105. Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • Assessment of Reports of Libyan Expropriation Plans (U)

I asked CIA and State for assessments of a CIA report that Qadhafi was thinking of nationalizing the remaining ownership interests of US oil companies in Libya on September 1 as an anniversary present to himself. You may not have seen State’s reply (attached), which discounted the reliability of CIA [less than 1 line not declassified] and doubted that Qadhafi would behave irrationally in oil matters; he knows that he needs the US companies’ willing cooperation, State says. You saw the reply from Bob Bowie,2 on which you wrote to Bob Hunter and me: “What do we need to do?” (S)

The first thing to do is to judge whether the aircraft embargo issue and other sources of Libyan hostility are likely to precipitate a rash Libyan action or proxy action (sabotage of tankers in the Strait of Hormuz, for example) seriously damaging to US interests. While the chances of Qadhafi’s recklessly jeopardizing Libyan oil revenues are low, he could devise a nationalization that keeps the oil flowing. (S)

The next thing to do is to consider whether the risk is sufficiently real and great to warrant appeasement of Qadhafi on a non-vital but burning issue, i.e., the C–130s or the 747s. I have asked Bob Hormats to get some technical and legal specialists in State to look into the feasibility of a restricted lease of transport aircraft with crews by a US company, perhaps with assurance of immediate recall by the lessor if the aircraft are sent on missions outside Libya. This probably is not practicable. Hormats will explore other ideas and report back shortly.3 (S)

Bob Hunter doubts that our possible gains from releasing the C–130s unconditionally would be worth the certain cost to our relations with Israel. He notes that he has State and Defense working on the Strait of Hormuz problem. (S)

[Page 267]

Attachment

Paper Prepared in the Bureau of Intelligence and Research, Department of State 4

Colonel Qadhafi’s Purported Intention to Nationalize American Oil Company Holdings in Libya

Colonel Qadhafi has for years expressed his intention to nationalize foreign oil holdings in Libya. These expressions have ordinarily taken the form of interviews with the press.

Form of nationalizations. There are two forms of nationalization: One is expulsion, the other is participation. Expulsion means that all equity is assumed and corporate expatriate personnel leave the country. Participation, such as in the case of the Kuwait Oil Company (BP and Gulf), means the same people who explore, produce, transport, ship and most importantly market the oil continue their activities, only the price and country take go up. It is not clear from the TD which form of nationalization is meant.

Expulsion. If the Colonel intends this, he would lose the production expertise of the expatriates and their ability to take care of his marketing. Right now a company, such as Exxon, would rather lift (the figures are illustrative, not definitive) Libyan oil at $23 a barrel rather than Algerian oil of similar quality at $22 a barrel. This is because Libyan oil, which Exxon produces provides them with U.S. income tax foreign tax credits while Algerian oil which they acquire on a straight purchase arrangement gives them no such tax credit. Therefore, Libyan oil even at a higher price is more competitive than Algerian oil in such companies. Guaranteed access to markets is another advantage that the companies provide the producing country; it is not certain whether Colonel Qadhafi understands this but his Oil Minister, Ezzedin Mabrouk certainly does. He knows that, while marketing oil in mid-summer 1979 may not present a difficulty, selling it in a slack market such as most observers see coming within six months will be much more of a problem.

Production expertise will be impossible to replace without increased cost and lower output. It can be done, but only with lowered revenues.

Participation. Colonel Qadhafi could increase government “ownership” of the companies to 100 percent and continue to let the same [Page 268] operators do what they have been doing all along, a la Kuwait. This, however, would lower the amount of risk capital put into the country at a time when all indications are that the GOL wants the companies to increase capacity. The companies could continue to benefit from foreign tax credits through a “service fee” arrangement, as they have done in Kuwait, and they would continue their marketing function.

[1 paragraph (7 lines) not declassified]

The Oil Minister and other cooler heads will continue to advise the Colonel against rash action against the companies. While the Colonel has been cited for acting in an irrational manner on some issues, he has never done so regarding oil. He did nationalize (expel) BP and Shell but those companies were not beneficiaries of of foreign tax credits and the American multinationals were forced to take over some of their marketing duties. He did nationalize (expel) Amoseas (Caltex) and Atlantic Richfield but they were new in Libya and their high depreciation allowances made foreign tax credits negligible.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Country Chron File, Box 29, Libya. Secret; Sensitive. Sent for information. A stamped notation on the memorandum reads: “ZB has seen” and is dated August 15.
  2. See Document 104.
  3. Brzezinski highlighted this paragraph and wrote in the left margin: “Worth looking into.”
  4. Confidential. Drafted by Edward Springer (INR/REC).