(ESTIMATED PUB DATE) THE LIBYAN OIL INDUSTRY: DEPENDENCE ON FOREIGN COMPANIES (

Created: 1/1/1986

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The Libyan Oil Industry: Dependence on Foreign Companies

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is heavily dependent on foreign oil companies for operating and maintaining its oilmainstay of (he Libyan economy.iteady earnings, however, hashallenge to Tripoli,in light of the toft oil market.esult, Libyan oil revenue* plungedillion0illiono protect its ability torevenues front oil, Tripoli is trying to:

Maintain the oil industry's productive capacity by reversing theof existing onshore oilfields and facilities caused by shortcomings in maintenance and management.

Develop new oilfield productive capacity principally through investments in offshore projects. Leading these activities is Tripoli's major investment in the offshoreilometers northwest of Tripoli in the Mediterranean Sea.

Induce foreign firms to explore for ocw oilfields, especially in western Libya, by requiring producing companies to invest money in exploration to ensure access to equity oil shares.

Make investments in new downstreamrefining, petrochemicals, and marketing. |

To make progress on these goals, Tripoli has had to depend on foreign oil companies and personnel, and wc foresee that it will have to continue to do so for tbe efficient long-term operation of its system. Foreign operating partners are involved in aboutercent of current Libyan production. In particular, foreign companies and workers provide:

Technical and management expertise in an industry thai is short of qualified personnel.

Equipment to repair and upgrade the oilfields and facilities; Libya has no oil equipment manufacturing capability.

Capital to helparge portion of Tripoli's oil development programs, including exploration. Libya has significantly drawn down its financial reservesa conditions in the oil market have softened |

The heavy dependence of tbe Libyan oil industry on foreign companies makes ii vulnerable, at least in principle, to economic sanctions. Although limited unilateral controls2 on trade of US-origin goods and technology have had some impact in limiting access to certain state-of-tbe-art computer equipment, the widespread availability of petroleumhas greatly softened the impact of US controls on Libya's petroleum industry. |

Weai tbe new. wider ranging unilateral economic sanctions by tbe United States could have greater consequences for tbe Libyan petroleum industry during the nest Tew months if US production and service companies pull out or are forced out of Libya abruptly:

could drop rnodestly in the shorthased withdrawal wouldmaller impact.

Oil exports could fall temporarily by up toercent or so from thelevelillion barrels per dayS firms currentlyercent of Libyanalternate export channels would have to be found, probably through priceIf discounts end up exceeding price concessions previously given the US firms, Tripoli will suffer some erosion in oil revenues.

will face delays replacing equipment and services previously procured from the United States.!

Over tbe longer term, the impact of US sanctions will tend to fade as time passes unless our allies follow suit. Several factors, however, workignificant widening of the international scope of the sanctions. Many countries hold large Libyan debts that can bc repaid only through oil exports. Some countries, especially in the Mediterranean area, also probably fear Libyan reprisals for any actions in support of the US sanctions. In response to the sanctions. Tripoli could offer tbe US oil concessions to companies in countries such as Austria. West Germany. Italy, France. Finland, Brazil, or even Romania. Alternatively. Libya may nationalize the companies and operate them with foreign technicalas happened after Exxon's withdrawal from Libyaeyond the marketing disruption, any short-term production problems in oilfields currently involving US oil firms could be handled by other foreign techniciansmall, but competent cadre of trained Libyan managers once tbe necessary arrangements weretrong poinl in Libya's favor is that most US companies provide services to Libya through their West European subsidiaries, often using European personnel. The number of US oilfield workers in Libya probably is no morendcould bc recruitedumber of countries. Most oilfield equipment and services are already obtained from non-US sources and most denied US trade can bc replaced. |

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In reacting to the US sanctions, Qadhafi is unlikely to detain US citizens or take them hostage. Following the initial imposition of sanctionsor example. Qadhafi even helped expedite the departure of US citizensropaganda ploy. Qadhafi probably believes any move against US personnel would be used toS military strike against Libya. The Libyan leader may even offer lucrative incentives to retain the services of select, highly skilled workers. Qadhafi probably will use economicto marshal support for even greater domestic austerity and toblame Washington for any further deterioration in economic conditions. |

