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Where Has Libya's Oil Gone?


Italy's Eni and others have to deal with rebels and loyalists, essentially shutting down operations until the outcome is clearer

For the Austrian oil company OMV, Libya has long been its prize overseas territory. Daily production of 33,000 barrels accounted for 10 percent of the company's output—until now. With conflict raging, the oil flowing from OMV's important Shateira field in the east and other areas has stopped. OMV has no idea when it will come back. "We have no precise information at all; we have no official contact at all; we are dependent on random contact," Chief Executive Officer Gerhard Roiss told reporters on Mar. 31.

Other companies with a big Libyan presence are trying to save their operations by walking a fine line between the regime and the rebels. Italy's Eni (E) has spent years working with Colonel Muammar Qaddafi's government and has supported charities run by Qaddafi's son Saif. Yet Eni CEO Paolo Scaroni said in March that he isn't working with Qaddafi: He's in business with Libya's national oil company and will continue to negotiate with them no matter who's in charge.

Italy's Foreign Minister, Franco Frattini, has stated publicly that Eni is also talking to the rebels. "Eni is very keen to engage and get in early," says Guma El-Gamaty, a spokesman for the Libyan opposition in London. The government of Italy, the country that is the largest market for Eni's Libyan gas, has publicly disavowed the Qaddafi regime. Although Eni has shut down most production, it continues to supply natural gas to the capital of Tripoli, perhaps to hedge its bets while Qaddafi hangs on.

At the moment, a prolonged conflict seems likely, with power divided between Qaddafi's weakened regime in Tripoli in the west and the rebels in the east. Unlike most of the foreign companies whose fields lie in the center of the country or the east, much of Eni's production is from fields in the west, where Qaddafi still exercises authority. Eni has built a state-of-the-art $9 billion plant at Mellitah, on the coast west of Tripoli. It processes natural gas and pumps it under the Mediterranean through the Greenstream pipeline to Italy, which gets 10 percent of its gas from Libya. The company paid the Libyan regime $1 billion in 2008 for a 25-year extension of its contracts, with as much as $28 billion in additional investment envisioned. Eni "risks angering both sides no ma-tter what they do," says Nicolo Sartori, an analyst at Rome's IAI Institute of International Affairs.

Most foreign companies are not taking sides. That appears to be particularly true of the U.S. companies, among them Marathon Oil (MRO), ConocoPhillips (COP), and Hess (HES). These three once operated together in Oasis Group, a joint venture that agreed to pay the Libyans $1.8 billion in 2005 to reclaim properties they had left because of sanctions and political pressures in 1986. Together the three would have produced about 90,000 barrels per day from their 13 million acres this year. They are keeping their plans and opinions about the conflict to themselves. In a typical comment, a spokesman for ConocoPhillips, which is losing about 45,000 barrels per day in production, says, "We do not have anyone available to discuss Libya."

The absence of Libyan crude is putting pressure on refineries around the Mediterranean. It is known as the best crude for making gasoline, and only a few crudes from Nigeria, Algeria, and Angola are suitable substitutes. Libya is only selling the occasional cargo of crude now. El-Gamaty, the rebel spokesman, says one was recently sold to Qatar, which is acting as a middleman.

Since the shooting started, the multinationals have been shipping personnel out, slowing Libyan production to a trickle. Shell (RDS.A), which was exploring in Libya, flew its people out on a chartered Airbus from Egypt. Schlumberger (SLB), the oil-field-services giant, took away more than 300 people, including about 30 employees of other companies, on a fast ferry to Malta. Schlumberger employees at a desert encampment were protected by the local community from looters of undetermined loyalty, according to Andrew Gould, Schlumberger's CEO.

David L. Goldwyn, a former Assistant Secretary of Energy for International Affairs and a Libya specialist, ticks off a long list of conditions, from lifting sanctions to restoring security, that will need to be satisfied before foreign companies return and begin producing again. "Right now the uncertainties are so numerous it is hard to foresee the revival of Libyan production in the near term," says Goldwyn, who runs Goldwyn Global Strategies in Washington.

The bottom line: Oil companies face a challenge: resuming production as they try to keep channels open both to Qaddafi and the rebels.

With Zoe Schneeweiss, Alessandra Migliaccio, and Maher Chmaytelli. Reed is a reporter-at-large for Bloomberg News and Bloomberg Businessweek.

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