BUSINESS IS POLITICS IN LIBYA: CANADIAN OIL FIRM VERENEX STILL TRYING TO SELL COMPANY TO THE CHINESE

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000517



SIPDIS



STATE FOR NEA/MAG; ENERGY FOR GINA ERICKSON; COMMERCE FOR NATE

MASON; PARIS AND LONDON FOR NEA WATCHERS



E.O. 12958: DECL: 6/25/2019

TAGS: EPET, EINV, LY, CA, EFIN, PGOV, ECON

SUBJECT: BUSINESS IS POLITICS IN LIBYA: CANADIAN OIL FIRM VERENEX

STILL TRYING TO SELL COMPANY TO THE CHINESE



REF: A) TRIPOLI 148; B) TRIPOLI 306



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CLASSIFIED BY: Gene Cretz, Ambassador, U.S. Embassy Tripoli,

U.S. Department of State.

REASON: 1.4 (b),(d)

1. (C) Summary: Verenex, a Canadian oil firm, continues to

experience delays from the Libyan National Oil Company (NOC) on

approving the proposed sale of Verenex to China National

Petroleum Company International Ltd (CNPCI) in a deal estimated

at 400 million U.S. dollars. In the latest round of stalling,

the NOC introduced allegations of misconduct during Verenex's

initial bid. The head of Verenex believes the Libyan

authorities are trying to force down the proposed share price

(10 Canadian dollars) in order to buy the company itself. The

reasoning behind the NOC's stone-walling remains elusive, but

may be related to a number of issues, including: Libyan

concerns about the Chinese offer, NOC's interest in accumulating

funds for the Compensation Fund agreed to with the U.S., or

bureaucratic incompetence. Regardless of the NOC's reasoning

(or lack thereof),Verenex's troubles may have broad

implications for other foreign firms doing business here, as

GOL's actions to stall the sale appear to violate the sanctity

of its contract with Verenex. End summary.



2. (C) On April 23, Jim McFarland (strictly protect),

President of Verenex, a relatively small Canadian oil firm with

exploration activities in Libya, provided an update on the

proposed sale of Verenex to CNPCI. As reported in Refs A and B,

the proposed sale requires the approval of Libya's NOC under the

terms of Verenex's Exploration and Production Sharing Agreement

(EPSA) with the NOC and contains a clause allowing the NOC to

pre-empt any bid that has been offered. McFarland believes that

the Libyans are dragging out the approval process in an attempt

to drive down Verenex's share-price and pre-empt the CNPCI offer

of 10 Canadian dollars per share (a deal that would amount to

roughly $400 million USD). He also stated that while the

Libyans have political concerns about the Chinese offer, they

want to avoid offending the Chinese government.



3. (C) The sizable profit that NOC stands to gain in acquiring

Verenex could be intended to repay the GOL entity (reportedly

NOC) for its contributions to the Libyan terrorism compensation

fund agreed to by the U.S. and Libya and completed on October

31, 2008. NOC Ghanem has reportedly been under intense pressure

to make up for the Libyan funding that resolved the issue.

Marathon Oil GM Steve Guidry told Pol/Econ Chief on June 28 that

NOC is developing various creative ways to try to collect money

from the IOCs for the fund. NOC's acquisition of Verenex's

fields would be consistent with that goal. On April 23,

McFarland noted that an NOC-owned subsidiary, African Gulf Oil

Co. (AGOCO),which previously operated in Verenex's block, may

be trying to re-acquire the area.



4. (C) McFarland said the consideration of the proposed sale

of Verenex has shifted from the NOC to the General People's

Committee (GPC),which is led by the Secretary of the GPC (prime

minister-equivalent) al-Baghdadi Ali al-Mahmoudi. McFarland

commented that the chair of the NOC Shukri Ghanem, had been

straightforward with him regarding the deal and wanted to avoid

tarnishing the NOC's reputation.



5. (C) In addition to regular meetings with al-Baghdadi,

Verenex is now meeting with the GPC's legal counsel. The lead

attorney is Ahmed Messalati. Verenex's lawyers "did some

checking" on Messalati, including asking the State Department

about him. It appears he was one of the main negotiators on the

2008 claims compensation agreement between the U.S. and Libya.

McFarland said the reports he received about Messalati were

positive and that Verenex appreciated knowing that a serious

interlocutor would be working on the case. Verenex also expects

Messalati to be a shrewd negotiator, who will try to win the

best deal for the Government of Libya (GOL).



6. (C) McFarland said Verenex had recently received letters

from the NOC saying the legal authorities in Libya were

investigating allegations that Verenex was improperly

pre-qualified to bid in the EPSA IV first bid round in January

2005, under which Verenex acquired its rights to its exploration

zones (Area 47) in Libya (see Ref A). McFarland called this a

"bogus investigation," and opined that it was a pressure tactic

to bring down the share price. He believes the investigation is

being carried out by the auditors of the GPC, as part of their

review of the Verenex "file." He said they had had plenty of

time to investigate the deal, including since last September

when the process for selling Verenex began. He noted the first

EPSA bidding round did not have clear criteria in the first

place; thus, GPC allegations had no real basis.





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7. (C) Verenex is also keeping the Canadian Embassy informed

of the progress of their negotiations and the ongoing

challenges. The Canadian Ambassador told the Ambassador that he

has raised the Verenex issue with high-level officials in

Tripoli and has requested a meeting with Muammar al-Qadhafi to

discuss Verenex, among other issues. Verenex has also kept the

UK Ambassador apprised of the latest developments, given the

important role British companies play in the oil and gas sector

in Libya.



8. (C) Comment: A number of reasons could be driving GOL's

blocking of the Verenex sale, including Libyan concerns about

the Chinese offer, NOC's interest in accumulating funds for the

compensation fund, revenge on the part of Libyan stakeholders

whose ox had been gorged by the initial permission for Verenex

to operate, or simple bureaucratic incompetence. While it would

appear the Verenex saga is not of direct concern to us (although

there are a considerable number of American shareholders) given

its status as a small Canadian company that perhaps entered the

Libyan market to make a quick profit and then exit, the case has

broader implications for other foreign firms doing business

here. GOL's stone-walling of Verenex's sale to the Chinese, and

the last-minute introduction of allegations of misconduct in

initial bidding rounds, raise strong concerns about Libya's

commitment to the sanctity of contract, a principle that is

essential for companies operating in Libya. We intend to raise

this troubling aspect of the case in future discussions with GOL

officials. End comment.

CRETZ