FSO Editorials: "Libya's Lockerbie Deal..." by Dr. Joe Duarte 12/23/2003

Libya's Lockerbie Deal Sets Potential
Bonanza in Motion for Global Oil Companies
by Joe Duarte
December 23, 2003 (originally posted on 8-22-03 at www.joe-duarte.com)

Editor's note: This excerpt from Dr. Joe Duarte's daily Commentary Market I.Q. is being provided to FinancialSense.com readers as important background information in reference to the announcement (12-19-03) by President Bush about Libya's ending of its weapons of mass destruction program. The focus of the excerpt is to put the effects on the oil markets in perspective, as well as to demonstrate that the announcement was the culmination of a lengthy process that was correctly predicted by Dr. Duarte.

Among the most interesting stories of the week is the $2.7 billion settlement between Lybia, the U.K. and the U.S. in which Libya took responsibility for the Lockerbie, Scotland bombing, and renounced terrorism. And although it is a welcome development by most accounts, as with all political solutions, what is not said is often more important than what is widely reported. Perhaps most important is to ask why Lybia even decided to move in this direction.

Stratfor.com, as usual, seems to have put its finger on the pulse of the situation, as to why Ghadafi made the deal. The intelligence web site wrote on 8-19: “This public relations gambit is driven primarily by geopolitical concerns: Gadhafi, a great survivalist, is hemmed in by two potential threats -- a more aggressive post-Sept. 11 United States on one side and the threat of militant Islam on the other. This has led Gadhafi to a strategy that seeks to resurrect Libya's international image while simultaneously trying to radically reform the state-run economy through privatization and access to foreign investment -- starting with the petroleum sector. These reforms have become a priority for regime survival in a complicated world.” More plainly stated: “Libya has no interest in being Syria or Iran, let alone Iraq. A kinder, gentler face from Tripoli will help to keep the country off the U.S. blacklist, as will economic reforms that increase Western powers' access to and interest in the oil-rich country.”

And finally: “A stronger economy may help Gadhafi to fend off a potential domestic threat that feeds on poverty, large numbers of disenfranchised youth and unemployment. After decades of economic mediocrity under a state-run system, Gadhafi likely calculates that the quickest road to strengthening the economy -- and keeping constituents happy -- will come through attracting foreign capital. Coincidentally, this also would enrich Gadhafi and his allies -- another fine motivator.”

The recent settlement of the Lockerbie hijacking by Libya and the upcoming vote in the United Nations to end sanctions against the oil rich nation has been getting little coverage in the major media, given that the situation has unfolded along the same time frame as the dramatic terrorist attacks of the last few weeks.

But the potential return of Libya to the mainstream of the oil markets, has been forecast for some time, a fact that we noted in "Successful Energy Sector Investing" (Random House/Prima Venture).

And although it is not guaranteed to happen right away, there are increasing bits of analysis that are appearing, that are worth noting.

According to European Intelligence Wire: “Major US oil companies fear Washington will lock them out of a multibillion-dollar bonanza in Libya if United Nations sanctions are lifted, industry sources say.” The article added that even if the U.N. lifts sanctions, “ the prospect of President George W. Bush's administration lifting a separate US embargo appear remote.”

The article quoted said William Reinsch, president of the National Foreign Trade Council, whose group represents 300 U.S. oil companies, and his analysis is neutral at best. While he says that there is “hope, but not optimism.” Meanwhile the official U.S. position is at least publicly quite stout, as espoused by White House spokesman Scott McClellan: “"The United States will intensify its efforts to end threatening elements of Libyan behaviour, and US bilateral sanctions on Libya will remain in full force until Libya addresses these concerns."

U.S. oil companies quoted in the article described Libya as “geologically attractive,” and added that: “obviously we are very much interested in returning to Libya as soon as the Libyan and United States' governments permit us to do so."

Thus, at first glance it would seem that if the U.S. does not lift sanctions against Libya, while the U.N. does, according to Reinch: “the US energy industry risks being left out of Libya for a generation,” as the Europeans, who are already present there through Italy’s Eni Spa, and Spains Repsol’s YPF, the Russians, and probably even the Chinese, whose oil industry is increasingly aggressive will move in.

So what’s the next likely move? The U.N. vote is scheduled for August 20th. If it passes, sources estimate that the U.N. sanctions could be effectively removed in 90 days.

If the sanctions are lifted the Europeans, especially those that are already there are likely to move aggressively.

Where does that leave the U.S.? In a tough situation. Stratfor.com notes that lifting the U.S. sanctions will be difficult since it will require both White House and Congressional approval, something that may not be all that easy to accomplish as the election season nears.

The official U.S. position, according to Agence Presse France, is at least publicly quite stout, as espoused by White House spokesman Scott McClellan: "The United States will intensify its efforts to end threatening elements of Libyan behaviour, and US bilateral sanctions on Libya will remain in full force until Libya addresses these concerns."

Stratfor notes that Secretary of State Colin Powell has hinted that: “the White House will be waiting for at least two things: first, evidence that Ghadafi's change of heart results in concrete changes -- particularly cooperation in intelligence gathering, and second, to see if Libya's economic reform ambitions are indeed authentic.”

Stratfor continues with this: “ by maintaining sanctions, Washington will force Ghadafi to deliver on both counts. And if he does, sanctions could begin to fall incrementally, though major movement is unlikely until after U.S. presidential elections in 2004.”

And contrary to Reinsch’s bleak, and perhaps influenced by his employers, the U.S. oil industry opinion, according to Stratfor’s analysis, the U.S. will fall behind the Europeans, but not as badly as they have fallen back in Iran. Stratfor notes that: “ Most of the infrastructure in Libya is of American manufacture and installment, which should give U.S. companies a leg up in the long run at existing production sites. U.S. firms hold all the technical data on the fields, and production has stagnated since U.S. sanctions were first imposed in 1986. In the natural gas sector, according to the EIA, one liquefied natural gas plant could increase its capacity by a factor of three if U.S. parts are installed.”

Still, more interesting is this observation: “the Bush administration probably will temper its prohibitions against U.S. corporate forays into Libya -- especially concerning companies with stand-still agreements -- so long as these do not result in major development contracts. The State Department allowed executives from Conoco, Hess and Marathon to inspect their abandoned assets in Libya back in 1999; such trips now will become more frequent, and lengthier.”