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The Libyan Oil Industry: Dependence on Foreign Companies I

Oil and Ihe Libyan Economy

Oil i> the maioilay of the Libyan economy and the principal source of Qadhafi's international influence. Oil revenues totaling about SI SO billion earned since tbe revolution9 have fueled his ambitious development plans and foreign adventures. Petroleum exports account for virtually all of Libya's foreign exchange earnings, about half of GDP. andercent of government revenues. Because of soft oil market conditions, however, real GDP per capita has declined0 by aboutercent and overall economic activity bas fallen below8 level. Oil revenues plungedeakillion0 toillionS (figure IX forcing Qadhafi to cut back on his nonpciroleum development plans and to expel several hundred thousand foreign workers. Thehowever, has made sure that most basic consumer goods areat reduced quality and with greater inconvenience, according to reliable reporting.suj

lunist countries, principally ihe in Darter for Soviet arms, import anotherercent of Libyan odl.H

Libya's major oil customers are the West European-OECD countries, which purchase roughlyercent of total Libyan oil exportshe degree of dependence of individual West European countries on Libyan oil varies widely, but no one country Is strategically dependent on Libyan oil, given the ready availability of oil from other sources.

of tbe Oil Indus try

Libyan system was developed primarily by US companies during, and production grew0ince reaching iu peak in the. Libyan production has steadily fallen to iu present level ofilUoo

b/d, largely paralleling the dramatic cut in overall OPEC oil productionesult of softening oil market conditions. During the same period,capacity has fallen from more

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toecause of inadequate oilfield maintenance andmore conservative approach to managing'T-ioyVs national petroleum resources. Nonetheless. Libya's excess capacity represents aboutercent of that outside the Persian Gulf. Moreover. Libya's crude is premium quality therefore easilyvine, high gravity and low sulfur con-tent

Foreign operating companies, such as Occidental.. and the OASIS partners, form tbe backbone of tbe Libyan crude oil industry. In total, fields involving foreign participation account for aboutercent of current Libyan production. These companies not onty provide infusions of badly needed capital but also bring to Libya essential technical skills and manageri-experience |

Crude Production Systems

Libya's crude oil production comes from fiveseparate export systemsombinedcapacity of at least two timesroduction levelheand the dispersion of the oil system across Libya with links to five separate terminals along tbe coast increase flexibility and reduce the vulnerability of Libyan exports to disruption '

OASIS. The OASIS system is the most important, accounting for more than one-third of Libya's total production, ortablehe system is owned and operated by the OASIS Oilartnership of three US oilMarathon, and Ameradathe Libyan National Oil Companyhich has controlling intcresl. This system probably has the best maintained fields in Libya,

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supplies cruoc to tne as aiar export facility. OASIS reportedly employseople, ofarge proportion reportedly arcumber of Western countries.

Occidental. The Occidentaljoint US-Italian (AGIP)-opcrated system, which producescurrently the second-largest producer.f Austria recently boughtercent ofibyan holdings. Occidental administers its Libyan operations from the United Kingdom. LNOC has controlling interest in both Occidental's Libyan holdings and AGIP's Libyan operating companies. This production system ismaintained

UCurrent produc-uonfrom Occidental andields is. respectively, with maximum production capacity estimated at. The system provides crude to the Az Zuwayunah export terminal.

AGECO. The two government-controlledGuir Exploration Company (AGECO) and Ummand operate the third-largest system in Libya. Current production isrom its western and eastern fields, respectively. This system wasdevelopedartnership of Britishand Nelson Bunker Hunt in theollowing the discovery of the giant Sarir field in cast-central Libya. AGECO is used as LNOC's swing producer because of its significantcapacity-l-

system supplies the newl Unuf export facilityrude mix from its Sarir and Messla fields, in addition to exporting Sarir crude from iu Marsa al Hariqah terminal near Tobruk in eastern Libya. AGECO also operates LNOC fields and pipelines in western Libya where ilmall volumebe Az Zawiyah refinery near Tripoli.

