Libya Proves Promising as New Source for Oil

As the price of oil continues to climb, the scramble for new sources of the fossil fuel continues. One of the more promising places is Libya. In the past year, the United States allowed American businesses to return to Libya — a decision that appears to be mutually beneficial.

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American energy companies are scrambling to find new sources of oil. One very promising place is Libya. Colonel Moammar Gadhafi renounced support for terrorism last year and that opened the door for American businesses to return to Libya after an 18-year absence. As NPR's Wade Goodwyn reports, the timing is good for both countries.

WADE GOODWYN reporting:

Perhaps more than any other American oil company executive, Occidental Petroleum's CEO Ray Irani understood the vast opportunity when the Bush administration eased the Libyan embargo. He quickly rented a Swiss jet and got to Tripoli first. The Arabic-speaking Irani met with Moammar Gadhafi and landed the drilling rights to big chunks of Libyan ocean and desert. Geoff Porter is a Middle East analyst for the Eurasia Group, which specializes in analyzing political risk.

Mr. GEOFF PORTER (Eurasia Group): I think there was an understanding that Occidental would do well, but Occidental did more than well. Occidental took nine out of 15 blocks on bid.

GOODWYN: Porter says Occidental was generous to Libya, gifting $100 million signing bonuses and giving back large portions of the oil they pull out of the ground.

Mr. PORTER: The problem that Ray Irani faces and the gamble that he's taken is that his share of the production is extremely low. In one bid, Occidental took a less than 10 percent share of the production. So that means that that well is going to have to be extremely productive, and the quality of the crude that's extracted from that well is going to have to be extremely high.

GOODWYN: Porter says many besides Occidental Petroleum are interested in taking this gamble: ChevronTexaco, Amerada Hess, Marathon Oil and ExxonMobil among them.

Mr. PORTER: The interesting thing about Libyan oil is the fact that it's of a grade which is in tremendous demand at this point. Most of the excess capacity that exists globally is of a heavy and sour crude. Libyan crude is particularly sweet and light.

GOODWYN: It is a measure of the sensitivity surrounding the US' return to Libya, that not a single American oil company would agree to talk about it on tape. Off the record, oil company executives say there is real opportunity. Exactly how much, geologists aren't certain, but they dream of reserves second only to Saudi Arabia. Libya's oil production has declined precipitously since the US pulled out, but Geoff Porter says the return of American oil could change everything.

Mr. PORTER: Libya returned to the international community because it needs money. Libyans require 30 billion US dollars in investment into the hydrocarbon sector. I mean, this is a tremendous amount of money.

GOODWYN: Need billions in oil infrastructure? Well, you've come to the right place, but doing business in Libya has its challenges. Take the legal system, for example.

Mr. STEVE DAVIS (Vinson & Elkins North Africa Group): The law is not as clear as you would like it to be. The law is not as sophisticated as you would like it to be. Those are legitimate kinds of issues. There can be illegitimate ones as well.

GOODWYN: Steve Davis is a partner at Vinson & Elkins North Africa Group. V&E is a powerful Texas law firm that counts as clients several large oil companies who are doing business in Libya. Chris Strong runs their Dubai office.

Mr. CHRIS STRONG (Vinson & Elkins): In general, I would think any international investor looking at Libya, as with many other emerging markets, would try to avoid the local court system. In your major agreements, you would want to have international arbitration so you get in front of a neutral decision-making panel preferably in a neutral company.

GOODWYN: You write it into the contract and everybody goes away happy. But there's also the dicey legal issue of Colonel Moammar Gadhafi's animosity toward Israel. Like most Arab nations, Libya has an active boycott of Israel. If you want to do business in Libya, you have to sign an agreement saying you won't do business in Israel. Conversely, it's illegal in the United States for American companies to sign those kinds of agreements. So this is a big obstacle, right? Well, nothing the lawyers can't work out.

Mr. STRONG: Over the last year, there have been a number of discussions with the Libyan authorities by private enterprise, by the US government, to try to seek clarity about that, and there has been a shift in Libya.

GOODWYN: So now if you're an American oil company, Libya's going to let things slide a bit on the Israel issue. But it's not just American money that Libya wants. Dan Yergin, author of the Pulitzer Prize-winning book "The Prize: The Epic Quest for Oil, Money and Power," explains.

Mr. DAN YERGIN (Author): A lot of the senior people in the Libyan oil industry were, in fact, trained in the United States, and they want to reconnect with the oil culture where they began their careers.

GOODWYN: Libya wants to grow its production from 1.4 million barrels a day to two million barrels by 2010, but that's an awfully big jump for a nation with an oil infrastructure circa 1980. Libya needs to shoot a $30 billion episode of "Extreme Makeover," and Yergin says they want American oil to produce and direct.

Mr. YERGIN: I think the American companies bring technology. They bring scale. They certainly are willing to take a risk, and in a sense, you don't have a serious domestic oil industry if you don't have American companies as part of it.

GOODWYN: But taking risks by investing in Libya is about more than just finding oil. It's also about surviving Gadhafi's unpredictability. His history with terrorists who blew up American and French passenger jets over Scotland and North Africa trails behind him like a skunk. It is Gadhafi's capricious manner of rule that makes investing billions of dollars in Libya a somewhat uncertain proposition.

Wade Goodwyn, NPR News.

INSKEEP: This is NPR News.

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