The Hindu Business Line : America's African safari for oil

AMERICA loves to impose sanctions on any country it hates. American companies hate sanctions that hurt their interests. There are recurring conflicts between the political goals of the US government and the commercial objectives of its corporations. US strategies reflect corporate interests adequately and, at times, are driven by them.

American companies were pioneers in oil development in Libya since the mid-1950s. When ESSO-Libya made its first oil strike in 1959, Libya was said to have "hit the jackpot." The incentives and concessions given by the government attracted many oil companies, especially independent firms such as Occidental Petroleum Company (OXY), to operate and reap huge profits.

The low-cost Libyan oil was ideally suited to European refineries. Moreover, Libya's proximity to Europe led to greater integration with Europe than with US. Unfortunately for them, the happy days were over within a few years after Col Qaddafi came to be power in 1969. For various reasons US-Libyan relations turned sour and US began to impose sanctions on Libya from early 1980s.

Responding to them, Exxon and Mobil withdrew in 1982. Five others (Amerada Hesse, Conoco, Grace Petroleum, Marathon and OXY) were ordered to close down in 1986. Surprisingly, Libya did not seize their assets, but kept them in `suspended animation.'

The National Oil Corporation (NOC), the government-owned company, signed a Standstill Agreement with them in June 1986. It allowed NOC to operate and develop the fields, while the US companies retained their rights and obligations until such time they could re-enter Libya.

In later years, the Libyan spokesmen would refer to these arrangements as a testimony of their adherence to international commitments. There was more to their behaviour than gaining goodwill. From time to time, Libyan officials would send veiled threats that their concessions would be sold off if the American companies did not resume their operations. The latter, in turn, would step up pressure on the State Department. The fear of losing the concessions deepened over the years.

Libya had to battle against unilateral US sanctions and UN sanctions for over a decade. By 1992-93 it was trapped in UN sanctions. In 1996, US passed the Iran-Libya Sanctions Act (ILSA), which sought to prohibit, extra-territorially, imports from third counties.

By April 1999, under international pressure and Libya's decision to release the agents involved in the Lockerbie incident, UN sanctions were suspended. However, unilateral US sanctions under ILSA continued. Oil companies had stepped up their campaign to get the sanctions lifted.

Powerful trade bodies such as the Atlantic Council representing 300 corporations including Halliburton, the Middle East Institute, etc., as well as State Department officials questioned the efficacy of ILSA. Many others joined the chorus.

When the Republican Party was voted to power in 2001 with Mr George Bush as President, there was hope that the sanctions would be lifted or modified. The oil lobby was known to be close to the new administration with Mr Richard Cheney as its Vice-President.

In May 2001, the report of the Energy Task Force headed by Mr Cheney, known as the Cheney Report, had suggested review of sanctions against Iran, Libya and Iraq and drew attention to the importance of their oil production to meet US and global energy needs.

After protracted backroom negotiations, UN sanctions were lifted on September 12, 2003. However, unilateral US sanctions continue. Under the compensation deal, the payment of the last instalment is contingent on the US lifting its sanctions. The US may delay it, but not for long.

Libyan diplomats expect it before November this year, before the presidential election. The marked shift in US strategies may be related to two developments. The first is the US misadventure; the other is the US pursuit for oil in Africa.

Months before the Iraq war, the hawks in the administration painted a grim scenario. In August 2002, Vice-President Cheney said: "Armed with an arsenal of these weapons of terror and sitting atop 10 per cent of the world's oil reserves, Saddam Hussein (can)... take control of a great portion of the world's energy supplies... and subject the US and any other nation to nuclear blackmail."

Though the administration claimed its right to disarm the despot on charges of possessing WDM and asserted repeatedly that its aim was not to seize Iraq's oilfields, it could not conceal its real intention.

Its major assumption was that a regime change would change the face of the global oil industry. A friendly government in Iraq would opt of OPEC and release large quantities of oil into the market.

The belief was that with proven reserves of 113 billion barrels per day and vast quantities of untapped and as-yet-unexplored areas, Iraq was the only country besides Saudi Arabia that could add additional production and supplies for 20-30 years.

It would reduce reliance on Saudi Arabia, which had become unreliable as a partner and unstable as a regional power. They were confident that the war would be short and the cost of war could be more than financed by oil recovered in Iraq.

A few months of occupation dispelled all these assumptions. The core assumption was that oil could be secured by use of force. As trenchantly put by Jeffrey Sachs in the Financial Times (December 22, 2003), "The US cannot secure oil supplies in the Middle East by military occupation." Even months after occupation, US has not been able to establish a legitimate government and control terrorism through its own forces. Iraq's future remains uncertain.

