LIBYA: OIL POLICY CROSSROADS

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Vo-,- v Directorate of ''" - ( Ali -- ;00 1 ~e T 2F ~lD ~~'~-? Secret
Libya:
Oil Policy Crossroads
Secret
NESA 82-10279
July 1982
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Directorate of
Intelligence
Libya:
Oil Policy Crossroads
Information available as of 10 June 1982
has been used in the preparation of this report.
This paper was prepared by Office of
Near East-South Asia Ana ysis. It was coordinated
with the Directorate of Operations and the
National Intelligence Council. Comments and queries
are welcome and may be directed to the Chief,
South Asia Division, NESA
Secret
NESA 82-10279
July 1982
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Libya:
Oil Policy Crossroads) 25X1
Key Judgments The soft oil market has caused the most severe problems for the Libyan
economy since Muammar al-Qadhafi took power in 1969. Qadhafi's
pursuit of price maximization has reduced sales to a level that is
insufficient to cover the country's imports. Erratic dealings with foreign oil
companies have inhibited an effective maintenance and development
program and caused an overall deterioration in the oil industry's capacity
and facilities
Luxury imports have been cut back and payments to foreign contractors
delayed to close the gap between income and expenditures. If imports are
not further reduced this year, Tripoli will have to finance a large current
account deficit either by drawing down foreign exchange reserves or
borrowing. By the end of 1982 cuts in development projects and military
procurement, both of which could be made without significant short-term
economic or political repercussions, may be necessary.
By next year Qadhafi may have to make some tougher decisions in his oil
management policies, particularly if the market situation does not improve.
A hardline nationalistic approach toward oil companies would cause
marketing difficulties and shortages of foreign exchange and lead to a
longer term erosion in oil productive capacity and reserves. In a few years
the financial shortfalls could undermine domestic political stability by
forcing cutbacks in social programs and consumer imports and also hinder
Qadhafi's international ambitions. A position that is more accommodating
to the oil companies would increase marketing of Libyan crude and long-
term investment by the companies. With the proper operating environment
and financial incentives, the companies could ensure Libya a larger share
in a soft oil market as well as a longer term resurgence for the industry.
Qadhafi, who has consistently resorted to brinkmanship in his dealings
with the oil companies, is likely to compromise just enough to keep them in
the country. The recent appointment as Oil Minister of Kamal Maqhur,
who is experienced in negotiating with the companies, may indicate
iii Secret
NESA 82-10279
July 1982
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Qadhafi's willingness to accommodate their interests. As long as Qadhafi is
around, however, constraints on company operations are likely to preclude
a major resurgence in exploration and development.
In the short run we expect the oil industry to provide Qadhafi with
sufficient funds to limit domestic discontent by maintaining adequate
supplies of consumer goods as well as to continue his support to foreign
governments and revolutionary groups. If oil sales do not rebound dramati-
cally by next year, however, the government may be forced to cut back so-
cial programs and consumer imports, thereby heightening domestic criti-
cism
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Libya:
Oil Policy Crossroads
A continued drain on the Libyan treasury will force
Qadhafi to make some hard decisions on spending
priorities over the next year or so. Until mid-1981
sustained high oil production combined with high oil
prices on the international market enabled Qadhafi to
pursue both domestic and international objectives.
Domestically, he narrowed the gap between rich and
poor and raised the standard of living for the masses.
On the international scene he worked toward Arab
unity, exported his revolutionary philosophy to both
Arab and non-Arab developing countries, and pro-
vided arms and training to diverse revolutionary
groups. Limited successes on both domestic and inter-
national fronts, however, are threatened by a soft oil
market and reduced oil prices. Lower revenues
brought about by these developments are already
hurting Qadhafi's domestic and international pro-
grams. Economic development projects have been
stopped or delayed, and Libya's ability to provide
financial support to other countries has been limited.