Sine. The Sirte system was buill by Exxon but has been operated by the government-controlled Sirte Oil Company since Exxon pulled out of Libya inSa small equity position in the Sine system. I

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Crude Oilroducing Companies and Paruaer* Noted)

Expert Terminal or Refinery

_|maintennncc programs have beet neglected or delayed for yean, and lhehave bad tome difficulties running the system since Exxon lefl Libya. Sirte is nowajot effort to modem ire iu facilities and increase

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system supplies _

Burayqah export facility and natural gas to Libya's LNG facility at Marts al Burayqah.

VESA. This it (he smallest producing system in Libya withroduction, lt was built and operated by Mobil until the company suspended iu Libyan production in ii

i system are reportedly in poor condition, although one source bas reported that problems are being resolved in tbe pipeline network. Crude it supplied to the Sirtica export terminal at Ra's al Unuf. I

Other Oil Induscrj Program

Although crude oil ttill provides the bulk of Libya's earnings, tbe role of natural gas, refined products, and petrochemicals is becoming increasingly important-According to Foreign Minister 'ALi Turayki, Libyan longer term marketing strategy is to export refined products and petrochemicali, rather than just crude. and to utilize domestic natural gat resources.

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Natural gas is becoming increasingly important asevenue earneromestic fuel and feedstock. Libya's LNG export facility at Marsaated capacity ofillion cubic meters (bem) per year,available capacity is leasan because of serious maintenance problems Shutdown isat any time because of the poor condition of theibya, however, recently embarked upon aprogram, and the plant could be at full capacity by tbe end5 Libya's nonpetrolcuro development projecu, including iu steel plant and aluminum smelter, will utilize natural gas for energy as will tbe future expansion of Libya's rxtrochemical

Libya is also trying to diversify through expanded downstream activities. Libya has three domesticgovernmentAzarsa alndhich meet iu domesticof. The Az Zawiyah refiner and terminal complex handlesand limited eiporu of petroleum products. In addition,5 Libya started upxport refinery al Ra's al Unuf _fl

thanercent of

this outputTsexportedastuel oil to Europe. In an effort to further secure an outlet for iu crudeLibyan intereau have purchasedamoil refinery and the associated distribution system ofervice stations.

The Libyan petrochemical industry began1 with tbe startup of the first phase of tbe Marsa al Burayqah petrochemical complex consistingon/day fertilizeroo/dayplant,oo/day methanolajor petrochemical complex is also being developed at Ra's al Unufton/year ethylene plant nearing completion. Additional units at both these complexes arc planned but are on hold until Libya's financial situation improves.)

Libyan OH Policy

Given the predominant role of oil sales in the Libyan economy, tbe generation of revenues is the highest priority goal of the country's oil industry. Indeed,

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Qadhafl reportedly has tasked LNOC to maximize i the country'! income from crude and product tales by improving the efficiency of oil production and by sustaining the highest petroleum prices and export level* bearable by tbe market. Despite interest in the highest possible revenues, Tripoli has adheredcioseJy to its OPEC oil production quotao help assure oilliability while maintaining its historic OPEC market share. At the same time, Tripoli has tried toeputationeliable oil supplier and diversified its customer base to reduce the risk that Us sales will be curtailed

WufffMfar of Libyan Oil Policy

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Qadhafi per tonally sets the guidelines for the Libyan National Oil Company. Acting Secretary ofFavzl alShakshuki. isrimary policy assistant. Aside from Shakthuki's role, ihe Ministry af Petroleum does notajor role in policy formation. LNOC also reportedly has no direct participation tn the design of the country's oil policy and acts only to Implement oil industry guidelines.

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addition to the continuing primary goal ofits oil revenues, Tripoli hai established several general development objectivea that are guiding cur-

imgV^rsthese Kittlt i* te maintain Ljbyas productive capacity. Maximum oil productivehas fallen from moren theoodayjiideTerwraiion of iu oilfields caused by previousin maintenance and management by both LNOC and ihe Western oil operators. |

Irr.jior investments in secondary recovery' systems, wcll-workovars, and pipeline repairs will be required to achieve this objective. Maintaining oil productive capacity substantially above production gives Tripoli the option to increase production to maintain oil export revenues in an oil price decline or to maximize revenues caused by oil supply disruptions elsewhere.