In a recent study placed on Brookings' Web site (January 2004), Mr Kenneth Pollak reports: "If the United States withdraws from Iraq, or retains only minor presence, Iraq could come apart quickly and slide into chaos and civil war."

As reported by Financial Times (February 12, 2004), a confidential report prepared by the US-led administration warns about the "Balkanisation" of Iraq as a result of continuing insurgency. The US had not foreseen these developments, nor was it prepared for long engagement in Iraq. It was wrong on cost calculations too.

Long before the war, many economists had questioned their estimates. The Economist (January 23, 2003) refers to a study of the Council on Foreign Relations (CFR) and the James Baker Institute of the University of Rice, which explained that though Iraq might have vast reserves, its infrastructure was `lamentable' and had been damaged during a decade of sanctions and under-investment.

Production averaged 2.2 mbpd in 2002. In a report of the Office of Management and Budget, the US Congress was informed that oil revenues in 2003 were $3.9 billion and would be $13 billion in 2004. The estimate of operating costs in Iraq stand at $15.6 billion! It was not only on WMD that the administration had misled the Congress!

The other side of it is that there is no scope for additional supply from the Gulf. There is no hope of new investment in the near or even short term. New investors are hesitant to enter unless a legitimate government settles the legal tangles attached to the contracts already awarded by the earlier government. OPEC has not been destroyed. On the other hand, it has reasserted itself and oil prices rose to $35 per barrel in the last quarter of 2003.

These developments could have led to the retreat of hawks and allowed the doves a voice in the policies in the changed circumstances. Even earlier there were reports that a group led by Mr Colin Powell wanted to settle the disputes through negotiations and were also for lifting sanctions.

The other idea that might have gained currency is the one that argued for diversification to other sources to reduce dependence on the Gulf. The Cheney Report itself recommended drawal of supplies from the Western Hemisphere, the Caspian and Africa to lessen the impact of supply disruptions.

Of these, the Western Hemisphere option proved to be unattractive in light of civil disruption in Venezuela and general unrest and anti-US attitudes of new governments in the area.

The Caspian option seems within reach during the years of President Yeltsin. But the US' meddling in Central Asia after its intervention in Afghanistan and its war on terrorism have strained US-Russian relations. President Putin has reasserted control over natural resources. And the arrest of Mr Khodorkovsky last October "disturbed Washington's plans to turn Russia into a major non-OPEC source of crude." By the end of 2003, it seemed that the most attractive option for the US was to reach out to Africa. Its African safari had commenced a couple of years earlier. The African option was pursued with vigour in the post September 11 era.

The Bush team made no secret of its intention to shift US reliance from the Middle East to West Africa. "African oil should be treated as a priority for US post-September 11 security," said Congressman Edward Royce.

West African producers, mainly Angola and Nigeria, held a 15 per cent share of the US market. The National Intelligence Council (NIC) estimated that it would rise to 25 per cent by 2015. An African Oil Policy Initiative Group (AOPIG) comprising Congressional members, oil companies, US investors and consultants was formed to prepare a blueprint for energy investment in that continent.

AOPIG has been highly successful in its efforts to co-ordinate issues at official and corporate levels. President Bush met leaders of all the West African countries that either produce oil or have the potential to produce oil. The advantages attached to West African supplies are that much of the oil is offshore and insulated from domestic politics and violence. It is light oil. The sea route to the Atlantic is the shortest and could be well defended by the US Navy. The end of 2003 had cleaned up political violence in the region up either under UN auspices or through regional powers like Nigeria friendly to the US.

Around this time, Col. Qaddafi began to promote economic union in North Africa as a benevolent leader. So to say he was waiting to be received into the new alignment that was orchestrated by US administration.

President Bush had despatched former Senator Danforth to broker peace in Sudan with rebel groups fighting for two decades. Geologists had assessed that Sudan's oil resources could rival Saudi Arabia's.

It was the dispute over sharing of oil revenues between the south, where the oil was, and the north, where the government was, that stood in the way of a peace agreement.

By late 2003, there were clear indications that an agreement in Sudan was in sight. (It was signed early in January this year.)

Nothing would have been more tempting to the chastened strategists in Washington than to enlarge the West African panorama by including Libya and Sudan in it. The vast Libyan oil resources are also located in the interior desert and isolated from people.

Chad is not far from Libya and Libyan oil can also be linked to the new pipeline connecting West African oil. It seems to us that it was America's African safari that led to the agreement with Libya and not the pre-emptive policies trumpeted by advisers to President Bush.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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