Qadhafi has a range of policy options. He can main-
tain the highest possible oil prices, continue to restrict
the profitability of the foreign oil companies that
produce two-thirds of the country's oil, and continue
to pursue a hardline "Libyanization" program. On the
other hand he can soften his oil pricing position and
make it more profitable for Western companies to
invest time and resources in the oil industry. The
hardline approach would almost certainly lead to low
oil production and slashed revenues for domestic
programs and international adventurism, a lower level
of oil production capacity, and a reduced maintenance
and exploration program. A more accommodating
approach would probably induce the Western com-
panies to increase their near-term liftings and improve
the long-term prognosis for investment in the indus-
try. A resurgence in the industry would provide
Qadhafi with the funds to pursue both his domestic
and international ambitions.
Libya's Oil Policies: The Road to Ruin
Qadhafi no longer can exert a major impact on the
international energy market as he did in the seller's
market of the 1970s. (See annex for a discussion of
Libya's role in the oil industry.) Libya now accounts
for only about 3 percent of oil output in the non-
Communist world (down from 9 percent in 1970), and
other suppliers could readily take up the slack if it
reduced its exports. Although it is one of the most
unrelenting price hawks in OPEC, Tripoli accepts
OPEC pricing decisions and focuses on maximizing
revenues within the OPEC pricing framework.'
Libya has itself to blame for its present bind. To take
advantage of potential worldwide shortages, it priced
its oil at the maximum set by OPEC following the
curtailment of exports from Iran and Iraq after their
border war erupted in September 1980. A combina-
tion of high stocks, increased output by Saudi Arabia,
conservation in the industralized countries, and a
worldwide recession dampened the oil market allow-
ing an orderly adjustment to the loss of supplies from
Iran and Iraq. Libya's refusal to reduce its prices led
to a decline in production from more than 1.6 million
barrels per day (b/d) in early 1981 to 600,000 b/d by
mid-1981. Despite minor price reductions and mar-
keting incentives such as substantial discounts for
barter and processing deals, a modest recovery in
output in late 1981 reversed itself in the first quarter
of this year
A combination of erratic policies and poor profit
margins during the soft market has affected company
operations. From the beginning the Qadhafi regime
labeled the foreign oil companies as enemies of the
state and threatened nationalization. The lack of
' Libya has a greater degree of pricing flexibility than most other
producers because its oil is of higher quality and is closer to major
markets. There is a certain amount of latitude in OPEC for price
adjustments to accommodate these factors as long as the oil is not
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Figure 1
Libyan Oilfields and Pipelines
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reasonable assurances that they would get an ade-
quate return on major new investments has dampened
some foreign operators' enthusiasm for maintaining
facilities and searching for new deposits. Government-
imposed oil production quotas left the companies with
more capacity than they were allowed to use. Large
tax payments and the high price of Libyan oil limited
the companies' profits.
Even though Libya permits greater foreign ownership
in the industry than most other OPEC producers, the
unstable political environment and production restric-
tions have kept the companies cautious in their oper-
ations. As a result of a lack of investment in upgraded
facilities and in exploration and development of new
fields, total capacity has fallen to about 2 million b/d
from a peak of 3.5 million b/d in 1970. Further
declines in capacity are likely if Libya fails to encour-
age investment in secondary and tertiary recovery
techniques at the older, more mature fields or to
develop new fields.
To offset these declines Libya has pressed the opera-
tors-with veiled threats and some incentives such as
production-sharing arrangements-to pursue active
exploration and development programs and to main-
tain and upgrade facilities. Encouraged by such in-
centives, companies that have a greater need for
access to Libyan crude have made large investments
in maintaining facilities and in exploration.
Oil deposits discovered in western Libya by the
foreign oil companies in the 1950s and 1960s are
being developed by the Libyan National Oil Company
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Exxon's Departure. Companies that have more profit-
able operations elsewhere and have adequate access to
crude oil from other sources are not so willing to be
pressed by the Libyans. Exxon's decision last Novem-
ber to cease operations illustrates one oil company's
frustration in battling Libya's oil management noli-
The company found it unprofitable to continue oper-
ations, and in its view conditions were not likely to
improve. Its LNG plant needed extensive repairs to
return to design capacity, and promising exploration
sites were in expensive offshore areas. F_
Despite policies that discourage Exxon and other
foreign companies, Qadhafi recognizes Libya's need
for the continued presence of the companies to retain
the skills of company personnel, their ready access to
technology, and the services of their parent firms.
