188. Paper Prepared in the Department of State1
The Libyan Oil Industry
I. Structure and Ownership
The Libyan oil industry is dominated by American companies, which account for approximately 80% of present production. The only important non-American concession holder is Italy’s ENI, which signed a 50–50 participation agreement with the LARG in 1972 in order to begin production from fields discovered earlier. Both major and independent US oil companies are represented in Libya, with a larger share of total production coming from the concessions of the independents. The relatively large number of competing concessionaires, and the rapid tempo with which the Libyan oil fields were developed in the 1960’s, led to installation of multiple facilities including six major pipeline networks and oil export terminals.
The LARG has played an increasingly significant role in the oil industry since the 1969 coup, first through supervision and direction of the companies and more recently through direct management of nationally-owned properties. With its latest nationalization of Bunker Hunt’s interests,2 the LARG now controls the entire output of that important concession, giving it direct control and ownership of approximately 15% of oil production. Two state oil companies—the Libyan National Oil Company (LNOC) and its subsidiary, the Arab Gulf Exploration Company (AGEC)—have been organized to run the nationally held concessions, but they suffer (as does the oil ministry) from [Page 496]a lack of technically trained manpower. The Libyans are reportedly having troubles running their presently-owned properties efficiently, and almost surely could not manage any other concessions (which they might obtain through nationalization or “participation”), without extensive expatriate help. Expatriate assistance would also be indispensable for any new exploration program such as the Libyans would like to mount. In the absence of legal disputes arising from present or further nationalizations, however, the Libyans should not have difficulty in marketing their highly-valued oil.
II. Strategic Importance of Libyan Oil
The relative strategic importance of Libyan oil has declined since 1969, when it filled over a quarter of West Europe’s oil imports. Production restrictions in Libya, coupled with rapidly growing production in the Persian Gulf and Nigeria, have since reduced the crucially important role which Libyan oil plays. Nevertheless, a number of European countries remain heavily dependent on Libyan oil—for Germany they represent 25 percent, for Italy 22 percent, the UK 13 percent, and France 11 percent of total 1972 imports—while OECD Europe in general remained 14 percent reliant on Libyan oil imports.
US dependence on Libyan oil is relatively small—under 3% of total crude and products imports in 1972 came directly from Libya, and a further 1% can be estimated to have entered indirectly as product from Caribbean refineries. The figures however mask the greater importance of Libyan oil as a blendstock needed to reduce the overall sulfur content of oil products in order to meet air emission standards. There are few easily available substitutes for Libyan oil in this respect, which is increasingly important in Europe as well.
Present Libyan oil production of approximately 2.3 million barrels per day could be replaced by the oil industry only with considerable difficulty, expense, and some drawdown in reserve stocks. Relaxation of air pollution standards would also be necessary; oil of Libyan quality is in particularly high demand and little of the replacement oil would be of equally low sulfur content. A maximum of perhaps 2 million barrels per day of excess oil productive capacity currently exists worldwide, most of it in the Persian Gulf. The longer tanker routes necessary to transport such oil would also create a severe transport problem in view of the current tight tanker market, although combined carrier or laid up ships could be brought into service over a medium-term disruption (which would also see important new additions to the tanker fleet). The dislocations and expense of any prolonged loss of Libyan production, plus the still important degree of reliance of certain European countries on Libyan supplies, would indicate strong pressures on those countries’ governments to reach terms with Libya which would enable a resumption of shipping.[Page 497]
III. Importance to US
The US is not significantly dependent on Libyan oil imports, which approximate only one percent of demand. While Libyan oil is highly desirable because of its low sulfur content, its supply is not of such importance to present the Libyans with important leverage for potential use against the US. (Conversely, suspension of air quality standards in the US would be unlikely to have much effect on Libyan oil policies.) Libyan oil is, however, important to the US for two reasons: the balance of payments benefits we derive, and the impact of developments in Libya on the stability and profitability of oil arrangements elsewhere.
