Libya flexes its new oil wealth muscles

After letting foreign oil companies back in, Qadafi alienates them with reaction to his son's arrest on abuse charges in Geneva.

Libya's oil and gasfields like the one in Tripoli, bove, have become the destinatiopn of choice for hungry oil companies.

RABAT // Let the world take note: Libya is an economic force to be reckoned with. That appears to be Libya's message to western countries as a row with Switzerland spins into a foreign relations crisis featuring a visa ban on most of Europe and a warning to US oil firms that their contracts are in danger.

But as Libya banks on oil-giant status to win political battles, the difficulties of working in the country are pushing foreign oil firms to seek an exit. John Hamilton, a contributing editor at African Energy magazine, said: ""That's partly because Libyan authorities have, over the past year, taken a very hard line on contract negotiations and renegotiations. A lot of companies developing oilfields are finding it incredibly difficult to make money."

Meanwhile, few companies have struck fresh reserves of oil or gas, Mr Hamilton said. "You've seen quite a lot of companies come to the end of exploration without anything to show for it." To those complications are added Libya's unpredictable foreign relations and its leader, Muammer Qadafi. The current trouble began in 2008 when police in Geneva arrested Mr Qadafi's son, Hannibal. They alleged that he beat his servants but later dropped the charge.

Libya retaliated by cutting oil supplies, expelling Swiss companies and detaining two Swiss businessmen, one of whom is still held. Last month the dispute flared into a crisis as it emerged that Switzerland had allegedly barred entry to top Libyan officials, Libya barred entry to citizens of 25 European countries and Mr Qadafi called for a Muslim boycott of Swiss products. The latter drew public derision from a US state department spokesman, Philip Crowley, which in turn provoked a warning from Libya that failure to apologise could hurt US oil companies. Mr Crowley apologised last week.

The unusual decision to mix oil and political controversy suggests Libya means business, said Ronald Bruce St John, a Libya expert with Foreign Policy in Focus, a think tank that is part of the Washington-based Institute for Policy Studies. After decades in isolation, Libya's oil reserves and a sovereign wealth fund worth around US$60 billion (Dh220bn) have given it unprecedented leverage with western governments.

Italy buys about a quarter of its energy from Libya, while leaders across Europe hope the Libyan Desert will yield natural gas reserves large enough to help free Europeans from dependence on Russia. The discovery of oil in Libya in 1959 transformed the country, as western oil firms were welcomed by the pro-western King Idris. Production peaked in the 1960s at three million barrels a day, a record still unmatched, according to the US Energy Information Administration.

In 1969, Mr Qadafi, then a 27-year-old army captain, overthrew Idris and reorganised Libya as a system of committees with himself as "brotherly leader and guide of the revolution". For three decades he backed assorted militant groups and liberation movements, attracting economic sanctions to Libya. In 1999 Libya surrendered suspects in the 1988 Lockerbie bombing, starting rapprochement with the West that has seen diplomatic ties restored, sanctions lifted and foreign companies line up to do business.

Among the first was Occidental Petroleum, a US oil firm that returned to Libya in 2005 after a 19-year hiatus. The firm's operations have since been crippled by a one-sided partnership with Libya's National Oil Corp that has cut net oil production by around two thirds in two years, Forbes magazine wrote this month, quoting Occidental Petroleum's chief executive, Ray Irani. "When prices collapsed, they couldn't afford to put up their share," Mr Irani told Forbes. "The historical importance of Libya to Oxy is a lot more than the future importance."

Occidental Petroleum's experience is increasingly shared by foreign firms, analysts said. The toughening policies suggest that Libya's old guard is gaining dominance within the country's ruling apparatus, Mr St John said. "People in all the key spots are very conservative, anti-reform people." While Mr Qadafi's reform-minded son, Saif al Islam, has shied from the limelight in recent months, his conservative brother, Mutassim, is a security adviser to their father and sits on a council created last year to oversee Libya's energy industry.

The result is a leadership willing to trade on economic relations to achieve political goals, analysts said. "Libya mostly gets its way because people are prepared to pay the price," Mr Hamilton says. Increasingly, however, oil firms are deciding instead to decline to renew contracts or sell their Libyan assets outright. "The future of new discoveries really boils down to a small number of companies - such as BP, Shell, ExxonMobil - which have massive exploration programmes going on for the next few years, and which could open new frontiers," Mr Hamilton said. "But for time being, oil companies are leaving rather than entering."

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