Mobil also has been negotiating to pull out of Libya.
In early June it announced it will withdraw on 13 July
even if no agreement is reached on comnensati
will continue negotiations
believe that Libya's financial difficulties an its dete-
riorating political relationship with the United States
have made it less accommodating with other compan-
ies attempting; to leave.
are foreigners.)
The Foreign Workers. Reliance on expatriate workers
in both technical and semiskilled positions is a major
constraint in the formulation of Libya's oil manage-
ment policies. Over half of the approximately 13,000
technical supervisors and workers in the Libyan oil
industry are expatriates, and even an accelerated
training program for Libyans is unlikely to reduce
that figure much over the next few years. (Of the total
Libyan work force of 900,000 to 1 million, about half
The longer term objective of "Libyanization" of all
technical positions is still a long way off. The original
contracts between the government and the oil com-
panies stipulated that after 10 years of operation
concession holders should employ Libyans in 75 per-
cent of the jobs if adequate skills were available. Each
company was required to set aside specific funds for
training once commercial exports commenced.
Throughout the 1960s, however, few Libyans were
effectively employed in management or technical
positions even though training programs were under-
taken. "Libyanization" of senior posts and more
intensive training of Libyans were accelerated after
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the revolution of 1969. Libyans now occupy almost all
of the administrative positions and also have a large
number on the boards of directors of the oil compa-
nies.
The US oil firms provide the largest number of
foreign personnel; most of the technical supervisors
and workers are from Western Europe and Canada.
In most cases Libyan personnel back up the staff.
Even the LNOC, one of the largest operations in the
country with operating oilfields with a capacity of
roughly 500,000 b/d, must rely on foreign personnel
for actual operations and exploration and develop-
ment work. To remedy this shortcoming, the state oil
company is being restructured and strengthened by
increasing the number of skilled personnel. Most of
the recruited personnel will still be expatriates.
The Prosperous Years: Easy Come, Easy Go
The oil industry catapulted Libya into a rapidly
developing country with financial reserves of about
$13 billion at the end of 1980. Earnings from oil
.exports soared to nearly $23 billion in 1980. Revenues
from oil production provide virtually all of Libya's
export earnings, two-thirds of gross domestic product,
and most government income.
Personal Prosperity. Oil earnings have enabled the
government to provide most Libyans with an impres-
sive standard of living. In less than a decade the
people have progressed from almost universal illiter-
acy and poverty to widespread prosperity
the people have come to
expect relatively high salaries and wages; imported
luxury goods; social services that are both free and
extensive, including secondary and university educa-
tion at home or abroad; care of the old; and compre-
hensive medical services. Libya has developed a
spending appetite that dwarfs the early 1970s. A
continued flow of revenues from the oil industry is
necessary for Qadhafi's government to pursue its
Libya: Oil Revenues and
Financial Reserves
1970 2.9 1.5
1971 3.2 2.6
1972 2.7 2.8
1973 3.5 2.0
1974 6.9 3.5
a End of year, excludes gold and other assets equivalent to about $3
billion in 1981.
political and economic ambitions. Adequate funds
also are important to prevent unmet expectations
among the population from evolving into widespread
dissatisfaction with Qadhafi's policies.
