Hot and cold: Libya and the Arctic oil deal

In part I of this posting, I spoke to the courage of pro-democracy activists in Libya.  I asked at the start:  “How will historians in the year 2100 treat current events?  They will face the same conundrum all historians do: how does one reconcile individual actions, and actors, with systemic shifts?  The events in Libya right now offer a great example.”  Having dealt with the individual actions half of the equation, let’s turn to the systemic shifts.

Our historian of 2100 might consider the Libyan situation as the latest installment in the Great Natural Resources (GNR) War that has dominated world politics since the 1980s.  That war has involved brutal proxy fighting: the war in eastern Congo, funded by mining of rare metals, especially “coltan”, essential for electronic devices (like the one I’m typing on right now), has killed an estimated 5 million people, giving it the dubious distinction of the most lethal front of the GNR War.  Such wars can encompass other factors, like ethnic conflict:  the Congolese war cannot be separated from the Rwandan genocide.

Great Powers and the GNR War

Oil – Iraq

My now-deceased (and much beloved) cousin, Tom, who worked for many years in the oil business, claimed that many top oil executives viewed the 2003 Iraq invasion as a logical outgrowth of fears about Saudi Arabia’s stability (in light of 9/11, carried out essentially by Saudi nationals).  Only Saudi Arabia and Iraq, he argued, had oil reserves large enough to stabilize world markets:  the West relied on Saudi Arabia to do so, but instability there meant the West had to gain certain access to the Iraqi fields, to be assured of future supplies.  Exxon-Mobil, of course, moved its Middle East headquarters out of Saudi Arabia

The deals between Western oil companies and the regional government in the Kurdish north, in particular, lend themselves to that interpretation.  Interestingly enough,

In a recent [Feb 2011, with Agence France Presse] interview, Iraqi prime minister, Nuri al-Maliki, has said that the production-sharing agreements (PSA) signed by the autonomous Iraqi Kurdistan region will be “respected” by the central government in a move confirming that a broad deal over the region’s oil autonomy has been struck, which officially will remove the legal uncertainties and open the growing Kurdish oil play up for investment by larger oil companies.

Read the full story at: http://www.ihsglobalinsight.com/SDA/SDADetail19852.htm

Forbes.com, in its recent story on the 10 largest oil fields of the future, lists as numbers 2, 3, and 4 fields in southern Iraq, in the Shi’a dominated region (and, as #5, another one directly across the border in Iran, in the area abutting that part of Iraq).  No great surprise that the first major conflict of the GNR War, the Iran-Iraq War of the 1980s, took place literally on top of these four fields.

Libya

Aside from Saudi Arabia (#1 and 7), the other members of the Forbes top 10 coming oil fields included Venezuela, Brazil, and Kazakhstan [and you are wondering why Russia, Brazil, and Venezuela are leading the charge against “civilian casualties” in Libya?].  Given that Alaska’s North Slope rounds out the top 10, we can probably expect to hear Sarah Palin soon denouncing the intervention in Libya. :)

For example, China seems upset about civilian casualties.  Hmm, any guesses as to who built the 1050km-long pipelines for gas and oil that run to the port at Mellitah (right next to Az-Zawiyeh)?   Do the initials CNPC ring a bell?  China National Petroleum Corp.  Go to their website for Libya and read all about it.

http://www.cnpc.com.cn/eng/cnpcworldwide/africa/Libya/

 

Compounding the internal Libyan contradictions – and we can see the tensions created everywhere by the coalition of young idealists seeking democratic reform and opportunistic politicians and military men hoping to use these movements to take power themselves (Yemen being the poster child of such a process) – we have the undoubted Western economic motives.  Europe’s reliance on Libyan oil and gas is obvious enough, but the rise of Mamhoud Jibril, former head of Libya’s main economic think tank, to official leadership of the insurgents (al-Jazeera story, 23 March), brings in the US, too.

WikiLeaks posted (in January 2011) the US Ambassador to Libya’s cable about his January 2010 meeting with Jibril, in advance of a February 2010 trade mission.

