Identifier
Created
Classification
Origin
09TRIPOLI72
2009-01-30 17:16:00
CONFIDENTIAL
Embassy Tripoli
Cable title:  

AL-QADHAFI'S FEINT: LIBYAN OIL NATIONALIZATION UNLIKELY

Tags:  ENRG EPET ECON EINV PREL EFIN PGOV LY 
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ZNY CCCCC ZZH
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FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4390
INFO RUEHRB/AMEMBASSY RABAT 0823
RUEHTU/AMEMBASSY TUNIS PRIORITY 0748
RUEHAS/AMEMBASSY ALGIERS PRIORITY 0880
RUEHHH/OPEC COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHTRO/AMEMBASSY TRIPOLI 4914
C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 000072 

SIPDIS

DEPT FOR NEA/MAG; DEPT PLEASE PASS COMMERCE FOR NATE MASON;
ENERGY FOR GINA ERICKSON

E.O. 12958: DECL: 1/30/2019
TAGS: ENRG EPET ECON EINV PREL EFIN PGOV LY
SUBJECT: AL-QADHAFI'S FEINT: LIBYAN OIL NATIONALIZATION UNLIKELY

REF: A) 08 TRIPOLI 474, B) 08 TRIPOLI 498, C) 08 TRIPOLI 563, D) 08 TRIPOLI 597, E) TRIPOLI 40

TRIPOLI 00000072 001.2 OF 003


CLASSIFIED BY: Gene A. Cretz, Ambassador, U.S. Embassy -
Tripoli, U.S. Dept of State.
REASON: 1.4 (b),(d)
C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 000072

SIPDIS

DEPT FOR NEA/MAG; DEPT PLEASE PASS COMMERCE FOR NATE MASON;
ENERGY FOR GINA ERICKSON

E.O. 12958: DECL: 1/30/2019
TAGS: ENRG EPET ECON EINV PREL EFIN PGOV LY
SUBJECT: AL-QADHAFI'S FEINT: LIBYAN OIL NATIONALIZATION UNLIKELY

REF: A) 08 TRIPOLI 474, B) 08 TRIPOLI 498, C) 08 TRIPOLI 563, D) 08 TRIPOLI 597, E) TRIPOLI 40

TRIPOLI 00000072 001.2 OF 003


CLASSIFIED BY: Gene A. Cretz, Ambassador, U.S. Embassy -
Tripoli, U.S. Dept of State.
REASON: 1.4 (b),(d)

1. (C) Summary. During a recent video conference with
Georgetown University students, Muammar al-Qadhafi suggested
that Libya and other oil exporting states could nationalize
their oil production in view of sharply plummeting petroleum
prices. Several days later, however, a sensior MFA official
assured the visiting Spanish King's delegation that Libya does
not intend to do so. In typical fashion, al-Qadhafi's call for
nationalization was ill-defined and left considerable room for
interpretation. Industry experts in Washington and Libya have
not entirely dismissed the possibility that the GOL could
nationalize its oil and gas sector (Libya did so in 1972);
however, they do not currently judge it to be a serious threat
and are waiting to see whether legislation proposing such an
initiative is introduced in advance of the upcoming session of
the General People's Congress. Informed contacts view the call
for nationalization as a tactical move to: 1) leverage the
expected re-negotiation of existing contracts with international
oil companies (IOCs'); 2) prompt IOC's operating in Libya to
contribute to the U.S.-Libyan claims compensation fund; 3)
establish a context for Libya's potential unilateral cuts in
production of oil below levels dictated by OPEC, and; 4) prepare
the Libyan people for the fact that this year's GOL budget,
which will be introduced at the General People's Congress
session, will be adversely impacted by falling oil revenues and
the global financial crisis. The GOL is in the midst of a
painful recalculation of its 2009 national budget to reflect

lower oil revenues. Suggesting nationalization - an idea
al-Qadhafi attributed to members of the local-level Basic
People's Congresses and can therefore disavow easily - clearly
signals the extent to which sagging oil prices and the global
financial crisis have hurt oil-dependent economies like Libya's,
helping pre-empt criticism from abroad if/when Libya makes
further unilateral production cuts below OPEC-dictated levels
and from regime elements when big ticket development projects
are scaled back or cut. Al-Qadhafi's real intent may have been
to shift the goalposts of debate so that the steps he ultimately
takes seem comparatively palatable. End summary.

