OIL MANOEUVRES BUYERS ARE ENCOURAGING LIBYA TO STEP UP PRICES

Press, Volume CV, Issue 30954, 10 January 1966, Page 10

OIL MANOEUVRES BUYERS ARE ENCOURAGING LIBYA TO STEP UP PRICES

[By

“Lynceus”

of the "Economist"!

[from the "Economist"'intelligence Unit.!

Over the years the international oil companies have grown used to living with the pressures of their landlords, the oil producing countries. Time was when the producer countries were quite content with 25 per cent share of the net profits from oil production on their territory. Today the host countries, with very few exceptions, are able to exact 50 per cent of gross profits before deduction of operating expenses and calculated on the basis of “posted prices” substantially in excess of the prices which the companies actually receive for their crude.

But if the oil companies have learnt to live with this inexorable squeeze, that does not mean to say that they like it. So it is all the more surprising to find them conniving at. if not actively encouraging. the action of a producer country in stepping up its demands. Yet that is precisely what has been happening in Libya. The phenomenon has far-reaching implications for the pricing structure of the international oil market. Late-comer Prospects Libya came late on to the scene as an oil-producing country. The first permits for prospecting were only awarded in 1956, and the first oil pipeline did not come on flow until the end of 1961. Yet today this formerly impoverished desert kingdom ranks only just behind the giants of the Middle East: and for several countries of western Europe it has become a major supplier (during the first nine months of 1965, Libya displaced Iraq as Britain’s second most important source of crud‘, after Kuwait). One of the main reasons for this astonishingly rapid development has been the tin-

| usually generous terms which Libya has offered to oil pros- • pec’tors. The original 1955 law governing prospecting for I oil in Libya fixed royalties at i 50 per cent of realised prices. The consequences of this generosity have been spectacular. Although the first oilfield was discovered by Esso, the second belongs to a group of American “independents” working under the soubriquet of Oasis; and more recently a second group of “independents,” Amoseas. has brought a third field into production. The “independents,” however, unlike the “majors,” had no established distribution networks in western Europe. This is where the generosity of the Libyan oil law was so vital to them. For it enabled them to break into western European markets by drastic price-cutting. As against a Mediterranean posted price of 2.26 dollars a barrel, the independents were able to offer crude from their Libyan oilfields at prices going down to 1.46 dollars. “Majors” Not Amused Understandably, the “majors” were not amused. Their cosily regulated markets were being turned into a bear-gar-den. They protested, with some justification, that the independents had never spent a king’s ransom, as they had, on building up an integrated production, refining and distributing network throughout the world. They complained that they were being undercut by a group of operators who enjoyed privileged access to one uniquely cheap source of supply, whereas they had to draw the huge bulk of their supplies from sources where posted pricing was rigorously enforced. They certainly did nothing to discourage the growing suspicion of the Libyan authorities that they were being taken for a ride. So earlier this month the libyan Parliament approved a new oil law. This lays down that royalties shall be paid, as in other Middle Eastern countries. on the basis of posted prices and before deduction of expenses. Companies complying will be entitled to bid for new concessions, and any outstanding claims against them by the host government over past royalty payments will be automatically abandoned. All Now Waiting All three parties—the “majors,” the “independents,” and the Libyan Government—are

now waiting anxiously to see what will happen next. The “independents” say they cannot afford to operate on the basis of posted prices: if they can only offer the sort of discounts offered by the “majors” they will lose their markets. The Libyans are hinting darkly that if the independents will not come to heel voluntarily, they will have to be made to do so. Whether the Libyans tear up the independents’ existing contracts or not, however, it seems clear that Oasis and Amoseas are going to be forced into line: and hence that Libya will shortly cease to be a source of supply for cutprice petrol. This may be in the best interests of the “majors;” but whether it is really in the long-term interests of the Libyans is by no means so certain.

The Libyans are taking a calculated risk that Oasis and Amoseas may be squeezed out of operation on their territory. They are not worried by this, for they calculate that even if output from Libya were slashed by as much as one-third, their oil revenues would rise substantially through being paid on a posted price basis.

Caution Well Advised They may be right. But they might be well advised to pause before committing themselves wholly into the hands of the “majors.” New oil discoveries continue to outstrip the advance in demand. Supposing the “majors” discover large commercial quantities of natural gas beneath the North Sea, the dependence of western Europe, the prime market for Libyan oil, on external supplies might be drastically reduced. The time might come when the “majors” would decide to restrict production from their Libyan fields. By then it would be too late for the host Government to try and tempt the “independents” back.

No doubt the “independents” have made a good thing out of Libya. No doubt the Libyans find it invidious to be the only members of Oil Producing Exporting Countries who fail to have the "posted price” rule respected. But in the long run it is not only the motorists of western Europe who stand to gain from breaches in the solid front of the “majors.” Competition is good for the producer countries too.