Libyan National Oil Corporation

views updated

Libyan National Oil Corporation

Bashir Sadawi Street
Tripoli
Libya

State-Owned Company
Incorporated: 1970

The Libyan National Oil Corporation (Linoco) was created under Law No. 24 of March 5, 1970. It replaced the older Libyan General Petroleum Corporation (Lipetco) with a new national oil company. Its mandate, similar to Lipetco’s, was “to endeavor to promote the Libyan economy by under-taking development, management and exploitation of oil resources . . . as well as by participating ... in planning and executing the general oil policy of the state . . . .” The fortunes of Linoco, therefore, cannot be separated from those of Libya, since the corporation acts as a government instrument of control, supervision, and participation in the oil industry and particularly in its relations with other oil companies.

The role earmarked for Linoco was largely a product of the political and economic events of the 1960s and 1970s in Libya. During the 1950s, Libya was an impoverished agrarian economy, practicing a near-subsistence level of agriculture. The discovery of oil and the application of the much-needed oil revenues to other sectors of the economy reversed this trend, and the economy attained growth rates as high as 20% a year in the 1960s. There was considerable readjustment in the structure of the Libyan economy, as the oil sector gained prominence and became the vehicle of growth for the economy as a whole. With oil revenues going straight to the government, the latter took the responsibility for planning expenditure derived from these revenues. The outcome was the creation, by royal decree, of the Libyan General Petroleum Corporation (Lipetco) in 1968.

The creation of a state-owned oil company allowed Libya to follow in the footsteps of other oil-producing economies, where control of such a revenue-generating resource lay with the government. Lipetco’s first chairman and director general was Mohammed Jeroushi. The company was based in Tripoli, but was physically distinct from the Ministry of Petroleum Affairs. Linoco would be similar to its predecessor in that it, too, would function under the supervision and control of the minister of petroleum. There was very little difference between Lipetco and Linoco in terms of responsibilities. It is quite probable that Linoco was formed in 1970 to highlight the political change from a monarchy to a republican government.

In 1969, the monarchy in Libya was overthrown by a group of young army officers led by Colonel Moammar Khadafi. In the years immediately following the coup d’etat, the government continued to follow the economic policies of the past. However, the new regime’s espousal of the creed of self-reliance and socialism indicated that in the future, the government would play a major role in economic policy. Planning, in other words, was to be more widespread, encompassing national issues rather than those of the oil industry alone. This became immediately apparent with a more aggressive policy on oil pricing and the structure of ownership in the oil sector. In May 1970, a series of cuts in OPEC-determined production levels was introduced to force up prices. This policy gained Libya influence in OPEC, where its radical stance met with considerable support.

Simultaneously, agreements on ownership were initiated with foreign oil companies, mainly in the form of joint ventures. The first joint venture was signed between Lipetco and the French state companies, ERAP (later Elf) and SNPA (Aquitaine) in 1968. Subsequently, in June 1969, joint ventures were introduced with Royal Dutch/Shell, ENI’s Agip subsidiary, and Ashland Oil & Refining.

Linoco’s first chairman and director general was Salem Mohammed Amesh, who was subsequently replaced by his deputy, Omar Muntasir. The latter remained in charge until 1980. The law under which Linoco had been established restricted new joint ventures with foreign firms to those in which the latter took on all the risks of the pre-commercial exploration period. Only contract-type agreements were authorized and Linoco’s share was fixed at a given percentage from the start of operations. Contract-type agreements referred to production-sharing agreements as opposed to those simply allowing exploration to proceed. Furthermore, in July 1970, a new law was passed which made Linoco responsible for the marketing of all oil products in Libya. The Brega Petroleum Marketing Company, a subsidiary of Linoco, was set up to carry out the marketing activities of Linoco, and the marketing assets of all the foreign oil companies were nationalized.

Linoco played a major part in the Libyan government’s new strategy of higher oil prices and production-sharing. The strategy was to lead to confrontation with the foreign oil companies. Foreign oil companies that did not voluntarily surrender concessions as part of the new policy were forced by economic and political pressure to relinquish these in full to the government. These were then taken over by Linoco.

