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Gadhafi's advance poses Eni expulsion risk from Libyan oil fields

18 March 2011

By Brian Swint and Alaa Shahine

Bloomberg News

CAIRO: Moammar Gadhafi may expel Western energy companies from Libya should he snuff out the month-old armed rebellion against his regime, draining money from the economy and hurting exporters such as Eni SpA and Repsol YPF SA.

Gadhafi, 68, took control of Ras Lanuf and Brega oil facilities and is bombing Benghazi, the center of the rebellion, as Group of Eight leaders split on imposing a no-fly zone to aid the rebels. His threat to bring China into the energy business that Italy has enjoyed for five decades may reshape the economic map of the country holding Africa’s biggest oil reserves.

“If Gadhafi wins, Libya will look to the East for support,” said Shadi Hamid, director of research at the Brookings Institution’s Doha Center in Qatar. “Western companies won’t get back in any time soon and won’t be able to invest. The Libyan economy will be devastated for years.”

Even without outright expropriation, a Gadhafi victory may lead to Western sanctions that would roll back almost 10 years of European and U.S. investment in Libya. The 2004 reprieve from two decades of trade restrictions allowed companies such as BP Plc and Royal Dutch Shell Plc to invest in Libyan fields, boosting output to about 1.6 million barrels a day, most of which was sold to Europe.

Libya’s oil output slumped to a “trickle” by last week, according to the International Energy Agency. The conflict, which has left hundreds dead, has helped push up Brent crude prices by about 20 percent this year. Libya’s crude exports may be halted for “many months” because of damage to oil facilities and international sanctions, the IEA said this week.

Gadhafi threatened to replace Western oil firms with companies from India and China in a March 2 speech and more than 10 days later discussed possible investments with the ambassadors of the two countries and Russia, state-run television reported.

Italian Foreign Minister Franco Frattini told Italian lawmakers on March 16 that “China’s reasoning is an economic one” when it comes to Libya.

Rome-based Eni, Italy’s largest oil company, France’s Total SA and Spain’s Repsol are among foreign companies that have evacuated their staff and scaled down production in Libya. More than 20 percent of the oil imported by Austria, Ireland and Italy is Libyan crude, the IEA said.

“I don’t consider relations with Libya compromised,” Eni Chief Executive Officer Paolo Scaroni told investors in London on March 16.

“We maintain relations with the national oil company, which is our natural counterpart.”

He said he asked U.S. Secretary of State Hillary Clinton, European Union Foreign Policy Chief Catherine Ashton and Frattini to ensure that gas production for the local population be excluded from any ultimate sanctions against Libya.

Eni’s shares have fallen almost 10 percent since mid-February, when anti-Gadhafi protests erupted, inspired by popular revolts that led to the ouster of Tunisian President Zine al-Abidine Ben Ali and Egyptian leader Hosni Mubarak this year. Repsol shares have declined 7 percent.

United Nations Security Council veto-wielding members China and Russia have been less critical of Gadhafi than France and the U.S., whose leaders openly called on the Libyan leader to go. Chinese Foreign Ministry spokeswoman Jiang Yu told reporters Thursday that “the sovereignty and territorial integrity of Libya should be respected.”

“China is far less interested in the strategic argument and much more concerned with its economic interests in Africa,” Frattini told a parliamentary committee on March 16. “Out of this situation, great doors open for China.”

It may not be that simple, said Elizabeth Cheng, Hong Kong-based editor of China Hand, a publication of the Economist Intelligence Unit.

“It’s a complicated issue,” she said. “I don’t think Chinese companies would be expected to make a reckless decision.” Oil companies would have to consider their relations with Western companies and security in Libya, as well as Gadhafi’s ability to maintain power, she said.

China already has a presence in Libya. China National Petroleum Corp., the country’s biggest oil and gas producer, has evacuated all its 39 staff in Libya, the company said on Feb. 28. Risk management is being strengthened, said Zhou Jiping, who is president of PetroChina Co., the country’s biggest energy producer, and vice president of China National Petroleum, the parent company, at a Hong Kong earnings news conference Thursday.

Present Libya operations are mostly engineering, he said without specifying which company he meant.

Gadhafi has kicked out foreign companies before. Three years after he came to power in a 1969 coup, Gadhafi began seizing oil fields, giving the state-owned National Oil Corp. at least 51 percent of all concessions, according to the 2010 Arab Oil and Gas Report.

A decade later, U.S. President Ronald Reagan, who called Gadhafi “the mad dog of the Middle East,” banned the import of Libyan oil and a number of exports to Libya. The U.S. bombed Tripoli in 1986 in retaliation for an attack on a Berlin discotheque that killed two U.S. servicemen.

Libya came under U.S. and U.N. sanctions in the ‘80s and ‘90s over accusations of planning terrorist attacks, including the 1988 bombing of the Pan American World Airways Boeing Co. 747 over Lockerbie which killed 270 people.

The turnaround in relations with the West started in 1999, when he allowed the extradition of two Libyan suspects in the Lockerbie bombing. Gadhafi abandoned a nuclear-arms development effort after 2002 while also pledging to destroy a chemical weapons stockpile and renouncing terrorism.

The current conflict “sets everything back many years,” said Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies. “There’s always a risk of expropriation. But the key thing is that Libyans struggled for 25 years under sanctions, and the lesson was that they can’t do much without outside help.”

© Copyright The Daily Star 2011.