AL-QADHAFI THROWS A CURVEBALL


2. (C) During a wide-ranging video conference with Georgetown
University students on January 21, Muammar al-Qadhafi raised the
topic of oil, saying " ... oil-exporting countries might opt for
nationalizations due to the sharp fall in oil prices". His
speech was foreshadowed by articles in state-run newspapers,
later picked up by Reuters, saying that members of the Basic
People's Congresses (the lower part of the pyramid scheme of
legislative committees and congresses that form the GOL) had
called for nationalization. Noting sharply plummeting oil
prices, al-Qadhafi suggested that oil production should be
temporarily curtailed or stopped altogether to spur higher
prices and suggested that a price point of USD 100/barrel was
needed to underwrite Libya's ambitious infrastructure
development projects. Libya's former senior representative to
OPEC, Abdullah al-Badri, told the press on January 23 that
nationalization could be "in the offing" and suggested that
events in Gaza may have partly prompted the proposal. At a
National U.S.-Arab Chamber of Commerce lunch in Houston on
January 27, Libya's Ambassador to Washington, Ali Aujali, said
the GOL had not ruled out nationalization and characterized a
USD 100/barrel price point as "fair". The NOC directed oil
companies producing in Libya to cut production by 270,000
barrels per day in compliance to an output-cutting decision
adopted by OPEC.


3. (C) During the recent visit to Tripoli of Spanish King Juan
Carlos I, al-Qadhafi was quoted as saying that " ... if Libya
ends up taking this decision, it will be because we don't have
any choice". Despite the public threats, MFA Secretary for Arab
Affairs (U/S-equivalent) Muhammad Siala told the Spanish
delegation that oil production would not be nationalized. In
remarks to Spanish daily "El Pais", Spanish energy giant
Repsol's President, Antoni Brufau, speculated that al-Qadhafi
had been "thinking out loud" (further details septel). A
well-connected contact in Tripoli who is a close friend of
Libyan National Oil Chairman Shukhri Ghanem told the Ambassador
on January 29 that Ghanem had not taken the press reports or
al-Qadhafi's remarks seriously and did not consider
nationalization of Libya's oil production as a serious or
plausible possibility. Ghanem was "extremely frustrated" that
he had not been consulted or informed before al-Qadhafi gave his
remarks, and told our contact he was "fed up" and waiting for an
opportunity to leave his position at the NOC.

GOL WANTS TO RENEGOTIATE EXISTING PRODUCTION CONTRACTS, INCREASE

TRIPOLI 00000072 002.2 OF 003


ITS SHARE


4. (C) Part of the issue may be definitional. Although
al-Qadhafi has used the phrase "nationalization", he may in fact
be signaling more aggressive efforts by the GOl and NOC to
secure greater shares of oil produced under existing contracts.
During 2008, the NOC renegotiated four existing production
contracts with Italy's ENI, Canada's Petro-Canada, a consortium
of U.S. Occidental/ Austrian OMV, and a European consortium of
Spanish Repsol/French TOTAL/Austrian OMV/ Norwegian Hydro
(reftels A, B, C, D). According to a recently-released NOC
report, the renegotiated contracts increased the GOL's earnings
by USD 5.4 billion last year; the four companies involved also
paid USD 3 billion in front-end bonuses, increasing the GOL's
take. The renegotiated terms brought those contracts in line
with Libya's preferred exploration and production sharing
agreement (EPSA) rubric, under which IOC's already producing in
Libya have extended their contracts, paid sizeable bonuses and
dramatically reduced their production shares to the neighborhood
of 10-15 percent. The NOC has repeatedly said it wants to
renegotiate its old (i.e., non-EPSA) contracts along EPSA-IV
terms, which would allow it to have more than an 80 percentage
share.


5. (C) The Oasis Group (ConocoPhillips, Marathon, Hess and
Occidental),Repsol, Wintershall and Total remain as the foreign
producing companies that have not signed the new agreements to
align their share percentages with the most recent EPSA-IV
configuration. The Oasis Group, whose constituent members'
assets and production were nationalized in 1972, agreed in 2005
to pay Libya USD 1.8 billions to return to their previous
acreage, which had been held in trust under a "stand fast
agreement" for 19 years during the period U.S. sanctions were in
effect against Libya. Oasis' contract is for 25 years; the NOC
holds a 59.2 percent share, ConocoPhillips and Marathon each
have 16.33 percent each, and Hess has an 8.16 percent share.
The GOL would like to renegotiate Oasis' contract to increase
its share, and has informally signaled that it intends to do so.


6. (C) At the same time, industry journals report that the
re-negotiated contracts with IOC's will entail investment in
exploration and production of some USD 22 billion over the next
5-10 years. Libya would bear up to 50 percent of that financial
burden, at a time when it may already have to scale back its
infrastructure development projects in light of falling revenues
(ref E). The GM of Canada's Verenex (one of the few companies
to find new oil under new EPSA's) said nationalization "did not
make sense" since the NOC would have to bear bear 100 percent of
development and production costs. By way of example, the NOC
only bears 50 percent of Verenex's development costs, but gets
87 percent of production revenues.