To maintain overall productive capacity,ajor effort to develop newmajor investment in the offshore Boonleads these activities. We expect thisAOIPn new oil productive capacityLess costly development efforts call forof Ibe oil potential in Libya'soverall petroleum potential and has

IOC management is ier pressure to meet Us goals with the threat of political disfavor or even fall If they fail. Pressure reportedly has been increased over the past year because of acute economic conditions. Management, nevertheless, appears to beelatively free hand in implementing policy guidelines.%M

fhe quality of LNOC top

management Is fairly good and that the companyusinesslike, pragmatic approach toTop managers have either been trained abroad and are experienced in the oil industry or artdgeable bustneitmen with access to foreign trained advisers and personnel wiihin LNOC's structure. The chairman of IJIOC Is Abdallah al Badii. |

reassessment bas already resultede focused wcll-workover program in key Libyan fieldsumber of discoveries near established oilfields that should result in improved oilfield productive capacity. |

Foreign Company Linkages To Libyan Oil

Foreign companies link lo Ihe Libyan oil industry in many diverse and complex ways. Generally, there are four kinds of foreign companies lhal ihe Libyan oil industry is heavily dependent ok

Producing companif

More the most important. These twliiB partnership wilh LNOC lo operate aproducing system. LNOC Is Ihe majority party and controls decisions affecting each particular system, but the minority foreign partners provide the bulk of the management and technicalOperating companies are obligated toortion of the crude produced in their system by virtue of the equity share they own of theTheyriceequitytheir return on their investment in lhe producing system.

Service companies,

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iw relatedide array of Industry operations. In particular, service companies provide critical maintenance of downbole equipment, pumps, and oiher elements of Libya's extensive petroleum Infrastructure. They also provide seismic and other services Involved with exploration activities.

Construction and engineering companies^

nd expansion of the Industry. Recently, such projects have included lhe petrochemical complex at Ra's al Unuf and the development of the offshore Bourl field.

Exploration for new oilfields alsoole in Tripoli's oil program. Ness- onshore and offshore areas can be eiplored without incurring heavy investment

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western Libya and is encouraging foreign firms to explore in that region. Offshore prospects include an area north of Tripoli near tbe large Bouri field and an area west of Banga/i, wheref Italyecent discovery according to press releasea. f

New downstreamrefining,andlargely being deferred in the continuing soft oil market except for tbe recent purchase of Italy's Tarnoil operation. LNOC is abo trying to eipaod sales of products from iuefinery at Ra's al Unuf. Work is abo proceedingomestic natural gas network grid to make more gas available for useuel and possible feedstock for theplanned expansion of iuindustry. I

The objectives set by Qadhafi for the Libyan oil industry are ambitious, especially in light of the soft oil market. There ishortage of financial reserves to make all the necessary investments,.

les serious financial constraints, contm-loru to Libyanize the oil industry work force have hampered progress in numeroussome skilled foreign midlevel personnel have been lost, reducing the effectiveness of decUicnmaking and weakening implementation of some oil program initiatives. I

of equipment and spare parts that are essential for maintenance of production andsystems and for refinery operations. Wilh no indigenous manufacturing capabilities of this kind. Libya must look to ihese companies for all of its oilfield equipment needs.X

Foreign Company Imoliement in tbe Oil Industry

Despite Tripoli's efforts to Libyanize the oil sector, the industry is dominated by the presence of foreign companies and workersheir presence is dictated by three key Libyan oil industry needs:

The need for foteign capital to carry out Tripoliil development programs. The drawdown in Libyan foreign rex:vci tiiis necessitated more foreignor barter arrangements that minimize Libyan capital outflows.

