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In this photo taken during a government-organised visit for foreign media, a pro-Gadhafi fighter makes his evening prayers in the desert as a plume of smoke rises from the burning oil refinery in Ras Lanouf. (Ben Curtis/AP)
In this photo taken during a government-organised visit for foreign media, a pro-Gadhafi fighter makes his evening prayers in the desert as a plume of smoke rises from the burning oil refinery in Ras Lanouf. (Ben Curtis/AP)

Oil producers in Libya face political conundrum Add to ...

The violent see-saw battle for control in Libya is raising new questions about how Western oil companies will be able to hold on to assets that straddle the conflict's fault lines.

Both rebel forces and those loyal to Col. Moammar Gadhafi are now threatening to treat foreign corporations according to the sides chosen by their home countries. For Canadian companies, that could mean a potentially disastrous result if rebel forces are not able to overpower the government, especially as Ottawa strengthens its anti-Gadhafi rhetoric and pledges to meet with the opposition.

The stakes are especially high for oil producers such as like Suncor Energy Inc., whose production fields are viewed as a critical economic asset by both the government and those looking to overthrow it.

Tensions rose again this weekend amid local media reports that Col. Gadhafi has begun speaking with ambassadors from Russia, China and India about the possibility of those countries taking over Libyan petroleum production. "It's not good news," said Samuel Ciszuk, senior Middle East energy analyst with IHS Global Insight in London.

It remains early days, and the substantial uncertainty hanging over Libya makes it exceedingly difficult to know which political threats are credible and which are not. Analysts believe Libyan production has essentially ground to a halt - and the country could find itself so desperate to resume oil production that it will welcome any company, regardless of national home.

"And it's not entirely straightforward whether Libya could actually succeed in saying to Chinese and, potentially, Russian and Indian companies - who are even less likely to take that kind of risk - to just come in and take over," Mr. Ciszuk said.

Those questions stem from the myriad issues confronting companies whose assets span Libya's fiercely opposed interests. Take Suncor, for example. It owns an oil terminal in Ras Lanuf, a key port town that has now been seized back by the government. But its oil production comes from the country's Sirte basin, an area believed to still be under rebel control.

"The companies will have to do some of their own diplomacy here," Mr. Ciszuk said. "The problem, of course, is the risk that you're sucking up to the Gadhafi regime during a time when it's one of the most, if not the most, vilified regimes in the world."

And if those companies are seen as supportive of Col. Gadhafi, they are also likely to find strong disfavour among the rebels.

Adding to the complexity, Canadian companies with existing operations in Libya may be able to escape the sanctions that would otherwise hobble their work in the country. Suncor, SNC-Lavalin Group Inc. and Bombardier Inc. are just some of the many firms whose business relationships with Libya began long before the current uprising - and violent government response. Suncor did not respond to a request for comment.

Canadian companies are allowed to apply for a certificate that that "exempts property from the application of the provisions of the regulations," said Mark Sills, an international trade and investment lawyer with Fasken Martineau.

The application and granting of such certificates is done in private, and Mr. Sills said he does not personally know whether companies have applied. But he said it's likely the biggest corporate players moved rapidly to gain such exemptions.

"I'm virtually certain, if my experience is anything to go by, that companies such as Suncor would have been in discussions with the Canadian government immediately after the regulations were announced," he said.

But, he said, "in the short term, it's going to be a very difficult environment for Canadians - as well as other Western countries to operate in."

And longer-term, it's a delicate balance: If they do resume work, they are likely to stir opposition at home, which could trigger harsher sanctions. If they don't resume work, they could anger whoever is leading Libya, and have their assets seized.

Ironically, though, the size of financial concessions made by Canadian companies in Libya has muted the blow of halted operations. Suncor, for example, receives just 12 per cent of the revenue from its share of assets there. As a result, though Libya formed more than 6 per cent of Suncor's production in 2010, it made up only 2 per cent of corporate cash flow.

Still, analysts say it's far too early to suggest Suncor will not be able to resume that production in the future, and the company itself has not changed its output forecasts. Indeed, foreign oil companies have left Libya before and eventually returned to their assets, although it took many years.

"Right now it's just a disruption in production. Unless the production is lost forever, there's really no reason to write it off," said Randy Ollenberger, an analyst with BMO Nesbitt Burns. "We're waiting to see how long it lasts."

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