in partnership with a state-run firm, recently said his firm
makes the same profit in a neighboring country in which its
production is only one-quarter that of its production in Libya.
That dramatic difference underscores the comparatively high
operating costs for oil/gas producers in Libya and raises grave
doubts about the profitability of deals agreed in the last two
EPSA bid rounds, which featured razor-thin production sharing
factors, reportedly as low as 6.8 percent of future production
in at least one case.


4. (SBU) The NOC appears to be actively looking for ways to
extract additional concessions, or to cut services previously
provided to the IOCs. Part of this may be the result of the
fact that the NOC is unable to effectively stave off other
players in the bureaucracy, particularly the powerful General
People's Committee (GPC) for Manpower, Training and Employment.
Led by long-time cabinet minister and regime insider Matug
Matug, the ministry has been one of the most active in
pressuring IOC's to hire greater numbers of Libyans, many of
whom are unqualified, The NOC is striking hard bargains with
thin profit margins at the same time that it is asking IOCs to
absorb ever-increasing costs -- direct and indirect -- for work
done in Libya. The end result is a substantially more difficult
and less profitable operating environment that has given IOCs
pause to consider how seriously they want to pursue further
concessions.

HERE, HAVE A MANAGER ... BETTER YET, HAVE TWO


5. (SBU) The increasingly restrictive labor regulations for
IOCs and service companies, mandated by the GPC for Manpower,
Training and Employment are particularly onerous. The GPC for
Manpower recently directed that for every new expatriate hired
by an IOC, one Libyan must be added to the company payroll as

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well. It is required that certain key positions in IOCs' local
offices - deputy country manager, finance manager and human
resources manager - be staffed by Libyans. Companies have tried
various ways to comply with these requirements, from hiring
competent managers away from NOC-run companies to hiring and
immediately marginalizing an "empty suit" employee. Other
tactics include adding a lightly disguised expatriate layer atop
the position encumbered by a Libyan and stalling with respect to
encumbering positions designated for Libyan nationals.
Expatriate IOC representatives consistently bemoan the time and
training required to bring new Libyan hires up to speed; a lack
of candidates with professional fluency in English and other
basic skills is a persistent problem. IOC managers stress that
they invest considerable time and resources training
locally-engaged staff everywhere in the world; however, they
describe Libyan employees as being less able upon hiring than
most, necessitating longer, more costly training.

VISA WOES CONTINUE TO RANKLE


6. (SBU) At the heart of the IOCs' struggle to succeed in
Libya's difficult operating environment is the constant
difficulty of obtaining visas and work permits. The NOC has
increasingly used visas and residency permits as a tool by which
to enforce compliance with the "hire Libyan" policy, refusing to
issue visas or residency permits to expatriates encumbering
deputy manager, finance manager or HR manager slots. Expatriate
employees often have to leave the country as their residency
permit runs out and remain outside the country for weeks or
months while their company works to get the permit renewed.
Many companies are forced to use two-week business visas, which
may be renewed twice, for up to six total weeks in country. The
Byzantine visa requirements put a tremendous administrative
burden on IOCs, which typically maintain up to a half-dozen
locally-engaged employees to work on nothing but visas and
residency permits. The GPC for Manpower's edict that a new
Libyan employee be hired for each new expatriate hired has an
additional, visa-related wrinkle: for each renewal of a one-year
visa for an expatriate employee, an additional Libyan employee
must be hired. An expatriate employee staying on for three
years could be accountable for the addition of four Libyan
employees (one counterpart at hiring plus one for each visa
issued). The NOC reportedly opposes this requirement, but has
been trumped by the GPC for Manpower.

THE TAX MAN COMETH


7. (SBU) Various arms of the Libyan government are also working
to extract additional tax revenue from energy sector activities.
This is reflected in the imposition of a two percent "Stamp
Tax," which will be assessed on all contracts falling under the
December EPSA round and all new contracts signed after that.
This tax has been sporadically applied to other areas of the
economy, specifically where foreign investment is involved,
since it first appeared on the books in 1955. An effort by the
Libyan Tax Authority to collect it on contracts under previous
EPSA rounds was successfully contested by the affected
companies, leading to the Tax Authority's announcement that all
future contracts would be subject to it. There is also a move
afoot to extract additional tax revenue from offshore
exploration and drilling. The GOL had previously allowed the
servicing of these activities out of Malta, but is now moving to
curtail that and to require that they be based out of Libya.
The relocation of onshore support services for offshore
operations generates considerable income for the Tax Authority;
offshore drilling operations can cost up to $750,000 per day for
deep-water operations. In addition, the NOC recently decided it
would no longer act as an intermediary between the IOCs and the
Tax Authority. IOCs have been forced to hire additional staff
and devote considerable resources to parsing through Libya's
amorphous tax system to determine what their obligations are and
how to meet them.

RISING SALARIES GUTTING STATE-RUN COMPANIES


8. (SBU) Libya's state-owned companies continue to protest what
they consider to be unreasonably high rates for expatriate
labor, and have attempted to hold a line at the rate schedule
employed in 2002 during the sanctions period. Overall salaries

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have risen about ten percent for each of the past two years, but
the state-owned operator oil companies (e.g., Waha, Zeuitina)
still lag well behind the IOCs in terms of compensation. They
are accordingly hemorrhaging seasoned workers, who are taking
advantage of high international demand for oil/gas worker to
leave Libya for more lucrative opportunities in the Gulf and
elsewhere. As the state-run firms fail to offer competitive
wages for expatriate workers, they are unable to fill current
vacancies. An example is the state-run firm Waha, which has at
least 100 expatriate vacancies at present, constituting roughly
one third of its expatriate workforce. The situation affects
not only these companies and the NOC, but also the IOCs that
depend on state-run firms as operating partners. This is the
arrangement for almost all companies engaged in production and
export activities. The GOL's decision (under Law No. 43 of
2006) to pull back the NOC's procurement offices in London and
Dusseldorf (Umm Jawaby and Medoil, respectively) also creates
problems for state-run firms, which have had their supply lines
interrupted by the disruption of a long-established logistics
system and the ongoing movement of more than two hundred state
employees from Europe back to Libya.


9. (SBU) Comment: Libya's oil and gas sector is in many respects
the bellwether for the rest of its emerging economy. The fact
that IOCs, which successfully operate in some of the most
forbidding environments in the world, are having such a
difficult time underscores how far the GOL has to go in terms of
reform if it is to achieve its stated goal of attracting greater
foreign investment and commercial interest to Libya. We
consistently hear expressions of disappointment from senior GOL
officials that more U.S. firms have not rushed to enter Libya's
market since sanctions were lifted and Libya was removed from
the state sponsors of terrorism list. Pernicious requirements
such as the "one expat-one Libyan" hiring policy and capricious
visa policies, however, do nothing to encourage other U.S. and
foreign companies with less international experience than the
IOCs to enter the Libyan market. End comment.
STEVENS