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Time to lift the transparency lid on Qadhafi’s oil contracts

As Libya enters a new era, the National Transitional Council must embrace transparency

LIBYA'S interim oil minister, Ali Tarhouni, should do it now. He should simply press that button and push every last page of every contract the Qadhafi regime ever made with local and international companies out onto the web. And all the accompanying data, too – the posted crude prices, the cost recovery certification, the service contracts, the company registration documents. Publish and be damned. Because when you look at the big picture, the National Transitional Council (NTC) - and Libya itself - has far more to gain than lose from resetting the rules of the game.

Such total transparency might actually be the most useful tool the new minister has as he confronts a complex situation that grows more complicated by the day. The Libyan oil sector, which produced 1.6 million barrels of oil a day (b/d) just six months ago, has all but collapsed, and experts disagree about how long it will take to get oil flowing again. There are rumours of dark deals done with oil majors in return for finance and humanitarian support during the conflict. And then there's the suspicion, never far from the surface, that the first western intervention in the Arab spring was really about lots of lovely, light Libyan crude.

Various arguments are made as to why such a step might have a downside for the Libyans. What if publishing represented a breach of confidentiality agreements? What if it revealed preferential terms for one company, giving the others ideas and leading to a weakening of the new government's position? What about the impact it could have on the NTC's relations with oil companies? What if premature publication prejudiced potential court cases against wrong-doers? And why bother anyway? What would it change?

First things first

Let’s look at the last objection first. The NTC said it will honour existing contracts agreed by the Qadhafi regime. That's probably sensible for the moment, although at some stage a contract review will be in order. But it would also be unwise to commit to the idea that, no matter what such an investigation found, the new government would consider itself bound to the keep all contracts under all conditions.

So publishing all contracts and associated data would not primarily target any change in existing contractual arrangements. But it would help to clear the air, establish an open environment, allow the tracking of corrupt activity, give the NTC legitimacy 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 exploration and production sharing agreement (EPSA) framework contracts agreed with oil companies, service contracts, posted prices, operational data and company information would be ... nothing. Life would go on. Breaking the secrecy surrounding these deals is, in the short-term, unlikely to have any dramatic impact, defying predictions of disaster pushed by those with interests to defend.

Longer term, though, there would certainly be an affect. Libyan officials, oil companies themselves and a small army of researchers from a variety of institutions would pore over a treasure trove of unparalleled depth and breadth.

Open-sourcing the data would attract a huge amount of attention and scrutiny from so many people, a move which would work more in the interests of Libyans than against them. Corrupt deals would stand out and the companies that made them could 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 nexus of relations between state-run firms, operators, service companies, secondary and tertiary contractors, transfer pricing, gold plating and all kinds of sweetheart deals, and create the conditions in which malpractice will be uncovered.

Breach of confidentiality

The most common argument against publishing contracts is breach of confidentiality. But Libya's EPSAs (rounds III and IV) explicitly bind only the oil company partner, not the Libyan party, to confidentiality. Secondary contracts between Libyan state-run firms and operating and service companies may have mutual clauses, but here it is worth noting that industry norms (defined in model confidentiality contracts by the Association of International Petroleum Negotiators, for example), have moved recently towards narrowing the potential scope for damages as a result of breaches of confidentiality.

In short, it is highly unlikely that the international oil companies would have any case at all to take to the International Chamber of Commerce in Paris, where the EPSAs stipulate arbitration.

And even if, in theory, they did, they probably wouldn't wish to pursue it. The narrow gains from such a process would be heavily outweighed by the damage to a company’s public image – the guys who have something to cover up – and the fact that the Libyan government, sitting on at least 40 billion barrels of light, sweet, low-cost oil, has no shortage of suitors lining up.

Like Iraq, Libya is simultaneously a major player and massively under-explored, and can expect to as much as double its proven reserves once post-war exploration gets under way. It has a number of distinct geopolitical advantages on Iraq. Libya lies on the southern shore of the Mediterranean Sea, which means those pesky choke points - the Strait of Hormuz, the Suez canal, piracy central at the mouth of the Red Sea – do not enter into the risk calculation. And Libya has only just started to exploit its gas, although the Greenstream pipeline running to Sicily has been operating for the past seven years – to a Europe desperate to diversify its supply away from Russia.

As for the NTC’s negotiating position, it is more likely to be strengthened than weakened through transparency. Despite what the corporate spin tells us, transparency of contracts does not always and necessarily conflict with commercial interest.

Full transparency would be the new Libyan government's guarantee against back-room manipulation by just about anyone. Tarhouni should press that button before anyone has time to change his mind.

Johnny West is founder of OpenOil, a consultancy that advises the UN on the public-policy implications of the oil industry in the Middle East, and seeks market solutions to resource-curse issues. He has published on energy for Reuters, the EITI, Transparency International, Iraq Oil Report and the Center for Global Development. His book Karama! Travels Through the Arab Spring, just published in the UK by Quercus, includes a chapter from Benghazi on Libya's oil industry in the hands of the rebels.

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