The Development Plans. Economic development,
which has been pushed to create a base for a postoil
economy, has been the kingpin of Libya's five-year
development plans. The 1976-80 plan was aimed at 25X1
building an industrial base to provide Libya with an
alternative income and facilitate income substitution;
creating transportation and communication links that
had long been neglected; and reducing Libya's
dependence on food imports. The 1981-85 develop-
ment plan, budgeted at about $60 billion, is double 25X1
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Many of the projects are large-scale prestige items,
including an iron and steel works at Misratah, a
petrochemical complex at Ras Lanuf, and an alumi-
num smelter at Zawiyah. Such projects require im-
ported equipment and manpower and, except for
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Libya: Development Plans
19
17
21
21
Economic infrastructure
42 a
52
Electricity
10
13
Housing
11
15
Municipal projects
7
6
Transportation and commu-
nication
13
18
petrochemicals, imported raw materials as well. Much
of the $10 billion allocated to agriculture will fund
large-scale land reclamation projects requiring irriga-
tion and mechanized farming equipment. Although
Libyan planners acknowledge that it costs less to
import food than to expand domestic output-the cost
of producing grain is conservatively estimated by
agriculturalists at five to six times the world price-
they have been willing to pay this cost to reduce
Libya's dependence on imported food.
The Finances of Foreign Policy
Qadhafi has allocated funds to support "national
.liberation movements" in an estimated 45 countries,
backing groups ranging from the Palestine Liberation
Organization to the Irish Republican Army, from
Muslim rebels in Ethiopia to black Muslims in Chica-
go. His army occupied Chad and threatens the Sudan
and other countries in northern and central Africa.
Qadhafi has also attempted to buy directly the sup-
port of other Arab and non-Arab LDCs with financial
aid and military support. He has wooed such African
states as Benin and Ghana but has alienated others by
meddling in their internal affairs. His offer to act as
host to and to finance the annual Organization for
African Unity meeting is an attempt to buy himself
the chairmanship of the organization and to enhance
his credibility as an international statesman and pan-
Arab leader. Recent meetings have cost from $15
million to more than $100 million depending on the
adequacy of local facilities.
(since the beginning of
1979, Libya has provided grants totaling about $900
million for arms deliveries and economic assistance to
governments and dissident groups in the Third World.
Although this figure in itself amounts to only about 2
percent of oil revenues over this period, the total cost
of Qadhafi's activist foreign policy is much higher. It
includes additional costs hidden in the defense budget
such as payments to terrorist groups, terrorist train-
ing, and arms stockpiling for eventual disbursement
abroad.
Libya has used a large portion of its oil wealth on
arms purchases. Following the Middle East war in
1973, Libya went on an arms buying spree to build up
domestic defenses, to prepare for foreign operations,
and to stockpile weapons for delivery to other nations.
Libyan
arms purchase agreements reached a record in 1980
of about $10 billion, boosting the value of orders
placed since 1.973 to almost $21 billion. The agree-
ment with the Soviet Union alone is valued at an
estimated $8 billion. Libya now heads Moscow's list
of arms clients and ranks second behind Saudi Arabia
among active arms buyers in the Third World.
The rapid accumulation of a major modern arsenal
has been accompanied by an increase in spending on
military services and support. Almost all military
training and maintenance functions are performed by
well-paid foreign nationals-mostly Soviet and East
European. Annual outlays for foreign technical sup-
port climbed to an estimated $750 million in 1980 and
were expected to approach $1 billion by 1983.
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The Current Situation: Libya Bites the Bullet
Economic Realities. Reduced oil production in 1981
cut revenues to about $15 billion and prompted a
cutback in imports and in the 1980-85 development
plan. Despite attempts at austerity, Libya had to draw
down its financial reserves by roughly $4 billion to an
estimated $9 billion in the last six months of 1981.
Those reserves were equivalent to about seven months
of imports at the 1981 rate. This dramatic reduction
of reserves has prompted the government to establish
a financial oversight committee to review government
expenditures.
ministries will no longer be permitted to disburse new
funds without obtaining the committee's approval.
Large financial resources built up over the past two
years nevertheless continue to erode rapidly, possibly
at a rate as high as $1 billion per month. This year's
projected shortfalls of a minimum $6-7 billion, howev-
er, can be met by drawing down foreign reserves,
borrowing, or cutting imports.
Government attempts to save on hard currency
expenditures already are evident. Late last year it
published a list of goods that may not be imported.
While the list deals primarily with luxury goods, as
the financial situation worsens the number of prohib-
ited items could be expanded. Libya also has delayed
payments to foreign construction firms for projects
that are under way and continues to press trading
partners to accept payment in oil. One of the largest
projects to be shelved indefinitely is the partly con-
Libya has begun to expel foreign workers as a
stoppages in the construction sector.
