December 4, 2011
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№ 11 (November 2011)

Paying Off a Losing Bet

   Over the last five years Russia bet heavily on  Muammar Gaddafi. Until recently, the bet made sense. Gaddafi was the gatekeeper to Libya’s oil, and Russian companies desperately wanted access to Libya’s upstream sector.

By Mark Pabst

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   However, when Western governments turned against Gaddafi in the wake of the Arab Spring, Russia chose to continue backing the dictator. Now that the Libyan strongman is dead and rabid anti-Gaddafi forces now hold sway in Tripoli, Russian companies are left wondering what Moscow’s support for Gaddafi now means for their prospects in Libya.

   For over 40 years doing business in Libya meant doing business with Muammar Gaddafi. Under Gaddafi the structure of the Libyan government was convoluted, somewhat esoteric, and always subject to change. However, everyone knew that ultimate power rested in the hands of the colonel who overthrew Libya’s king back in 1969.

   In practice, the business climate in Libya during the Gaddafi era was not very different from many other countries in the region. Companies had to play nice with the dictator to get a shot at doing business, and in Libya business almost always has a connection to the oil industry. Libyan crude has several natural advantages, including low recovery costs, low sulfur content, and proximity to European markets. There is also a lot of it; the country has the largest proven oil reserves in Africa.

   Gaddafi’s monopoly on power, combined with Libya’s staggering resource wealth, meant that many companies were willing to overlook the colonel’s abysmal human rights record and ties to international terrorists in exchange for access to opportunities in the upstream sector. When the United States and United Nations lifted the sanctions they had slapped on Gaddafi for his violent extracurricular activities, oil companies flooded into Libya. All of them jockeyed for position in part by cozying up to the dictator.

   For much of Libya’s modern history, American oil companies had monopolized some of the best acreage, but European firms managed to make inroads after UN sanctions against Libya were suspended in 1999, five years before the United States lifted its own, more restrictive, sanctions. While Russian companies were generally not in a position to compete with their European counterparts in the late 1990s, the end of all sanctions against the Gaddafi regime in 2004 coincided with the Russian oil industry’s adoption of a more international strategy. As a result, Russia’s best known oil companies all began courting Gaddafi with as much fervor as their European and American counterparts.
Gazprom, Tatneft, and LUKoil all set their sights on Libya, with varying degrees of support from Moscow. Gazprom’s strategy to aggressively expand its resource base and gain access to new markets, led the company to make successful bids on acreage in 2006 and 2007 and swap assets with Germany’s BASF and Italy’s ENI to further increase its presence in Libya. The company also signed a memorandum of understanding with Libya’s National Oil Company (NOC) in 2008 that “pledg(ed) the parties (would) study the possibilities of implementing joint projects in the energy area.”

   Despite Gazprom’s aggressive Libyan campaign, Tatneft, a much smaller company, actually beat Gazprom onto the Libyan upstream scene. Tatneft obtained the concession to develop a block in Libya’s Ghadames region, located about 500 kilometers south of Tripoli, back in 2005. The company then gained access to more Libyan acreage through a bid round at the end of 2006, and has undertaken a promising exploration campaign that only halted when open rebellion broke out against Gaddafi earlier this year.

   Of course, things have not always gone smoothly for Russian companies in Libya. In 2007, the head of the Lukoil Overseas Libyan office Alexander Tsygankov was detained in Tripoli without charge, though it was widely rumored at the time that the Libyan authorities suspected the LUKoil exec of corporate espionage. Russian Foreign Minister Sergei Lavrov visited Tripoli shortly after Tsygankov’s detention to lobby for Tsygankov’s release. The Tsygankov affair not only highlighted the opaqueness of the Gaddafi regime, but the willingness of the Russian government to work with Gaddafi to keep the relationship between the Libyan strongman and Russian oil companies mutually beneficial.
Lavrov was not the only high ranking Russian official to have contact with the Libyan government. During Gaddafi’s state visit to Moscow in 2008, the dictator met with Russian President Dmitry Medvedev, while officials from the NOC met with both officials from Russia’s energy ministry and the top brass of Russian oil companies. The Libyan leader even offered to host a Russian naval installation in Benghazi to protect his country against “American Imperialism.”