Maintaining Production aid Rr-rnoe*

Tripoli is fully aware of its reliance ou foreign oil companies, service companies, and personnel for tbe efficient operation of its oil system and has tried to make working ia Libya attractive to foreignand personnel. The government has regularty adjusted equity margins for iu foreign oil equity partners to maintain their production and presence in Libya. Foreign equity participation and barter ar-range merits are generally viewed by the foreignas particularly profitable

ce^ngineering. und equipmentto participate actively in the Libyan oil pro-gram despite political strains in recent

Besides oilfield expertise and capital investment,companies provide an assured crude oil salesoreign companies in Libyalift about one third of Libya's production, the exact amount depending upon buy backeriod of market surplus, assured crude cIlrnarKcts are extremely important to mainuining Libyan revenues. Operating companies arc assessed stiff financial penalties if they fail to lift their equity shares. H

All Libyan operating companies use equipment and service companies from the United Stales. Canada, and Western and Lustcrn Europe for specialized tasks, including well maintenance and workover tasks, artificial lift equipment, installation, and pipeline inspection services.

The role of overseas subsidiaries of US companies in serving Libyan needs is particularly complex. Most US manufacturers of oilfield equipment as well as US engineering and service companies have established foreign operations to avail themselves of lowercosts and trade and tax advantages and means of avoiding US export and trade restriction'.]

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most oilfield equipment, such as down hole gear-like packers and seals; drillingsuch as drill bits; and wellhead equipment, such as blowout preventers and Christmas trees, can be

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from US manufacturing subsidiaries throughout the world, but particularly in Western EuropeT These companies operate under the laws of their boat countries and employ primarily localConsequently, while US companies may be the ultimate source of certain petroleum equipment and services used in tbe Libyan oil industry, the actual equipment and services may be providedoreign subsidiary, especially West European. |

Expatriates comprise up toercent of theforce of Libya's operating companies.

living in Lil

Utbougb. we do not lion, we believe many of these individuals have petroleum-related jobs. Other foreign personnel include Pakistani, Indian, Philip-line. South Korean, Maltese, and Dutch workers.

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arc nircd as technicians (machinists and computerngineers, drilling supervisors, oil pipeline and terminal operators; and Asians are hired for rig operations and as construction contractors andIn addition, LNOC himaHHHHHHHHHHHHHHHMmmmma

colog isls, gcopnysicists, and engineers. One oi toe aavisers to LNOC is reportedly the former head of the Iranian National Oil Company. As ofbe expulsion of expatriate workers from Libya had not affected skilled foreign workers in the petroleum industry.

The quality of foreign personnel has improvedof the worldwide oil slump and theof

also to livuia^onditions as pleasant as possible for expatriate workers. For instance, in contrast to the conditions in the rest of tbe country, tbe government it assuring that the center of the oil industryarsahowplace by LibyanilandardsJ^J

l Nevertheless, retaining ihe expatriates reportedly is difficult because they are overworked. Salaries also are not as inviting at in the

past. LNOC reportedly has been forcing foreign technicians toercentage of their salaries in Libyannontransferableeffectively lowers their salaries.

Boosting Capacity

Besides maintaining the productive capacity ofoilfields, foreign producing companies operating in Libya are involved in tbe development of newProducing companies provide the capital and development plans, and foreign oil service companies carry oul tbe actual development work. The most Important new oilfield project is tbe offshore Bouri field, the largest oilfield yet developed in theTbe Italian oil company AGIP is developing the field near the Tunisian border north of Tripoli at an estimated cost of more thanillion. I

Hhe project is being financed Vpercent TyT^OC^ndercent by AGIP. Plans call for two drilling and production platforms to be seteters of water and the drilling ofells.reserves are estimatedillion barrets. Fust-phase production is expected to flow Into moored tankers at the rate07 with full production

timum field capacity at

The Italian Government is reportedly involved in this project primarily because most of tbe plannedwork will be carried out by Italian firms, and it willx>percent share of tbe oil produced. Besides Italian companies, French, British, Norwegian, and Korean firms also are participating in this scheme. The entire project is being developed without US-built equipment or services, according to available information.!

