Libya, Where they Tried to Skin the Cats

by Debora Billi

Often – and, alas recently, always – people suspect there is oil behind wars. But wars are not carried out simply to “get the oil”: one can almost always get it more comfortably by signing an agreement and shaking hands. People who have oil need to sell it. Of course, the increase in demand and the fall in supply have made it a seller’s and not a buyer’s market, but the goal for both is still the same.

The problem, therefore, is not to “get hold of the wells”, but to get very favourable contracts. This is not always possible, especialy when the producer country has a strong national company or laws which do not allow foreign companies to do as they please. Some examples? Saddam’s Iraq, where a highly controversial oil law was imposed after the war which virtually deprived the Iraqi people of their sovereignty over their own underground resources; Chávez’ Venezuela or Gheddafi’s Libya.

Gheddafi, through the national oil company (Noc) has a system of agreements which differs from that in use in the rest of the world. The Epsa agreement, which many companies stipulate in Libya, does not provide for royalties, sharing operating expenses, taxes or the like. Much more simply, the government takes its share of the gross output. The companies work at their own expense, they pay neither taxes nor dues, and they share the output with Libya. But it no fifty-fifty matter at all.

And this is where the Italian company, Eni comes into the picture. Eni has been drilling in Libya since before Gheddafi, and has always posed a problem. And if we think of what is going on now, perhaps Eni was the straw that broke the donkey’s back. Wikileaks provides us with some classified documents which can help us to understand.

June 17, 2008: “Eni’s oil and gas deal extended, other companies worry terms will set a new (unfavorable) precedent”. Maybe you will remember, there was a lot of talk about it [in Italy]: in 2008, Libya extended Eni’s drilling rights for a further 25 years.“Under the new deal, Eni reduced its production share to 12% for oil (down from 35-50 percent for its various fields) and 40% for natural gas (down from 50 percent).” The Wikileaks cable goes on”: “The potential impact of Eni’s deal is significant. Local observers expect that the National Oil Company’s (NOC) success in securing very favorable terms will embolden it to pursue renegotiation of existing contracts with other international oil companies (IOCs).” In brief: they complain that Eni is selling out in Libya. Competing against the other companies whom the powerful Libyan company will force to work on Chinese conditions.

And Noc did start putting the heat on the other companies too.

July 23, 2008: “Within the new framework, the production share for the European consortium [developing the Marzuq basin] will be reduced from 25% to 13%. Repsol, OMV, Total and Saga Petroleum have followed other major actors in Libya in acceding to pressure by the NOC to convert to the new EPSA-IV framework, which features significantly reduced production shares for international oil companies.

If anyone is still in doubt, there is a cable complaining about Noc’s failure to compromise, and especially about the autocratic management by the director, Shukri Ghanem. Who, just last year, announced his intention to extend the fatal Epsa IV agreement to the other companies which had hitherto been enjoying traditional concessions. “There’s more than one way to skin a cat”, he said.

Perhaps more than the tough contracts, it was this figure of speech which the international oil companies failed to appreciate. With all the predictable consequences.

Debora Billi is an Italian journalist and expert on energy and environmental issues. She is a member of Aspo (Association for the Study of Peak Oil). Her blogs (in Italian) are:

Petrolio.blogosfere.it
Crisis.blogosfere.it

This article came out in the online version of the daily Il Fatto Quotidiano, on March 21^st, 2011.

Translation by Miguel Martinez