55. Telegram From the Embassy in Libya to the Department of State1

2299. Subj: Oil Negotiations. Ref: State 156345.2

Libyans are not bluffing. They have already assured, through deals with Oxy and three American partners Oasis,3 production of approximately 1.5 mbd. As we have repeatedly pointed out, LARG has sufficient foreign exchange reserves to cover three years non-oil imports at 1968 level. In addition, LARG not impressed by majors’ argument that Libyan increase will set precedent; on contrary, they expect their action to be followed by other Arab producers and see such moves (in Libyan context at least) as “necessary rectifications.”
It is true that Jallud told Shell 22 September that, since company refused retroactivity part of package, its share of Oasis production would be “stopped.” We understand from other Oasis owners however that only action LARG has taken is to block shipments of crude for which Shell is consignor, i.e. ban exports of Shell “owned” crude. Yet total Oasis production has not been cut below earlier imposed limit. Other owners, therefore, are able to lift Shell’s one-sixth entitlement of Oasis crude as if it were their own, and crude consigned by them to Shell subsidiaries is moving. Oasis owners, and particularly Shell, are relieved at mildness of LARG’s reprisal but anticipate harsher measures if current action does not cause Shell to yield.
It seems to us almost certain that, in confrontation with majors acting in concert, LARG would promptly force shut-in of their production—probably halting all operations which they control. This would mean a loss of about 1.5 mbd. Dept’s—and our—deep concern, therefore, that stonewall position by majors could lead to drastic cutbacks is soundly based. Effects on European energy supplies, prices [Page 128] and economies and probable repercussions on US and Alliance far outweigh debatable effects on majors’ profits elsewhere, as emphasized Tripoli 2294.4
We agree with Dept’s estimate possible LARG scenario, with following comments: it highly likely that word of companies intent to stand fast will get back to LARG before Jallud actually calls majors in. And it conceivable in these circumstances that Libyans would hold off on presenting demands—but only until they had taken all possible precautions and had activated some alternatives to majors. In this connection, we believe Japanese and/or East Europeans may already have given LARG some assurance of help in event of impasse. Thus LARG can keep its cake and eat it too. Therefore, any respite resulting from firm stand by majors is likely to be of very short duration.
From what we understand of Esso’s strategy, it is prepared to lead resistance in hope that: (A) LARG will pause and finally shrink from all out confrontation, (B) cutting off half of Libya’s production will create enough internal uncertainty and confusion for rumors of dissidence in Cyrenaica to become political reality—leading to change of course or change of government, (C) even if game is lost in Libya, new price pattern can be prevented from spreading to ME. We think any such assessment is woefully wrong on all three counts. And we strongly recommend that Dept make clear to majors their proposed tactic risks not only their own assets, but our broader interests here and in Europe as well.
  1. Source: National Archives, RG 59, Central Files 1970–73, PET 14 LIBYA. Secret; Flash; Limdis. Repeated to London and The Hague.
  2. Dated September 23, telegram 156345 informed the Embassy that on September 24 BP and Shell executives would meet with those from Esso, Mobil, Socal, and Texaco to develop joint positions on negotiations. The companies were expected to take a hard line with Libya and not give in to posted price or tax increases, on the assumption that the Libyans were bluffing. The telegram indicated that the Department was concerned about the impact of either Libyan production cutbacks or nationalization if the major oil companies refused to compromise, and thought a confrontation was “highly probable.” (Ibid.)
  3. In telegram 2171 from Tripoli, September 9, the Embassy relayed information concerning the specifics agreed to between the Libyan Government and Occidental Petroleum. Palmer commented that this agreement, plus continued limitations on Libya’s oil output, “seems to have set in motion events which will lock European market prices into level above $2.00/b.” (Ibid.)
  4. Not found.