Exploration

Although tbe Libyan operating companies of AGECO and Sine have ihe most active exploration programs-numerous foreign companies are also involved. We

estimate LNOC has budgeted0 million for oil explorationpeteent increase "over5 budget. The key players include not only foreign producing companies, such as OASIS, Occidental, and AGIP, but also companies holding undeveloped concessions in Libya, such as Bulgarian Oil from Bulgaria, Rompetrol fromand Braspctro from Brazil.'.

Qadhafi is determined to develop the oil potential of western Libya near ibe Algerian border and isforeign firms to explore in that region^

^The Romanian companyiKOmpctrol. hasumber of smaller oil deposits in this region, I

Downstream Activities

Libyan efforts to develop lhe downstream sector of its peirokum industry have been sharply curtailed by tbe severe drop in Libyan oil revenues and the excess capacity in tbe worldwide refinery and petrochemical indus'jies. Mostli second export refineryMisratab has been put on bold until financial and market conditions improve, as have ibe second-phase developments of lhe petrochemical complexes at Marsa al Burayqah and Ra's al Unuf. Libya'snatural gas development plana have likewise been affected by current conditions. If Libya's financial picture improves, all of these downstream plans will be contingent on lhe availability of foreign equipment and services. |

upon the uniqueness and range of lhe denied goods and services andthe international scope of theimposed. |

LxpenciKt With Usnlled Control*

The United States has maintainedontrols on exports or reexports to Libya of US-origin goods and technology Although far short of outright denial of trade through sanctions, ihese measures allowed the United States to restrict the flow of certain goods and services to Libya. Tbe controlsalidated license from lheof Commerce for the export to Libya of virtually all US-origin equipment aad technology other than food and medical supplies. Because of the widespread foreign availability of most petroleumicenses were generally approved for most petroleum equipment, except for those items that bad dual civilian-miliury uses or would contribuie to theof ibe refining and petrochemical processing complex at Ra's

The most noticeable effect of US export controls on Libya's petroleum industry was the inability to ac-quire staic-of-ihc-art computer equipment.

Sanciioas in tbe Near Term

The new, wider ranging economic sanctionsby the United States go welt beyond the trade controls imposedhe US sanctions will

of Economic Sanctions

The heavy dependence of the Libyan oil industry on foreign companies makes it extremely vulnerable, in principle, lo economic sanctions. As in all such cases, however, the eventual impact of sanctions depends

be disruptive to the Libyan petroleum industry for several month* at least, if the US producing and

companies pull out ot are forced out of Libya. The abrupt withdrawal of these US companies could resultodest sbort-tenn drop in Libyan oil product>on in ourhased withdrawal wouldmaller impact. Any resulting production decline, however, would most likely be temporary and inflict limited hardship on tbe government. Theof US oilfield workers in Libya, for example, is no

and Asianominant position ingoods markets. Several subsidiariessupplying the Libyans with many oftheusually provided in the past by US-based

working in Libya probably are easily replacingsupply items, such aa drill pips, needed by tbe Libyans. Although replacement pans forpumps, comnd other equipment might be harder to obtain, suitable substitutescan be procured from European subsidiaries of US firms or the USSR, ir these efforts failed, tbe Libyans could replace tbe equipment at greater expense with new systems.

near-term production and revenues might see some temporary erosionesult of USTripoli's'development, exploration, andactivities seem more insulated. Tbe major push offshore to develop the Bouri field is beir overseen by AGIP. an Italian firnv|

production might bold up fairly well, the departure of US operating companies wouldtbe marketing of Libya's crude. Prior to the sanctions. US companiesargin of abouter band for lifting as muchfercent of currentas compensation for their equity holdings. Tbethen either processed tbe crude in their own downstream operations outside of Libya or sold the crude on the spot market. As for Tripoli, it must now find buyers to replace tbe assured offtake of USmove that will probably require price discounts to attract new customers away from existing arrangements. Even if sufficient new buyers arc found for the equity oil. the required price discount may exceed the presanctions equity margin, eroding Tripod's oil revenues somewhat

Trends over tbe past few years have worked to lessen the impact of the removal of US petroleum equipment companies from Libya. Within that period, European

only through oil exports. Many countries also sec the potential of gaining large construction contracts in Libya ffrld'ao notwant to endanger their prospects. Some countries, especially in tbe Mediterranean area, probably also fear Libyan reprisals for any actions taken in support of the US sanctions:

* Italy is Libya's largest trading partner in Europe, and Italian officials have placed considerableon trade ties in justifying Rome'sof normal relations with Tripoli. Libya's serious arrearageRome, however, is clouding this relationship.has linked tbe payment of arrearages to increased Italian imports of Libyan oil and gas. Italy alsoubstantial stake in the development of Libya's large offshore oil resources.