“Summary: Mahmoud Jibril, head of Libya”s premier think-tank — the National Economic Development Board — told the Ambassador on January 21 that US business enjoys “a competitive edge” in the field of technology in Libya, and argued that now is the time for US business to capitalize on opportunities for trade and investment in Libya. He welcomed a February 20-23 Department of Commerce-led Trade Mission and offered to speak with GOL officials who could help facilitate the visit. Exploring areas for future bilateral cooperation, Jibril recommended that both countries work together to implement joint projects aimed at “building trust,” which would help to erase the historically negative perceptions that each has of the other. He described an idea for a high-level dialogue between US and Libyan policymakers and scholars, to combat such misperceptions, and discussed building connections between US and Libyan academic institutions.”

The cable later states that Jibril has close ties with Saif al-Islam, Muammar Qaddafi’s son, who has been quite prominent on our tv screens in the last few weeks. The ambassador wrote:

“His [Jibril] confidence in his own ability to approach Saif al-Islam with a new idea, as well as to raise the Trade Mission with GOL ministers, indicates that he is well-connected within the regime. As the head of a think-tank that reports directly to the Prime Minister-equivalent (who called him during the meeting), without the burden of an official policymaking role, he may have a unique ability to influence decision-makers without challenging their authority.”

Now, it seems, Mr. Jibril is challenging their authority, with American and European military support.  Choosing someone who had direct and close ties with Saif al-Islam may increase the chances of effective negotiation between the two main parties.  Anointing an insurgent leader someone who has an avowed interest in tying Libya more closely to international capitalism certainly adds grist to the mill of those seeing the intervention in such terms.  Judging from press reports, damage to Libyan oil and gas installations has been very limited, which suggests that all sides, while happy to slay their fellow Libyans (and the mercenaries, like the Serbians who actually fire Qaddafi’s cannons), are not yet ready to kill the goose that lays the golden eggs.

We might contrast the Western eagerness to save Benghazi, and, not coincidentally, to allow the insurgents to try to regain control of the coastal region down to Ras Lanuf.  As for Misrata, so long ignored, it was the “shorebase for our exploration drilling operations” of ExxonMobil in Libya. The company set up a rig starting in 2009 but that rig, the Noble Homer Ferrington, has been idle since April 2010, due to a dispute between ExxonMobil and BP, seemingly resolved in favor of the latter, given that it has announced drilling in those waters in 2011.  Ras Lanuf  has refineries that turn out over 200,000 bbl a day.  On the western border with Tunisia, Az-Zawiyeh, right next to the Melittah terminus of the gas pipeline to Sicily, has been the scene of particularly brutal fighting; press reports suggest Qaddafi used 50 tanks to retake the city (March 10th).  Little wonder why.

Euro News recently interviewed a retired French admiral about the military situation.  He argued that it has two possible outcomes: those around Qaddafi force him to leave [clearly the outcome favored by Western governments, and one constantly and openly stated by, among others, Secretary Clinton]; or the country gets split into two parts.  He focused on Tripoli and Cyrenaica (around Benghazi) as the division, but Ras Lanuf is part of Sirte district, thus of Tripolitania, not Cyrenaica; Misrata is clearly in Tripolitania.  Even worse, the Waha oil fields (see below) lie on both sides of the fault line.

If there is to be a division of Libya East-West, then Qaddafi will have to keep Az-Zawiyeh and the insurgents the fields that drain toward Cyrenaica: the main fight will be about the Waha oil fields, that drain towards Ras Lanuf, and the nearby offshore potential fields.  Don’t look for any serious efforts to stop the fighting until the insurgents get control of the central region.

The largest known oil field, however, lies in the east (the Sirte field).  It was producing about 220k barrels a day, under direct control of Libya’s National Oil Corp., but Libya recently (2008) negotiated a deal with a company called TNK-BP to improve the facilities, with a view to doubling production.  Who is TNK-BP?  Read on.

As they say, you can’t know the players without a scorecard, so let’s check them out, starting with the home team.

