Attachment
Memorandum Prepared in the Central Intelligence
Agency5
Washington, August 6, 1979
SUBJECT
- Libyan Expropriation of US Oil
Company Interests
1. Relations between the United States and Libya regarding the sale
of C–130s, 727s, and 747s have over the years taken heavily symbolic
overtones, which in large part account for Libya’s consideration of
drastic measures in retaliation for the US denial of these planes. The possible nationalization
of the remaining US oil company
assets in Libya in retaliation for the US Government refusal to permit the sale of transport
aircraft to Libya [less than 1 line not
declassified] should be viewed as a credible threat. [classification marking and handling restriction
not declassified]
2. The contract for the original contingent of eight C–130s dates
back to mid-1969, before the revolution in Libya that brought
Qadhafi to power. Those
planes were delivered without incident, but by the time the new
Libyan regime sought to exercise its right under the contract to
purchase another eight planes, it had established a record for
supporting terrorism that induced the United States to hold up the
export license. (Strictly speaking, the license has not been denied;
it is still “under consideration.”) Lockheed had been warned in
advance of potential problems with the license but accepted full
payment ($4.5 million per plane) from the Libyans, who are still
paying monthly storage and service charges for their maintenance in
Georgia. The Libyans have chosen to make the issue a matter of
principle, not finances; they have refused to re-sell the planes,
although with the rise in prices—the C–130, substantially unaltered,
now goes for $10.5 million—they would stand to recapture their money
and probably make a tidy profit. The C–130 question has remained an
irritant in Libyan-US relations for
years. (U)
3. In March 1978, Boeing applied for a license to export two 727s and
was turned down. That fall, however, the decision was
reversed—apparently the result of Congressional pressure to help out
Boeing, [Page 263] although the
reversal also came at a time when the Libyan government was seeking
improved relations with the United States to balance its growing
ties with the Soviet Union. The license was granted under condition
that the aircraft not be put to military use or altered to enhance
their military capabilities, and that they not be used for military
training. The 727s were delivered in November. (C)
4. In March 1979, the United States received evidence that the
Libyans had used 727s to transport troops and military equipment to
Uganda—though, as it later developed, the 727s used were not those
sold under the US conditions. The
United States nevertheless decided that the spirit if not the letter
of the agreement had been violated, and decided to block the export
of the three 747s. (U)
5. The Libyans already had reason for irritation at the United
States. They have been attempting for some time to persuade the
United States to upgrade its representation in Libya to the
ambassadorial level, without success. Libya looks with considerable
suspicion at the US alliance with
Egypt, particularly the US
willingness to help Egypt out with arms, in view of the fact that
President Sadat continues to
make preparations for an attack on Libya; Qadhafi is also convinced that the
US-sponsored Egyptian-Israeli
peace treaty represents a sell-out of the Palestinians, Syrians, and
Jordanians. Qadhafi resents
US opposition to the Libyan
involvement in Uganda and the fact that Libyan oil—10% of US oil imports—seems to be given no
weight in the US attitude toward
Libya. (S)
6. Since the US decision on the 747s
was announced, Qadhafi has
made clear his intense annoyance and the fact that he would
seriously consider retaliation—specifically by withholding US oil supplies—if the decision were
not reversed. During West German Foreign Minister Genscher’s visit
in mid-June, Qadhafi talked
angrily about “anti-Libyan actions” by the United States and
indicated that Libya was interested in expanding oil exports to West
Germany by shifting oil from US
contracts. In a magazine interview given on 25 June, Qadhafi said that Libya was
“seriously thinking” of reducing or even stopping oil production for
two or three years in response to “pressure and threats of
invasion.” (The article was originally mistranslated to sound as if
the decision to stop production had already been taken, and caused a
minor panic on Wall Street.) During the course of his three-week
tour of various Arab countries beginning at the end of June,
Qadhafi apparently
attempted to persuade the oil-producing countries that they ought to
freeze production to defend Arab rights. He made no converts, but
may still be thinking about a unilateral use of the oil weapon.
(C)
7. Qadhafi has made no public
statements implying that he is considering nationalizing the
remaining US oil interests in Libya
as an alternative form of retaliation, but the step could hold
considerable [Page 264] appeal for
him. The move would probably cost him very little, particularly if
the US companies could be induced to
remain in place—a strong possibility in light of the current tight
oil market. With the tenth anniversary of the Libyan revolution
approaching on 1 September, moreover, Qadhafi may be tempted to announce the
nationalization as a dramatic gesture suitable to the occasion.
(C)
8. Nevertheless, we believe that Qadhafi will not make a final
decision until he has given up hope of persuading the United States
to approve the aircraft sales. Moreover, Libya is currently
negotiating revenue-sharing agreements with US and West European firms now operating in the country
in an effort to encourage exploration and development commitments;
nationalization would presumably upset the applecart.
9. Finally, Libya—probably as a result of its own intelligence assets
in Egypt—expects an attack from Egypt, possibly as early as this
month. It realizes that the United States is the only country that
might successfully dissuade Sadat from the attack, and would not wish to
alienate the United States—or provoke the United States to support
the Egyptians—at this critical juncture. If, however, Qadhafi held the United States
partly responsible for an Egyptian attack, he might take any one of
the following retaliatory moves: nationalization, embargo of oil
deliveries to the United States, or possibly even cut off of total
production for a time. (S NF)
10. After a decision to nationalize, two main issues would remain:
terms of compensation and the future role of the US companies in Libya. (U)
11. Although companies frequently argue that compensation should be
based on replacement cost, net book value or some portion of net
book value is more frequently settled on as the basis for a
compensation agreement. A comprehensive audit would be required to
determine the exact value of these assets and disputes between
Tripoli and the companies over the results could be expected.
(C)
12. One American oil executive has estimated that the net book value
of the remaining producing assets of American firms in Libya is
around $100 million. This compares with an original cost on the
order of $1 billion. American equity in Libyan producing assets
currently represents about 30 percent of the total. (C)
13. The same American executive estimated that replacement costs for
facilities to produce an equivalent amount of production—about
600,000 b/d—would amount to between $1.6 billion and $1.9 billion.
He put the finding costs necessary to establish a reserve base to
support this level of production at an additional $1.8–2.6 billion,
bringing the grand total for replacement to an estimated $3.4–4.5
billion. The compa[Page 265]nies
clearly would not expect the Libyans to agree to such compensation.
(C)
14. The above estimates do not include an LNG plant owned by ESSO with an estimated book value of
around $35 million and a replacement value of about $800 million.
They also do not include an estimated $100 million worth of
equipment in Libya belonging to American oil service companies.
(C)
15. Compensation could take forms other than cash. For example, Libya
might offer the companies better long-term purchase agreements
“guaranteeing” future access to Libyan crude or a slight discount on
crude purchases. The former concessionaries in Kuwait, for example,
purchase crude at a 15 cent-per-barrel discount. Current Libyan
financial arrangements allow the companies operating there to
maintain a 50–55 cent per barrel profit margin on their equity oil.
(C)
16. While the Libyans need technical assistance, they do not
necessarily need US technical
assistance. Although US oil
technology and services are in general superior to those of other
nations, Tripoli probably would be willing to arrange technical
service contracts with non-US firms
to replace US operators. Qadhafi could probably obtain good
terms in the current market by providing access to Libyan crude
denied to the nationalized US
companies. Similarly, while the Libyans clearly want US investment in exploration and
production, they could find European investors. (C)
17. If US companies are to be
excluded from Libya and denied access to Libyan crude, their
attempts to find new supplies would put further pressures on the
world market. (C)