While economics is at the heart of the relationship, political and security aspects have gainedin recent years. Concern about Libya's ability to threaten Italian interests has increased in Rome, and we believe that Qadhafi plays on these fears in his effort to intimidate the Italians. Qadhafihas threatened to attack military bases in Sicily and elsewhere if tbey are used totrike against Libya. Tbe significant economic ties and heightened security concerns probably will make Rome reluctant to reduce imports of Libyan oil. or Other commercial ties, in the near term. Prime Minister Craxi, however, recentlypecial study of its overall trade with Libya and hopes to gradually scale down economic ties.

relies on Libya for about one-fourth of iu oil imports and probably would be unwilling tothis trade in the near term. Athens enjoys ixs trading relationship with Tripoli because Libya is one of tbe few countries willing to engage in barter arrangements with Greece.

South Korea has significant trade lies to Libya and the Dong Ah company has the largestbillion outadhafi's Great Man-made River project. Accordingeliable source, Tripoli has suggested that South Korean firms take as muchf oil in barter for existing contracts and to ensure further consideration for lucrative Libyan construction contracts. Seoulwould be unwilling to reduce iu oil imports or abandon its large engineering and construction

Turkey has experienced significant problems in gaining Tripoli's cooperation in meeting long-overdue commercial arrearages to domestic firms. Turkey's oil imports from Libya are linked to Tripoli's repayment of these debts, and they are unlikely to be reduced any time scon.

Austria takes Libyan oileans of diversifying petroleumrowing interest in direct participation in Libya's petroleum sector and iron and steel industry weigh against Austria being persuaded to reduce its purchases of Tripoli's crude oil in the near term.h

Given time, Tripoli could offer the US oil concessions to non-US oil companies under terms that would be enticing even in ihe present soft oil market.Libya could choose to nationalize lhe assets of US companies and operate them with foreignassistance as happened after Exxon's withdrawal from Libyaith tbe present glut in the petroleum equipment and services markets, Libya

would'probably have little (rouble arranging, in tbe long run, to operate without the involvement of USif the economic sanctions remained unilateral. I

On the otherroader set of sanctionsfor example, the NATO countries, including Prance, would impose considerable, long-lastingon the Libyan oil industry:

About half of present revenues would be lost if not replaced through adjustments in trade patternthe international oil markethole

Companies from South Korea, Japan, Brazil, and the Soviet Bloc might replace tbe services and equipment lost from NATO countries butignificant overall reduction in effectiveness. This cost would be evident increasingly over time through Increased physical deterioration ofall in maximum sustainable capacity (MSC) as production declines outpaced new development projects, and decreased replace* ment of reserves through exploration. H

We believe an effective allied-wide economic boycott of Libya would succeed only if Italyajor participant. Besides American companies, the Italian oil company AGIP has the largest equity stake in the Libyan oil industry and gains most from Libyan oil exports. Moreover, Italian investment in the Bouri offshore oil development program is the largestinvestment activity in the petroleum sector by any foreign company. Even if Rome acts fully in concert with tbe United States, the likelihood that other European governments will follow suit is probably still small. H

How Qadhafi Will Play the Sanctions

Qadhafi probably will use economic reprisals tosupport for even greater domestic austerity and to blame Washington for any further deterioration in economic conditions. Qadhafi is unlikely, however, to detain US citireos or to take them hostage Following the imposition of sanctionsor example. Qadhafi even helped expedite the departure of US citizensropaganda ploy. Qadhafi probably believes any move against US personnel would be used toS military strike against Libya, which he is probably reluctant to encourage. Oadhafi may even offer lucrative incentives to regain the services of select highly skilled

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