Our balance of payments benefitted by $409 million in profits repatriated by US oil companies from their Libyan holdings in 1972. This flowed from an investment, figured at net book value, of only $1.044 billion. Since net book assessment may be an inaccurate measurement of the importance of the US investment, another measure of the apparent earnings of US companies in Libya is to compare their repatriated profits against oil production, which would give a figure of approximately 50¢ per barrel. It is this profit flow which the companies seek to preserve, and from which our balance of payments benefits. If American companies were nationalized and the oil production subsequently sold in non-American channels, these profits would be lost to us. To the extent that oil marketing, even after a nationalization, remained under US company control, however, the loss of equity and direct profit would to some degree be offset by marketing and downstream profits, and the potential balance of payments loss reduced.
Libyan oil industry developments are also important because of their potential impact on arrangements reached elsewhere between the international oil companies and OPEC countries, particularly in the Persian Gulf. The recent “participation” and analogous agreements reached with oil producing governments give promise of stable and gradual transition to new forms of ownership and control of oil production—important if the large and continual increments in investments and production necessary to meet growing world demand are to be made. Because of inter-OPEC and inter-Arab rivalries, however, Libyan nationalizations or other dramatic steps taken by the LARG against the companies would probably have to be echoed or matched by other governments. This could destroy the hopes for a relatively stable transitional period now embodied in the “participation” agreements, and make more tenuous Western, and particularly US, access to relatively stable supplies of oil on advantageous terms from Persian Gulf suppliers.
IV. Current Negotiations
American interests, both in Libya and in other oil producing areas, will be directly affected by the outcome of the current negotiations [Page 498]in Tripoli. The goals of the LARG in those negotiations are to gain national control of the oil concessions and retain its claim to a leadership role in oil affairs, while at the same time maintaining its oil revenues and developing its prospective new reserves to the extent possible. The dichotomy of this position often makes the LARG’s negotiating posture uncertain and erratic. Combined with the government’s apparently deliberately unsettling negotiating tactics, this has the effect of keeping the oil companies uneasy and off balance much of the time.
The oil companies, in spite of the common front they have so far maintained successfully throughout the negotiations, are far from united in their basic outlook. The major oil companies are fundamentally concerned that they not set precedents in Libya which would affect the terms of their access to oil in the Persian Gulf; in view of the strategic importance of Persian Gulf oil supplies and reasonable access to them, the USG has supported the majors in their efforts to keep the Libyan negotiations directed toward a conclusion which would not prejudice the Persian Gulf settlements. The independents, on the other hand, having a great deal at stake in Libya and little in the Persian Gulf, are more inclined to try to strike a deal with the LARG even if it means negotiating from the basis of demands (net book value compensation, repurchase of the oil at market price) which they consider next to confiscation. To date, however, the extreme Libyan demands have kept the independents in line with the majors as much as the more positive aspects of the various joint negotiating proposals which the industry has advanced.
The LARG and the industry still remain far apart on the basic terms of a settlement. A prolonged confrontation is possible, and could be accompanied by further nationalization or production cutbacks, either selective or total. (The recent nationalization of Bunker Hunt was probably taken in large part in the interest of bringing pressure on the other, vulnerable, independent companies to break ranks.)
- Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–200, National Security Study Memoranda, NSSM 185. Confidential. The paper was prepared by an ad hoc interdepartmental group under the chair-manship of Claude G. Ross, Assist-ant Secretary of State for African Affairs. It is Appendix A of the July 6 response to NSSM 185, entitled “U.S. Policy Toward Libya.” The NSC Staff also prepared a paper on Libyan oil negotiations for Love on August 22. (Ibid., Box 739, Country Files, Africa, Libya, Vol. II) Additional information on Libyan developments is in INR Intelligence Note RECN–58, “Current Oil Developments: Libya and the Persian Gulf.” (Ibid., RG 59, Central Files 1970–73, PET 6 US)↩
- Libya nationalized Bunker Hunt on June 11, and its portion of the concession was taken over by the Arabian Gulf Exploration Company, the operating company of the Libyan Government. According to a June 11 memorandum from Newsom to Rush, U.S. policy was to “recognize the right of any country to nationalize foreign investments but expect prompt, adequate, and effective compensation to be paid.” (Ibid., PET 15–2 LIBYA) This information was passed to Kissinger in a June 14 memorandum from Eliot. (Ibid., Nixon Presidential Materials, NSC Files, Box 739, Country Files, Africa, Libya, Vol. II)↩