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Libya's Missing Trillion or Why Oil Companies Will Soon Support Total Transparency

09/09/2011 11:53 BST | Updated 08/11/2011 10:12 GMT

Never again should be the motto of Libya's new oil minister Ali Tarhouni. Never again should Libya's oil business be done in secret. Despite all the prognostications about oil companies pressuring not to renegotiate, countries wanting payback for supporting the rebels, secret deals, and so on, he has one cheap, simple weapon to achieve it - he can publish every last page of every last Gaddafi-era contract.

And here the oil companies themselves should want this too - courtesy of the full Wikileaks disclosures of 252,000 cables last Friday.

Tarhouni's predecessor as oil minister, Shukri Ghanem, briefly resigned in 2009 after one of Muammar Gaddafi's sons, Muatasim, pressured him to hand over $1.2 billion in cash or oil for undisclosed security plans. Ghanem came back later, telling US diplomats he'd been on extended leave to "catch up on movies, read books, and rest" but rumours were that a senior official in the National Oil Corporation (NOC) had been abducted as part of the ongoing disagreement. Meanwhile Saif al-Islam, he of the LSE degree, rimless designer spectacles, polo-necked jumper and reforming zeal, was "lifting" (stealing) his own supply of oil from a field called Jurf, 60 miles out into the Mediterranean where the oil is stored in a floating vessel and can be simply offloaded. Jurf is part of a joint venture with the French company Total.

Meanwhile a third son, Hannibal, set up his own shipping company, Mariner, in Cyprus in 2000 which in a few short years garnered 75% of the business of shipping oil products from Libya to Europe, with no competition. Hannibal also had nice sidelines in brokering the purchase of ships for the state-owned shipping company, and in chartering supply ships to support Libya's growing offshore oil exploration for companies like Total and Eni, a business which picked up after a law in 2006 prevented oil companies from servicing their offshore rigs from Malta, as they had done before. Another manager of Total reported that Libya's overall production of 1.6 million barrels a day was ordered to be boosted by 100,000 barrels a day to meet the extra expenses of the 40th anniversary in September 2009 of the coup which brought Gaddafi to power. All the oil companies went through a period of intense pressure earlier that year when the Gaddafis tried to make them "contribute" to an initial $1.5 billion terrorism compensation fund the Libyan state had agreed to as part of its rehabilitation process.

So far, so Borgian, even if these antics of the revolutionary First Family are, to anyone who has followed them at all, simply average form. But what emerges also from the Wikileaks cables - apart from the overwhelming professionalism, in fact, of the State Department diplomats who wrote them - is that the culture of secrecy and arbitrary decision begin to build a tremendously strong case for transparency that the oil companies themselves should be interested in.

Wooed back in after Libya was rehabilitated in the War on Terror the oil companies constantly had the rules changed on them. The regime made a great fuss about reforms, including market reforms - remarkable how that dog-eared old narrative of Old Guard versus the Modernisers will sucker us every time - and touted Exploration and Production Sharing Agreements (EPSAs) bid out in public auction with published terms for evaluation. What could be more transparent? Apart from the fact that many agreements were concluded outside this framework. And renegotiated again and again. And that the major leak points of corruption are not in the main agreements, which these days nearly every oil producer in the world has model versions of, like shop windows advertising business propriety. They're in the service contracts operators sign with Libyan and foreign companies, the procurement of billions of dollars of goods and services to make the oil flow, every two-week business visa given to the thousands of foreign oil workers, even the Oil And Gas Exhibitions which sprang up as individuals took advantage of the "liberalised" environment to lure in foreign investors to trade shows claiming, often spuriously, to have the backing of the oil ministry or the National Oil Corporation.

It's not just the Gaddafi spectaculars - the threat to nationalise PetroCanada followed by an order to them to cut production by 50 percent following a Canadian government refusal to roll out a red carpet for him for a stopover on his way to New York; the cutting off of oil supplies to Switzerland after Hannibal was arrested there for beating hotel staff.

The more mundane business-as-usual impositions in a secret petro-state are just as burdensome. You never quite know who you're dealing with. One part of the government blocks your activity while another apologises and says it wishes it could help. Within a few years, policy goes from being set by the National Oil Corporation, to a council of ministers, to a newly formed ministry of energy, but there seems to be little continuity or institutional knowledge inherited.

You sign an agreement which gives you free access to water, then you get charged for it and told that was in the original petroleum law (passed in 1955). A new tax pops up retrospectively. All contracting companies need Libyan partners, a virtual invitation to extortion. You sign up to production sharing agreements with thin profit margins because you calculate that there's a lot of oil in there and it's cheap to produce. But at the same time, you need to hit high production to make it worthwhile and that needs high investment. The NOC agrees to match your investment dollar for dollar, billion for billion. But will they? Especially when politicians regard the NOC practically as their own piggy bank, the political class wants to immediately appropriate whatever windfalls come from high prices to distribute patronage, and the NOC sometimes finds it hard to get the government to even approve this year's operating budget.

Perhaps most tellingly of all, at the same time as a Canadian and German company are ordered to cut production in their fields, others, an American consortium grouping Marathon, Conoco Philips and Amerada Hess, is invited to increase its own without restraint. But the suspicion is that, in addition to punishing and pressuring the companies in displeasure, the move is also a form of fact-finding. The NOC would like to know how much the Waha operating area really can produce. Because, even after decades of production, and despite the fact that they are the majority stake holder, they don't know.

It's a hell of a way to do business, this uncertainty on all sides. Surely, there have got to be some investors, some oil companies out there who, if they could sign up for a deal of reasonable profit against what Donald Rumsfeld would call the "known unknowns" of geological risk and market volatility alone, would take it.

Publishing all contracts and their associated data would not primarily target any change in current contractual arrangements. But it would help to clear the air, establish an open environment, allow the tracking of corrupt activity, add legitimacy to the TNC with the Libyan people, and position the whole country differently in the eyes of the international community. The most important thing to happen after publishing the EPSA framework agreements with the oil companies, the service contracts, posted prices, operational data and company information would be... nothing. Life would go on. Breaking the taboo of secrecy is unlikely to lead to any dramatic short-term impact, defying predictions of disaster pushed by those with interests to defend.

Longer term, though, there would certainly be impact. Libyan officials, the oil companies themselves and a small army of researchers from a variety of institutions would pore over a treasure trove of unparalleled data. Open sourcing the data would attract a huge amount of attention and scrutiny from so many people, which would all work more in favour of the interest of the Libyan people than against it. Corrupt deals would stand out and the companies that made them would be sidelined in future operations and deals, with or without actual prosecutions. Oil is a complex system and corruption relies on that complexity. It is only by publishing everything that the new government can lay bare the entire Heath Robinson/Rube Goldberg apparatus of the industry, the entire nexus of relations between SOEs, operators, servcos, secondary and tertiary contractors, transfer pricing, gold plating and all kinds of sweetheart deals, and create the conditions in which malpractice will be uncovered.

As for the government's negotiating position, it is more likely to be strengthened than weakened through transparency. Contrary to corporate spin, transparency of contracts does not always and necessarily conflict with commercial interest.

If they have any real strategic sense, the oil companies too will see this in the coming months as more Wikileaked tales of baroque folly doubtless emerge from other countries.