Political Implications. If Libya's financial situation
does not improve significantly by the end of the year,
the government will have to examine its spending
priorities. A continuation of revenue shortfalls into
1983 almost certainly would require Qadhafi to make
some tough decisions on allocation of limited funds
among welfare programs, imports of consumer goods
and military hardware, development projects, and
financial aid to other countries and revolutionary
groups. Those decisions would directly affect both
domestic political stability and foreign policy options.
We believe deep cuts in social programs or consumer
imports could erode Qadhafi's vital support among
the lower classes. Most Libyans are accustomed to
periodic shortages of consumer goods, but recent
restrictions designed to reduce the import bill have
significantly worsened the situation and,
Although criticism prompted by the recent economic
austerity measures, in our view, does not threaten the
regime, consumer shortages-together with compul-
sory military service, heavy casualties in Chad, and
Qadhafi's militant brand of Islam that offends tradi-
tional Muslim mores-have further eroded Qadhafi's
domestic support, particularly among the lower
cations and oil policies.
Oil Policy Options
The loss in revenues brought about by the weak
international oil market has posed a dilemma for
Qadhafi as to how best to maximize oil revenues while
limiting the role of the foreign oil companies. On the
one hand, he can adopt a hardline policy pointing to a
complete nationalization of the oil industry. On the
other, he can espouse a policy of accommodation
toward the companies that will encourage stepped up
investment and commitment by them. For the sake of
simplicity, we describe only the two extremes of the
options open to Qadhafi.
Hardline. Under a hardline option Qadhafi would
push for the highest possible oil prices and increase
constraints on the operation of foreign oil companies
in the country. Hardline proponents, who have often
put revolutionary politics above efficient operation of
the industry, are dedicated to a complete "Libyaniza-
tion" of the oil industry and to eventual nationaliza-
tion-even though they admit that Libya is not ready
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to manage a totally nationalized industry. The hard-
liners had been led by recently replaced Oil Minister
Zaear and received much of their support from labor.
Under a hardline option, near-term technical prob-
lems that Libya might have in producing oil and
maintaining facilities would probably be overshad-
owed or masked by difficulties in selling the oil in a
buyer's market. In the long term a hardline policy
would result in degradation of oil production capacity
and reduced efficiency.
The resulting further deterioration of the industry
would create more financial shortfalls and eventually
require a further budget retrenchment. The five-year
development plan would be a likely area for cuts. The
1982 budget calls for about $6 billion for projects to
be awarded and started this year, only part of which
requires foreign exchange. Most of the industrializa-
tion schemes, both under way and on the books, are
largely irrelevant to the average Libyan. Since much
of the work is performed by imported labor, the
impact on domestic employment would be minimal. A
cutback, however, could be painful for Qadhafi be-
cause it would hinder the implementation of his
domestic economic ambitions and damage his credi-
bility.
Another likely candidate for a major cut would be
purchases of sophisticated military equipment. Most
of the $8 billion in equipment scheduled for purchase
under the 1980 agreement with the Soviets and $650
million worth of equipment under 1981 agreements
with the East Europeans has not been delivered.
Much of this is high cost advanced weaponry beyond
the needs of local commanders; a cutback or delay in
deliveries would not have a significant impact on the
military establishment.
Softline. Implementation of a softline, accommodat-
ing policy toward the oil companies, as urged by many
senior government officials, would restore the confi-
dence of international investors
If Qadhafi adopts a policy of reconciliation, the
prognosis for future growth in the oil industry is good.
Those Western oil companies currently operating in
Libya have already withstood years of government
constraints on their operations but, with the exception
of Mobil, have indicated a willingness to stay-even
with only minor government concessions. Sufficient
oil reserves exist in Libya to encourage foreign oil
companies to search for oil if the government adopts a
more accommodating line. Libya can maintain crude
oil production near the 2 million b/d level beyond the
year 2000 if it employs a rational development plan
and sound reservoir management practices. Although
proved oil reserves have declined during most of the
last decade, substantial offshore discoveries in the
past few years have temporarily reversed this trend.
