After nearly 40 years, BP is returning to Libya amid widespread controversy about an alleged link to the Lockerbie bomber’s release and fears about a potential oil disaster in the Mediterranean Sea.

Yet despite the oil giant’s enthusiasm, its future in Libya – a country boasting the largest crude oil reserves on the continent -- may end up as murky as competitors that have ventured there.

Three years ago, BP signed a $900-million exploration and production deal with Libya, decades after Muammar Gaddafi’s government nationalized 100 percent of the oil company’s holdings. BP, which has not been involved in the country since 1971, announced in late July that it would begin drilling in the western part of Libya and in the deep waters off the coast in a matter of weeks.

Although BP presumably believes the agreement will be good for business, Libya’s terms of attracting foreign investment is “so convoluted and corrupt, I don’t think anybody gets a real advantage,” said Ronald Bruce St John, an analyst for Foreign Policy in Focus, a Washington-based think tank.

Libya’s oil sector has grown more conservative after years of being run in an apolitical fashion, said St John, who has served on the international advisory board of the Journal of Libyan Studies and the Atlantic Council Working Group on Libya. He is based in Albuquerque, New Mexico.

Last fall, the government created a supreme council for energy affairs to oversee the oil and gas industry that is “packed with conservatives,” he told OilPrice.com, and this rigid treatment of the oil sector may be reflected in a revised petroleum law in the works. A few months ago, the Libyan National Oil Corp. said the new law would make the industry more transparent.

It is not a positive sign that conservative factions are amassing greater control and “doing everything they can to undercut the economic and political reform elsewhere in the country,” St John argued.

On that note, it would be foolish to believe “the Megrahi thing” would give BP a big advantage, St John said, adding that most of the oil majors are already operating in the country.

St John was referring to Abdel Baset al-Megrahi, the man convicted in the 1988 bombing attack on Pan Am Flight 103 off the coast of Lockerbie, Scotland. Speculation has swirled that BP influenced the United Kingdom’s decision to release an ailing Megrahi from jail in return for BP’s resuming business ties with Libya after decades.

The U.K. and Scotland have denied the charges. While BP said that it did not take part in talks about Megrahi’s release, it admitted to lobbying the Scottish government for a prisoner swap. In the end, the bomber was released on compassionate grounds.

Plans for a U.S. congressional hearing reviewing the alleged link between BP’s move into Libya and the bomber’s release were scrapped days ago due to a lack of witnesses.

The oil firm and the Libya Investment Corp. plan to explore about 54,000 square kilometers of the onshore Ghadames and offshore frontier Sirt basins, which is equivalent to more than 10 of BP's operated deepwater blocks in Angola, according to a press release that BP issued May 29, 2007. Successful exploration could lead to the drilling of around 20 appraisal wells, the company stated at the time.

It has taken a while to begin exploration because the Libyans, to some degree, delayed the process or “made it difficult for BP to consummate the deal” in a bid to “get Megrahi out of jail,” St John said. “I can’t document that, but that’s my guess.”

Further complicating the three-year-old agreement, BP is taking heat from critics concerned about another Gulf of Mexico oil crisis in Mediterranean waters. Some European Union members have demanded a moratorium on deep-water drilling in the Mediterranean Sea until an effective strategy is drawn up.

As the British oil firm forges ahead, it will find a Libyan government that has historically taken about a 60 percent stake in oil discoveries and left 40 percent for the producer, said St John. Contract terms have become “even looser as Libya got into economic difficulties in the 1980s,” he noted.

>From 2005 to 2007, Libya awarded 36 companies with either oil or gas exploration blocks that were “extremely stringent,” he said. These were known as EPSA, phase four, contracts (BP’s new deal is not part of these contracts). Instead of a 60-40 split, in one case Libya took 93.2 percent of the oil discovered, leaving only 6.8 percent for the producer, he recalled.

In addition to the generous Libyan cut, these international oil firms were asked to make upfront payments, St John said, adding that Occidental Petroleum had to pay $25.6 million to get its hand on a block.

“So it’s going to be hard, even if you find oil, to make much money out of it,” he predicted.

Libya’s treatment of Verenex Energy Inc. is “just one more indication, in 2009-2010, that the conservative, non-reform faction in Libya is exerting more and more influence on hydrocarbon policy,” he said. Verenex is a small Canadian firm that was the only player to make a sizeable discovery (more than two billion barrels of oil) under EPSA, phase four, contracts awarded after 2005, he noted. Libya’s interference in negotiations between Verenex and the China National Petroleum Co. over the sale of the Canadian firm’s exploration contract drove down Verenex’s share price by 30 percent and forced it to sell the contract to Libya at 70 percent of the original

offer to China, he said.

Family honor has been known to play a role in how Libya does business, too. In 2008, Gaddafi’s son Hannibal and his wife were temporarily arrested in Geneva after the couple’s domestic staff accused them of mistreatment during a hotel stay in the city. Libya then blocked two Swiss businessmen, Rachid Hamdani and Max Goeldi, from leaving Libya.

The heads of European and U.S. oil companies were also warned that their “business interests might be at stake” if the row with Switzerland was not resolved, St John noted. The whole incident illustrates that “whenever something goes wrong with a country,” Tripoli takes it out on individual companies from that particular country, he said.

As BP prepares to start drilling in Libya, what puzzles Libyan expert Omar Turbi is that “not everybody was excited to get in” when Libya opened its investment doors around 2003 with the offer of controversial EPSA contracts. For many months, some firms that won leases did nothing and “the land was just sitting there,” Turbi, chief executive officer of computer firm Orbit Systems in Irvine, Calif., told OilPrice.com.

He has testified before Congress on U.S.-Libyan relations and participated in think-tank discussions in Washington assessing the country.

“So this BP deal to me is ironic,” argued Turbi, adding that it is uncertain whether it will be good for the company in the long run. “From my understanding, Libya needs the oil companies more than the oil companies need Libya.”

Source: http://oilprice.com/Geo-Politics/Middle-East/An-Uncertain-Homecoming-BPs-Return-To-Libya-Decades-After-Gaddafis-Revolution.html

By. Fawzia Sheikh for Oilprice.com who offer detailed analysis on Oil, alternative Energy, Commodities, <a href="http://oilprice.com/Finance/Economy/" target="new">Finance</a> and Geopolitics. They also provide free Geopolitical intelligence to help investors gain a greater understanding of world events and the impact they have on certain regions and sectors. Visit: http://www.oilprice.com

August 10, 2010