Libya, Russia, BP

Russia, the world’s second largest oil producer, has been laughing all the way to the bank: oil prices have risen 24% in 2011, mainly due to the Libyan crisis, so Russia has reaped a financial windfall from the events of the past few weeks.  I’m sure they will be happy to have Libyan oil offline for a few more weeks, so long as they get to keep access to some of the main fields in the long run.

In 2010, a Russian company, Tatnaft,  discovered new oil reserves in Libya’s western Ghadamis field.  Rinat Galeyev, Tatnaft’s longtime director, has ties to Lukoil, which has also helped Libya develop fields in that area.  The American company, ConocoPhillips, is the largest stockholder in Lukoil (20%).  Conoco also has a 16% stake in Libya’s centrally located Waha field (see below).

The Russians, hedging their bets in case Qaddafi stays in power, will want to make sure that he still has control of the oil fields and pipelines that focus on the Az-Zawiyeh-Melittah area.   On BBC’s Hard Talk, Mikhail Margelov argued that the time for political talks is fast approaching, and that they should take place early in this coming week.  Putin, of course, has called the Western intervention a modern Crusade.  Qaddafi has already played this card (March 14th), saying that he will expel Western oil companies and allow Russia, China, and India to exploit Libya’s oil.  [The head of the Libyan National Oil Corporation contradicted him the next day, saying all agreements with Western companies would be kept.]

Ok, so what’s up with Russia and Libya?  Wrong question:  what’s up with Russia, Libya, and BP?  That’s what we need to know.

Eight years ago BP struck a deal with Russian investors (collectively known as AAR) to create a joint venture:  TNK-BP, with each side owning 50% of the company.  It’s been a highly successful venture: in 2010, TNK-BP produced 25% of BP’s total profits.

In 2008, the CEO of this company was one Robert Dudley.  In a typical Russian-style power play, the Russian government accused him of violating Russian laws (BP, violating laws, I’m shocked, shocked) and forced him out, changing the basic agreement by allowing TNK-BP to compete worldwide with BP, and installing a Russian CEO.  This conflict had been going on for some time:  on 3 June 2007 the British newspaper, The Independent, in its business section, ran a story under the headline: Gazprom v BP: Russian roulette – and next stop, Libya. How Putin’s Russia is putting the squeeze on Britain’s energy giant.  Just by coincidence (?), at precisely that moment BP, under the leadership of Tony Hayward (whom we all remember fondly for his deft handling of the Deepwater Horizon spill), got a contract for off shore drilling in Libya.  The US Senate closely questioned Hayward about the connection between that contract and the release of the Lockerbie bomber, al-Megrahi, and WikiLeaks documents (among other sources) make it obvious the deals were connected.  So, we have BP getting off shore drilling deals and TNK-BP negotiating to develop the large Sirte field (Libya’s largest known reserve) in 2008.

Fast forward to March 2011.  What’s been in the news this month?  Why, the West has intervened militarily in Libya and quickly driven Qaddafi from the east.  On March 23rd, long after the initial imposition of sanctions, the US Government finally announced it was adding National Oil Corp (Libya) to the list:  among the subsidiaries included are, ta-da, Sirte Oil, Waha Oil, and Ras Lanuf Oil (see below on Waha and Ras Lanuf).  Now, AMAZINGLY enough, Vladimir Putin announced, on March 4th, that he supported changing Rosneft’s partner in Arctic drilling for oil from BP to … TNK-BP.  If you’ve been reading other news, you know that a Russian court just (March 23rd) upheld an injunction against a share swap between BP and Rosneft (it would get 5% of BP; BP would get 9.5% of Rosneft), the key part of the joint Arctic venture.  And who protested, on the grounds that it violated a shareholders’ agreement?  Why none other than TNK-BP.  Let it be noted that Gazprom (whose former CEO was Russian President Medvedev) and Rosneft are in the midst of a ten-year joint exploring venture.

The Big Picture [those of you old enough to remember 1950s television will recall that the US Defense Department used to sponsor a show of that name during Saturday morning cartoons.]

Ok, taking the above into account, how about a brutal Realpolitik analysis of what’s going on.  Let’s go back to our French admiral and ask, is Libya just the latest chapter in the GNR War?