Future additions to proved reserves are possible
through major investment in enhanced recovery and
from remaining unexplored areas. Given the difficulty
and expense of offshore oil recovery and the high
technology required for enhanced recovery, however,
the government will have to improve the investment
climate significantly before the necessary commit-
ments will be made.
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Although reconciliation with the foreign oil compan-
ies would not alleviate the current soft market, it
would help assure Libya at least the minimum allo-
cated to them under OPEC prorating schemes. In a
friendlier operating environment that includes ade-
quate pricing or other financial incentives, the foreign
oil companies would find it in their best interest to
find a market for Libyan oil. In any case, the current
financial shortfalls would be only temporary if the
government pursued a more accommodating approach
to the oil industry
A turnaround in the financial picture would give
Qadhafi more flexibility to promote his domestic and
international goals. He would have adequate funds to
finance consumer imports and welfare programs and
still pursue his economic development programs, mili-
tary purchases, and foreign ambitions.
Outlook
Libya is most likely to follow a policy somewhat closer
to accommodation than confrontation with the oil
companies. We believe a continued weak oil market,
concern over US actions, potentially greater isolation
in the Arab world, and decreasing latitude to pursue
his international ambitions will push him to moderate
his policies toward the oil industry. He probably has
already reached the outer limit in his relations with
the oil companies and is now willing to compromise to
protect his source of income.
Qadhafi's appointment of Kamal Maqhur in March
as Oil Minister to replace hardliner Abd al-Salam
Zagar could signal a decision to moderate relations
with the companies.
The $1.35
per barrel cut in official oil prices on 1 April and the
$2 discount on the company's equity crude appears to
be an additional move toward accommodation.
Libya will encourage the foreign oil companies cur-
rently operating in the country to remain in some
capacity for the near future even though they will not
be permitted greater ownership in the industry. Other
foreign oil companies, both Western and Communist,
will be welcome to explore for oil under a service
contract or a form of production sharing. As long as
Qadhafi is around, however, Libya's policy is likely to
permit oil company profits only large enough for the
companies to continue a low to moderate level of
operations, not large enough to stimulate a major
resurgence in exploration and development.
We expect that Qadhafi will be able to limit domestic
discontent by concentrating spending cuts in the
industrial development and military procurement
spheres that would have little impact on the average
Libyan. If the soft oil market continues beyond a year
or two, however, the government may be forced to
take bigger cuts in the social program and consumer
import budgets, which would heighten domestic criti-
cism of Qadhafi's oil policies.
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Libya's Oil Policies:
A Historical Perspective
The Petroleum Law of 1955, amended in 1961 and
1965, set Libya's relations with the oil companies.
The original legislation was designed to attract for-
eign capital for exploration and production as rapidly
as possible. Instead of conducting a single agreement
with one concessionaire, as had been done in many of
the other oil-producing countries, the Libyan legisla-
tion invited bids on a number of specified but sizable
areas at the same time. To speed up exploration, the
law provided that the bulk of a company's concessions
would revert to the state incrementally in 10 years
The legislation also provided incentives not encoun-
tered in other major producing countries, including
permission to discount prices for tax determination.
The discount feature was especially advantageous for
small independent companies because it allowed those
with no overseas refining and marketing capabilities
to penetrate the European market by cutting prices.
An exceptional combination of circumstances spurred
a rapid development of the Libyan petroleum sector
after Esso discovered commercial quantities of oil in
1959-despite a worldwide surplus of oil and falling
real oil prices. Libyan oil was low in sulphur; had a
significant transportation advantage over the Persian
Gulf countries in the growing European market; was a
more secure supply because pipelines and tankers did
not have to traverse foreign territory; and the dis-
counting provision allowed the smaller companies to
profitably undercut the prices of the majors. The
companies were so successful in rapidly developing
and marketing Libyan oil that production soared from
less than 20,000 b/d in 1961 to more than 3.3 million
b/d in 1970, 9 percent of non-Communist oil produc-
tion.
