Western Oil Majors Will Get the First Crack at Libyan Oil Production

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Countries that supported the overthrow of dictator Moammar Gadhafi's regime are likely to get first crack at post-war Libyan oil production, while those that sat on the sidelines are at risk of losing out.

"We don't have a problem with Western countries like the Italians, French and U.K. companies. But we may have some political issues with Russia, China andBrazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.

Talk like that has many Western oil companies licking their chops. Meanwhile, officials from China and Russia are foundering for ways to deal with the emerging Libyan government, the National Transitional Council (NTC).

Although Libyan oil production before the uprising comprised just 2% of global output, it is prized because it is of the light sweet crude variety – it contains less sulfur than most other oil and is thus cheaper to refine.

The deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang, tried to stay positive when asked about Mayouf's statement last week.

"We hope that after a return to stability in Libya, Libya will continue to protect the interests and rights of Chinese investors and we hope to continue investment and economic cooperation with Libya," Wen told a news conference.

But other Chinese observers were indignant.

"I can say in four words: They would not dare; they would not dare change any contracts," Yin Gang, an expert on the Arab world at the Chinese Academy of Social Sciences in Beijing, told Reuters.

Although China was getting only about 3% of its oil from Libya, the Asian giant's rapidly growing economy has given it a ravenous appetite for energy – including oil.

China abstained from the United Nations vote that authorized force to protect civilians during the uprising, and along with Russia and Brazil opposed sanctions against the Gadhafi regime.

Attempts to hedge its bets by meeting with both sides earlier in the conflict did little to appease the Libyan rebels.

"Many, many countries have been very resolute and strong in coming out and siding with the Libyan people from day one," Guma El-Gamaty, a British-based coordinator for the NTC, told BBC Radio. "There are other countries who have been very slow, and, if you like, only came around very, very late – countries like China and Russia."

Russian officials, unlike the Chinese, have voiced pessimism over their country's Libyan prospects – but they blame the North Atlantic Treaty Organization (NATO).

"We have lost Libya completely," Aram Shegunts, director general of theRussia-Libya Business Council, told Reuters. "Our companies will lose everything there because NATO will prevent them from doing their business in Libya."

Western Winners

By contrast, some European officials – most notably those from Italy – struck a celebratory tone.

"The facilities had been made by Italians … and therefore it is clear that Eni will play a No. 1 role in the future," Italian Foreign Minister Franco Frattini told state television RAI.

Meanwhile, French PresidentNicolas Sarkozylast week ensured France's place in a post-war Libya by pledging continued military operations to support the rebel cause "as long as our Libyan friends need them."

Italian oil company Eni S.p.A. (NYSE ADR: E) jumped 7% last week on the news; Austria's OMV AG (PINK ADR: OMVKY) and France's Total S.A. (NYSE ADR: TOT) also rose more than 3% each.

Some entities not previously in the North African nation may view the regime change as a chance to get their own slice of Libyan oil production.

"Qatar will be a big player. Vitol might be an important one. [Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B)] is also looking to boost its role," a Western risk consultant with knowledge of negotiations told Reuters.

Of the U.S. oil companies that had operations in Libya before the war, primarily Marathon Oil Corp. (NYSE: MRO), ConocoPhillips (NYSE: COP), Hess Corp. (NYSE: HES) and Occidental Petroleum Corp. (NYSE: OXY), most were taking a wait-and-see approach, citing ongoing violence.

"We have no intention of returning to Libya at the moment, as we don't know what's going on," ConocoPhillips spokesman John McLemore told Reuters. "We are not in contact with the rebels or the Gaddafi people."

Back to Capacity

Still, Libyan oil production has always relied on a lot of outside help, and the new government will have its hands full just getting the country back on its feet.

"It remains unclear whether Arabian Gulf Oil Company (AGOCO), the rebel oil company now poised to take over national production, has the ability to administer both raw material flow and infrastructure repairs," noted Money Morning Global Energy Strategist Dr. Kent Moors. "A post-Gaddafi Libya will rely heavily on Western oil companies, especially from Europe, for guidance."

Libya will need months, if not years, to rebuild its oil production infrastructure and to restore its oil output from the meager 60,000 barrels a day it produces now to the 1.2 million barrels it produced before the uprising.

Beyond that, Libya will need foreign aid to help rebuild its damaged cities and towns.

That's an opportunity for those nations in the NTC's doghouse, which could offer to repair and rebuild war-damaged infrastructure other than that related to Libyan oil production.

But for now it's the Western oil companies – particularly those based in Europe – that have the advantage.

"I don't see any major changes to the oil relationships that are currently in place," Troika Dialogue Chief StrategistChris WeafertoldNew Europe. "The oil companies already active in Libya are mostly European. I expect theEUto prioritize strong links with the new Libyan administration, and that will ensure the existing deals remain largely intact."

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  1. Dr Halid Ali | August 30, 2011

    I believe that those who sat on the fence during this crisis will continue to remain on the fence. There has been a very strong connection with the rebels (NTC) and the Europeans throughout and the NTC will obviously reward them . There is need for development at all levels and not exploitation as we have seen in the past by others.

  2. j r | August 31, 2011

    The looting begins….

  3. Howard T. Lewis III | August 31, 2011

    The smell of the average American just descended below that of a 10-occupant catbox, fishfed. They did not even wait for the bodies to go into rigor. Not good.

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