If so, the home team, China and Russia, defending the human rights of the “civilian casualties” in Tripoli, are trying to make sure that Qaddafi does not lose power in a way that jeopardizes their investments in the western oil fields and pipelines.  Putin also want to ensure that TNK-BP, and not BP, gets full authority in the Sirte field.  Are we looking at a compromise in which BP gives up to TNK-BP the Arctic rights, and, in return, BP gets the Sirte field?  Or just the off shore drilling rights in Libya?  By all reports, the Arctic field is larger, but Libya likely has a lot of undiscovered oil.

The visiting team, the US and EU, are standing up for the human rights of the insurgents in Cyrenaica, hoping to get control of the eastern oil fields, like Sirte.  {Poor Uncle Silvio: the gas pipeline to Sicily runs from the western fields.} The large Waha field – jointly developed by Libya and a trio of American companies (ConocoPhillips, Marathon, each with 16%, and Hess, 8%) – drains toward Ras Lanuf.  Conoco’s website has an excellent map of the fields.

Two relevant facts about Conoco:  1) their Board of Directors includes former Bush II Undersecretary of State, Richard Armitrage, a national security expert, and former Reagan White House Chief of Staff Kenneth Duberstein;  2) as noted above, Conoco owns 20% of Lukoil.  Why relevant?  The presence of Armitrage reminds us that oil business issues are intimately related to national security, for all these countries.    Oil and high politics, including war, cannot be separated.  The astoundingly intricate network of ties among all these companies show that one has to hedge one’s bets: viewing these conflicts as A against B is very difficult when A owns part of B and vice versa.

The situation on the ground right now (3/26) is that the Americans and Europeans have the eastern fields, the Russians and Chinese have the western field, and the real fight is just about who is going to get Waha and the terminals near and around Ras Lanuf, the so-called Sirte basin.

The Russians and Chinese are hoping to use world opinion to stop the intervention before the insurgents get to Ras Lanuf; the coalition wants the insurgents to get control of Ras Lanuf before a real cease fire goes into effect.  The Realpolitik “negotiated” settlement might leave Sirte, Qaddafi’s hometown, in his hands – and the rhetoric can focus on Sirte, to allow him to save face – but allows Jibril et alia keep Ras Lanuf, which is what matters to the West.  Conoco, with its 20% stake in Lukoil, looks like the smartest player: even if Qaddafi keeps Waha, Conoco’s 16% share there can simply be transferred to Lukoil, if Qaddafi puts into effect his nationalization of the Conoco-Marathon-Hess share of Waha.  [For the record, Marathon Oil sold its Russian oil holdings in 2006 to Lukoil, but they were relatively small, as the price was only $787 million.]  Interestingly enough, one stock touting website, as of March 24th, was promoting the shares of Lukoil, Conoco, and Marathon as three of the top five oil company stock values. One of the other top five was BP.

Ok, back to BP.  Remember, they seem to have supplanted ExxonMobil as the company in charge of offshore exploration.  Between April and June 2010, ExxonMobil had to shut down its drilling operations (April) and then lost the rights to BP (June).  BP was to have started up the drilling early this year.

As for BP and Russia, it’s perhaps worth noting that Hayward and Dudley have basically just changed chairs.  Dudley, former CEO of TNK-BP, is now CEO of BP, and Hayward, former CEO of BP, is now a member of the Board of Directors of TNK-BP.

As for the Russians themselves, are the public differences over Libya voiced by Putin and Medvedev really about a split over the Arctic contract between TNK-BP (Putin), which has a contract to develop that eastern Sirte field, and Rosneft-Gazprom (Medvedev), which wants to squeeze TNK-BP out of the Arctic?

Sticking with our American TV theme, Let’s Make A Deal.  I’ll bet Monte Hall would propose something like this.

The West guarantees TNK-BP’s stake in Sirte; ExxonMobil gets to share off shore drilling rights with BP;  the three American companies keep their stake in Waha; Rosneft gets to deal directly with BP in the Arctic.  China keeps its pipeline.

Or will greedy Mr. Putin want both the Arctic and Libya?

Our 2100 historian will naturally know what happened; as for us, we’ll just have to stay tuned.

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