Soon after its establishment, Linoco signed a joint venture agreement with the U.S. Occidental Petroleum involving production-sharing. In 1971 Linoco arranged a processing deal with Sincat of Italy for refining oil products for domestic consumption, thereby providing a cheap supply of oil for internal Libyan consumption. A joint drilling company was formed with Saipem, a subsidiary of the Italian ENI, in early 1972. Linoco took over the production operations of the Sarir oil field after the nationalization of British Petroleum’s Libyan concession in 1971, and the U.S. company Hunt Oil in 1973. Similarly, Phillips’s Umm Farud field was taken over in 1970. Other fields taken over by Linoco included Amoseas’s Beida oil field in 1974, and Amoco’s Sahabir oil field in 1976.

By April 1974, production-sharing agreements had been reached with Exxon, Mobil, Compagnie Française des Pétroles, Elf Aquitaine, and Agip. All these agreements provided for production-sharing on a 85-15 basis onshore and 81-19 basis offshore. Each agreement had commitments in terms of expenditure on exploration by the foreign company. Development costs incurred by Linoco were reimbursable by the partner. By using the surplus funds and technical expertise of the foreign oil companies, the problem of stimulating investment in exploration was resolved.

By the mid-1970s, Linoco was faced with complications as a result of legal actions brought against it by British Petroleum (BP) over claims of ownership. Fears of an oil price rise in 1973 had led to a demand for Libyan crude oil. However, BP’s legal position had made buyers wary of purchasing oil over which Linoco may not have had legal title. Linoco compensated for this position by arranging barter deals with both France and Argentina. Eventually all the foreign oil companies in Libya, except BP, agreed to the conditions imposed by Libya of partial nationalization, and as a result Linoco had a substantial surplus of oil to sell. This was because Libya received share entitlements from the foreign companies, giving it rights on production by the foreign companies. It was part of the policy of production-sharing introduced by the government of Libya. However, by 1974-1975, declining oil prices and oil consumption led Linoco to sell back its shares of production to companies which had agreed to the partial nationalizations. This amounted to about 425,000 barrels per day (b/d) from its entitlement. Overall, Linoco produced about 281,000 b/d in 1975 and 408,000 b/d in 1976. It exported 908,000 b/d in 1975 and 1.2 million b/d in 1976. The topical status of Linoco’s dispute with BP gradually faded away, and BP, Libya, was nationalized in 1974, as were the American companies Amo-seas, Hunt, and Atlantic Richfield. Complementing its upstream activities and acquisitions, Linoco itself had built two refineries at Azzawia during the period 1974-1976, with a capacity of 120,000 b/d.

The 1970s were a decade of great corporate activity. It saw the further consolidation of Linoco’s power. Nationalizations, the seizing of company assets, and buying out company shares were among Linoco’s activities. Esso Libya agreed to sell its share to Linoco in April 1974. It subsequently withdrew from its Libyan operations in November 1981, and reached a compensation agreement with Linoco in January 1982. Esso Sirte companies, Esso’s Libyan subsidiaries, also relinquished 51% of their shares to Linoco. In November 1982, Exxon’s share in Esso Sirte was purchased by Linoco and formed into a subsidiary company, Sirte Oil Company. The largest oil company in Libya at the time of the nationalizations was OASIS. Shell’s original share of 16.7% was seized by the government in 1974, giving the government of Libya 59.2% ownership of OASIS in the early 1980s. Occidental Libya had agreed to a 51% nationalization in August 1973. This gave Linoco a 51% share in Occidental, Libya. Mobil-Gelsenberg was owned 51% by Linoco, 31.85% by Mobil, and 17.15% by Gelsenberg, the West German refining and marketing company. Mobil, however, left in 1982. In this period, Linoco held 81% of Elf Aquitaine.

The 1980s was a decade of emphasis on joint venture projects. However, it was also characterized by a conflict of interests between Libya and the United States. The latter had instituted sanctions against Libya, based on assertions that Libya was supporting international terrorism, which had seriously affected the operations of U.S. oil companies in Libya. The Libyan government responded by freezing the royalties of the U.S. companies, restricting the repatriation of profits, and threatening to take over the entitlement rights to production of these U.S. companies.