The revolutionary government under Qadhafi inherit-
ed this flourishing oil industry intact in 1969, and in
less than five months it moved against the oil compa-
nies with a combination of shrewdness, nerve, and
seeming recklessness that revolutionized the world oil
industry and brought Libya a dramatic increase in oil
revenues. Although the new government promised no
spectacular changes in oil policy, it quickly became
evident that Qadhafi would seek greater benefits and
more control from the foreign oil companies in line
with his general nationalist and socialist philosophies.
A remark to the heads of foreign oil companies
indicated the high-risk attitude and philosophy he
would follow: "The Libyan people, who have lived for
5,000 years without petroleum, are able to live again
without it."
Unsuccessful in its initial attempt to negotiate a
satisfactory price increase in May 1970, the govern-
ment began to systematically reduce oil production
under the guise of conservation. Occidental was the
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first company to receive such orders because it lacked
oil resources outside Libya, but Libya soon cut the
output of other foreign producers. These cutbacks led
to scarcities and to fears for future supplies among
consumer countries which in turn stimulated stock-
building. World oil demand at this time was near
productive oil capacity. The consequent rise in prices
of both oil and freight fostered conditions in which the
oil companies could not resist Libyan demands for
increases with any degree of plausibility. After pro-
longed discussion, Occidental conceded an increase in
posted prices that set the pattern for the other com-
panies
The capitulation by Occidental marked the beginning
of the shift in control of oil production and pricing in
international oil markets from the head offices of the
major oil companies in London, New York, Houston,
and San Francisco to the host governments. Although
OPEC supported Qadhafi's implementation of the
conservation regulation and viewed with satisfaction
the cutbacks, which stimulated sharp increases in
petroleum prices, most of the members stood aloof
while the negotiations were in progress. After the
Libyan victory, the breached oil company defenses
became vulnerable everywhere, and OPEC countries
individually and collectively took the offensive on oil
pricing. Between June and December 1973, OPEC
took the power of price-setting altogether from the oil
companies.
Libya's price maximizing policies, however, eroded its
traditional cost advantage. From the spring of 1971 to
the end of 1974-with the exception of the confused
period during late 1973 and early 1974-oil exports
shifted from Libya to the Persian Gulf. Libyan ex-
ports dropped to 800,000 b/d in December 1974. In
early 1975 Libya lowered its prices significantly to
regain competitiveness. The Libyan price cuts stimu-
lated oil production, and for the third quarter exports
reached 1.9 million b/d. Libya kept its prices com-
petitive with the rest of OPEC and maintained pro-
duction until mid-1981 when Qadhafi failed to make
accommodations in response to the soft oil market.
Backed by major successes in gaining control of
pricing and output, Libya moved to the forefront of
OPEC in addressing the question of the government
role in the capital structure and decisionmaking pro-
cess of the companies. In December 1971 the govern-
ment nationalized the British Petroleum share of the
Sarir field. In late 1972, 50-percent participation was
agreed to with an Italian company, and in early 1973
talks began with the Oasis group and Occidental
Petroleum. By August both of these companies had
agreed to 51-percent participation by the Libyan
Government. On 1 September 1973 Libya unilaterally
announced that, with the exception of a few small
operators, it was taking over 51 percent of each of the
remaining oil companies.
The unfavorable working environment for the com-
panies prompted a dramatic decline in exploration
and development investment. The number of drilling
rigs in the country fell from 55 at the end of 1969 to
eight by 1974.. The regime since has pursued erratic
policies that have inhibited foreign operators from
implementing a systematic development program.
Even now, with oil capacity declining as the older
fields are depleted, Libya has only 35 operating
drilling rigs
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Secret
Oil Gas Dry Others Total
Wells Wells Holes
106
146
121
210
407
360
245
191
199
277
245
75
1964 231
1965 205
1966 147
1967 117
1968 116
1969 187
1970 171
1971 31
170
153
91
69
82
86
71
38
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Secret
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