Oil Politics and US Elections

US petroleum companies are buzzing with excitement over the prospect of sinking their wells into the vast sands of Libya as soon as Muammar Gaddafi finishes scrapping his nuclear program and welcomes President George W. Bush to Tripoli, moves that could lead to a lifting of US government sanctions on the oil-rich desert nation.

But this is no sudden bolt from the blue.

DEBKA-Net-Weekly's sources in the oil industry have learned that Big Oil and the US government began holding clandestine meetings with Libyans two years ago to prepare for the opening of country. Recent media reports have quoted US administration officials as saying the White House could ease the 18-year-old ban on US oil investment in Libya as early as spring.

Once restrictions are loosened, US oil companies could bid on new contracts without any immediate payment. Those companies that have held on to stakes in Libya’s oil fields since 1986 could be allowed to begin test pumping and repairs, or ship in equipment.

Four US oil companies retained their stakes. ConocoPhillips and Marathon Oil both have 16.33 per cent holdings in the Waha field. They are in partnership with Amerada Hess, which has an 8.16 percent stake in a joint venture operating as the Oasis Group. Oasis is the minority partner of the Libyan National Oil Co., which has a 59.16 per cent stake in the field. Separately, Occidental Petroleum owns rights to fields in eastern Libya.

The US oil firms are playing catch-up with European oil companies, such as Italy's giant ENI, which owns Agip Petroleum, and France's Total, which are already doing business in Libya. The Turks also have a presence there but not a commanding one.

This week, Eni, which is responsible for 14 percent of Libya's annual oil output, said production at the Al Fiil, or Elephant, oilfield had started with an initial flow rate of 10,000 barrels per day (bpd), increasing to 150,000 bpd by the end of 2006.

Oil industry sources told DEBKA-Net-Weekly that US companies could be back in action in a big way in Libya much quicker than expected, despite some final hurdles within the US government and Congress. Preliminary deals could be struck this year, with Bush pointing the American voter to progress in Libya as a dividend of the US invasion of Iraq.

A telltale sign that contracts are imminent will be the deployment of modern 3D seismic surveys and equipment in Libya, by companies such as Western Geco, to fill in the gaps from an absence of up-to-date analyzable data on the country's geology. Oil companies will then be able to assess properly the economic potential of the licensing blocks once Libya officially opens.

The Libyans are itching to develop their untapped oil reserves, but much will depend on the pace at which their nuclear and chemical weapons programs are scrapped.

Libya has proven oil reserves of some 30 billion barrels, but only a third of its potential fields has been explored. Libyan crude has low levels of sulfur and can be easily converted into gasoline and diesel fuel, experts say.

Saudis spring surprise cut at OPEC

Oil analysts, scratching their collective heads over the cartel's surprise announcement last week of a production cut from April 1, shared some of their theories with DEBKA-Net-Weekly. OPEC, which controls half the world's oil exports, announced the lowering of its supply ceiling by one million barrels a day to 23.5 million bpd to compensate for what it described as the second quarter drop in fuel demand after winter ends in the northern hemisphere.

DEBKA-Net-Weekly's oil industry sources reveal that the Saudi oil minister Ali Naimi received his orders to initiate the cut from the top, not as a cartel consensus, and that it was as much politically motivated as influenced by any fuel demand curve. The Saudi royal family which calls the shots in OPEC is deeply disturbed by the progress of the war in Iraq and what it regards as the al Qaeda backlash rocking the kingdom. The princes of Riyadh may have been using their clout in the oil cartel to buy leverage in Washington, their way of conveying this message to President George W. Bush: Oil is our only weapon and we may be forced in our own interest to hang a production cut over your election campaign as a threat, implementation of which could send prices surging to $40 a barrel at the peak motoring period between America’s Memorial and Labor Days. That would slam the brakes on the US economic recovery you have choreographed so carefully to pick up speed as the November poll approaches. You must understand that a Democratic administration would rescue us from your neo-conservatives whose constant moralizing on democracy in the Middle East is making our radicals restive and determined to send both the Americans and the Saudi princes packing out of the Arabian Peninsula.

That is one explanation. Other oil analysts postulate an opposite motive for the production cut, one that makes the Bush administration the beneficiary. Their argument is that Washington needs high energy prices – provided pre-election economic recovery is not stalled – in order to finance the shortfall of volumes in Iraq’s output due to the coalition’s inability to reopen northern export routes to Turkey, as well as a quid pro quo for Big Oil backers and the Saudis and Russians for their cooperation in the Bush agenda for disseminating democracy across the Middle East.

But when in doubt, energy analysts return to their trusty charts – which most probably hold the most rational explanation for OPEC’s decision to slash production.

The Saudis could simply have chosen to heed the warnings of supply-demand math generated by the US department of energy, the international energy agency and slews of analysts which showed a huge growth in global oil inventories driven by steady oversupply and a lower demand for heating oil as the weather warms up. Under that scenario, the cut was justified and OPEC was simply trying to keep prices at the high end of its target range of $22 to $28 a barrel – which it has exceeded for most of the past five months.