During the 1980s, Libya’s oil interests became less insular and more outward-looking. Libya relaxed its confrontational attitude, and Linoco entered into new production-sharing agreements with a number of companies to ensure partial control. These included Rompetrol (Romania) and the Bulgarian Oil Company in 1984-1985. Other agreements were signed in 1988-1989 with Royal Dutch/Shell, Montedison of Italy, the International Petroleum Corporation of Canada, INA-Naftaplin of Yugoslavia, and a consortium of companies comprised of ÖMV in Austria, Braspetro in Brazil, and Husky Oil of Canada. These new agreements included guarantees ensuring rapid payment by Libya to these companies for the development costs incurred. These guarantees represented an important change from earlier Libyan regulations on joint ventures. The change was designed to offset the U.S. sanctions by offering incentives in joint venture terms to other foreign companies.

In 1980, the Libyan Arabian Gulf Oil Company (Agoco) was established by Linoco, through the amalgamation of the Arabian Gulf Exploration Company, Umm-al-Jawabi Oil Company, and direct Linoco exploration and production interests. By 1989 Agoco’s production was 400,000 b/d, and it was the largest individual oil producer in the country. Agoco was wholly Libyan-owned and fitted into the overall oil policy of the government, which was to initiate and invest in new projects, while maintaining control. Linoco was also instrumental in the policy of downstream expansion. It was one of the shareholders, together with the Libyan Arab Foreign Bank, and the Libyan Arab Foreign Investment Company, in Olinvest, a Libyan holding company established in 1988 for investment purposes and intended to permit a high degree of integration all the way to end consumers. Furthermore, Olinvest was responsible for ensuring that the downstream activities continued, and so invested in Italian and German refineries. By 1990-1991, the company was handling some 400-450,000 barrels per day.

The Reagan administration had introduced economic sanctions against Libya in January 1986. These were renewed in December of 1988, in the review of U.S. government policy by Congress after two years. The immediate impact of the sanctions was on the production and financial operations of five U.S. oil companies: Marathon, Conoco, Amerada Hess, Occidental, and W.R. Grace. In June 1986 these five companies had a total production entitlement of 263,000 b/d. As a result of the U.S. sanctions, the holdings and entitlements of the U.S companies were kept in suspension and their operations were handled by Linoco. Much of the latter part of the 1980s was spent in negotiations between the U.S. companies and Linoco over the treatment of their equity holdings. The U.S. companies had offered to return to Libya to meet their commitments with regard to capital expenditure, but continued U.S. sanctions did not allow them to bring in new technology, equipment, and spare parts. Even an easing of the ban by the Reagan administration in early 1989 only allowed the companies to transfer their equities to a third party, and did not change the core issue of a transfer of technology. Due to the lack of overall progress, some of the companies were willing to extend their suspended status until a more viable political solution could be found.

Under Abdallah al-Badri, the chairman of the Linoco management committee until November 1990, a new policy has been introduced for the 1990s. This focuses on reducing the number of new projects and upgrading the existing facilities of the national oil producers. Linoco has continued to make production-sharing agreements. New joint ventures have been initiated between Linoco and Veba, Petrofina, North African Petroleum Limited, and a consortium led by the Petroleum Development Corporation of the Republic of Korea, and Lasmo. However, an additional emphasis has also been placed on encouraging foreign companies to produce exclusively for export, and on confining the sale of crude oil to a select number of national oil companies that already own equity in Libyan production. This would limit the crude being offered in the spot market through third-party traders, and would increase the input into Libya’s downstream system. As a result, the national oil marketing company, Brega, ceased operating in 1990, and marketing is a responsibility of the National Oil Corporation itself.

Principal Subsidiaries

Arabian Gulf Oil Company; Azzawa Oil Refining Petroleum Company; Mediterranean Sea Oil Services Company; National Drilling Company; National Oil Fields and Terminals Catering Company; National Oil Services Company; National Oil Wells Chemical and Drilling and Workover Equipment Company; National Oil Wells Services Company; Sirte Oil Company.