   To be sure, Russia was far from the only country attempting to cozy up to the Gaddafi regime. German Chancellor Gerhard Schroeder travelled to Tripoli in 2004 to meet with the Libyan leader, British Prime Minister Tony Blair subsequently held his own meetings with the dictator, and Italian Prime Minister Silvio Berlusconi went as far as referring to Gaddafi as “my dear friend.” However, Russia distinguished itself from the majority of countries courting Gaddafi when it refused to abandon its support for the dictator when he threatened to massacre Libyan rebels earlier this year. Even Berlusconi, who seemed genuinely pained to have to repudiate the colonel, belatedly condemned Gaddafi’s actions and did not attempt to block NATO airstrikes against Gaddafi’s forces.

   Russia’s support for Gaddafi was a gamble that initially appeared set to pay off. When the rebel advanced toward Tripoli stalled back in March, the dictator met with ambassadors from China, India, and Russia and reportedly offered each country the chance to take over oil installations vacated by Western companies. The move, widely reported by the official Libyan news agency JANA, was a classic Gaddafi gambit, designed to use oil to bolster his support among his perceived international allies.

   However, with Gaddafi now dead and the former rebels firmly in control of Libya, it appears the country’s new rulers may be willing to borrow a page from the former dictator’s playbook. In August Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters news agency that the rebels had “political issues” with oil companies from Russia, China, and Brazil, and that these issues could cost these companies when it came to accessing opportunities in Libya. Some elements within Russia helped spread concern that Moscow’s support for Gaddafi would cost Russian companies now that a new order had taken over in Tripoli. Aram Shegunts, head of the Russian-Libyan Business Council helped fan the flames when he told Reuters in August, “We have lost Libya completely. Our companies won’t be given the green light to work there. If anyone thinks otherwise they are wrong. Our companies will lose everything there because NATO will prevent them from doing their business in Libya.” While Russian political analysts have been slightly less alarmist in their public comments than Shegunts, many have agreed with the basic sentiment that Russia’s decision to back Gaddafi will cost Russian companies. Sergei Demidenko, an analyst with the Russian think tank Institute of Strategic Assessment and Analysis summed up a prominent school of thought when he recently told Pravda, “I personally believe that Russia is not going to get anything in the new Libya now.”

   Extreme pessimists like Shegunts were given credence when, after the fall of Gaddafi, the NOC began talking about renegotiating contracts signed by the former Libyan government. However, the fallout has hardly been the disaster some people expected. In late October, the Libyan National Transitional Council (NTC) charged Gazprom with violating its investment obligations under a Gaddafi-era contract and officials were summoned to Tripoli to discuss the matter. Specifically, the problem involves 60 Libyan university students being trained to work in the oil sector who were left without funds halfway through their academic year when Gazprom allegedly failed to fund their training. While the issue is a simple one (and, in theory, simple to resolve), the message from the new Libyan authorities to Gazprom is clear: the new order is prepared to make changes to old agreements.

   While such uncertainty is frightening for Russian companies, there are signs the Kremlin is already trying to mend its relationship with Libya’s new rulers. Although Russia was late in recognizing the NTC as Libya’s legitimate authority, waiting until September to officially switch sides, unnamed sources have been widely quoted in news services claiming that Russian refined oil products were shipped to the rebels before Moscow recognized the new Libyan government. Moscow has also taken a very different tone than people like Shegunts and Demidenko in its official statements regarding Libya. In mid-September the Russian Energy Ministry announced that it had begun developing new initiatives to re-establish cooperation with Libya in the oil and gas sector. The same month Alexander Sukhov, head of the ministry’s department of international cooperation issued a statement saying, “Russia expects further fruitful cooperation in the energy field with Libya.” These statements jibe with what a Kremlin spokesman told Interfax when asked about whether Moscow was doing anything to mend its relationship with Libya’s new government. “We are not just having the intention, but undertaking practical measures,” he reportedly said.
While such statements are optimistic, they can also be seen as vague and self-serving. Moscow bet on the wrong horse in Libya’s political upheaval, and is now playing damage control. However, to dismiss Moscow’s attempts to patch up their relationship with Libya’s erstwhile rebels would be a mistake. The reconstruction of Libya will require a great deal of money, and any democratically elected government operating under a modicum of transparency will feel the need to maximize revenue from hydrocarbons. This means that companies willing to cut the best deals with the new Libyan government may ultimately be the ones who benefit. Settling political scores may matter in the short term, but if both Russian companies and Moscow can persevere through some tough times in the immediate future, they may get another chance at Libya’s upstream riches.

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