CLAIMS COMPENSATION FUND CONTRIBUTIONS


7. (C) In addition to providing leverage for potential
renegotiation of existing contracts, the threat to nationalize
may in part be an attempt to prompt IOC's operating in Libya to
contribute to the U.S.-Libya claims compensation fund that was
implemented in October 2008. Marathon's General Manager (GM)
told the Ambassador that the NOC Chairman Shukhri had begun
soliciting IOC's again about two weeks ago for contributions to
the fund established to compensate U.S. victims of acts of
terrorism authored by Libya. The NOC had previously targeted
only companies that were producing oil; however, in its most
recent approach it also touched IOC's that are in the
exploration phase and have not yet begun producing oil.
Representatives of Occidental said the company was concerned
about press reports, but not overly so. Oxy has received
private assurances from Ghanem that nationalization is not the
in the offing, and views al-Qadhafi's remarks as posturing to
pressure companies to contribute to the fund. GM's of major
IOC's here believe that the first-tier producers, who have so
far abided by an informal agreement not to accede to demands for
contributions, will continue to hold the line; however, there is
concern that second-tier producers and perhaps oilfield supply
and services companies may buckle under pressure from the NOC
and choose to contribute. A second meeting between IOC GM's and
Ghanem that was to have occurred on January 28 has been
postponed until February 1 or 2, according to Occidental's GM.

PORTENT OF FURTHER UNILATERAL PRODUCTION CUTS BY LIBYA?


8. (C) Remarks by al-Qadhafi and other senior GOL officials may
also have been intended to establish a context for potential
unilateral cuts in Libyan production of oil below levels
dictated by OPEC. Three OPEC production cuts since September,

TRIPOLI 00000072 003.2 OF 003


most recently a 2.2 million barrel per day cut that went into
effect January 1, have failed to slow a slide that has left
crude oil prices about 70 percent below the mid-July 2008 price
of USD 150 per barrel. Libya directed IOC's in Libya to cut
their production by 270,000 barrels per day (Libya's total
production is 1.7-1.8 million barrels/day),more than it needed
to account for its share of the overall OPEC cut. In his
Georgetown remarks, al-Qadhafi flatly said that Libya would not
adhere to OPEC's quotas " ... because our livelihood depends on
oil". He also suggested that further unilateral production cuts
or perhaps even a temporary production freeze could be adopted,
although either of those options would result in further
declines in revenue at a time when the GOL can ill afford it.

CREATING A DIVERSION IN ADVANCE OF THE UPCOMING GENERAL PEOPLE'S
CONGRESS?


9. (C) Finally, al-Qadhafi's remarks may be part of an effort to
prepare regime figures and, to a lesser extent, the Libyan
people for the fact that this year's GOL budget, to be
introduced at an upcoming session of the General People's
Congress (GPC),will be adversely impacted by falling oil
revenues and the global financial crisis. As reported ref E,
the session planned for January was postponed, in part because
the GOL has had to re-calculate the national budget to reflect
dramatically reduced oil revenues. A senior MFA official told
us that al-Qadhafi, unhappy that widely-publicized
infrastructure and development projects designed to demonstrate
the Jamahiriya system's benefits, tried to secure funds from
Libya's newly-constituted Sovereign Wealth Fund (SWF) to cover
budget shortfalls and avoid delaying the projects. The
President of the Libyan Investment Authority, which administers
the SWF, told the Ambassador that a recently-adopted law
prohibits such raids on the fund, and al-Qadhafi appears to have
been deterred from doing so (at least for now).


10. (C) Comment: Famous for saying the unexpected (a favorite
local saying is "from Libya comes the new"),al-Qadhafi did not
disappoint with his threat to nationalize Libya's oil
production. As with similar dramatic, headline-grabbing
statements on various other subjects in the past, though, much
of what he says and does represents tactical maneuvering rather
than a sincere expression of intent. While it is never wise to
rule out the possibility of seemingly irrational decisions by
the GOL, we are not inclined to believe that nationalization is
being seriously considered. Floating the idea helps leverage
the GOL's position with respect to renegotiating existing oil
production contracts and (potentially) garnering contributions
to the claims compensation fund. More important in the
immediate sense, though, is that it clearly signals the extent
to which sagging oil prices and the global financial crisis have
hurt oil-dependent economies like Libya's, helping pre-empt
criticism from abroad if/when Libya makes further unilateral
production cuts below OPEC-dictated levels and from regime
elements when big ticket development projects are scaled back or
cut at the upcoming session of the GPC. In that regard,
al-Qadhafi's real intent may have been to shift the goalposts of
debate so that the steps he ultimately takes seem palatable by
comparison with the specter of what could have been.
Well-connected businessman Husni Bey (strictly protect) told the
Ambassador that he doubted that the GOL would "make the same
mistake twice" by nationalizing oil production again, and
highlighted the fact that al-Qadhafi attributed authorship of
the idea to the BPC's, which would make it easier for him to
later disown it. Tellingly, MFA A/S-equivalent for the Americas
Ahmed Fituri told the Ambassador on January 28 that he did not
expect nationalization to occur, and had attended a meeting
earlier that day in which participants discussed opening a
consulate in Houston, in part to better facilitate travel
to/from Libya by U.S. oil representatives. End comment.
CRETZ