How Canadian companies navigated the complexities of dealing with Libya

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Near the centre of Tripoli sits the bunker, residence and military command post of Moammar Gadhafi.

It is hidden behind three concentric rings of defensive walls. It is a fortress that sprawls over six square kilometres. But for much of the past decade, those working hardest to penetrate it have not been citizens rising up against a despot. They have, instead, been wealthy Western companies, intent on wringing riches from the Libyan desert's massive oil reserves.

For some of them, gaining access to Col. Gadhafi - whether directly, or through one of his powerful sons, or through a shadowy network of well-connected "consultants" - was just one of the many challenges of operating in a country some remember as downright bizarre.

Libya, recalls Jim Buckee, the former chief executive officer of Talisman Energy Inc., which spent years attempting to gain land for oil exploration in Libya, has "got all these strange characters with influence. It reminded me of the courts of Medici. The place is medieval."

For oil companies, the work of navigating ancient kingdoms and secretive relationships has become an integral part of finding new reserves. The search for energy "elephants" - major fields that are increasingly unlikely to be found closer to home - has led the industry, including its Canadian participants, to the most difficult corners of the earth.

In the process, it has forced them to confront a series of vexing questions. How, when dealing with dictators, graft and unfamiliar practices, are companies to act? To what standard of moral responsibility are executives to be held? And if so, is it more responsible to produce the energy that fuels the global economy, or to avoid enriching leaders with unseemly track records?

For Canadian companies, even North American laws aren't perfectly clear on some key issues. Due to a legal loophole that allows so-called "facilitating payments" to foreign officials, many wonder: What's a bribe? And with Canadian anti-corruption laws responsible for only one conviction in more than a decade, is there any real risk of punishment?

For those forced to face these questions head-on, the answers have not been simple.

"Life's not perfect," said Peter Kallos, who served as executive vice-president of Petro-Canada's international and offshore division for much of the past decade. "You decide whether or not you're comfortable doing business in Country X. If you decide you are, then you're going to do that business in a way that fits within your standard ethical framework as best you can. And Even in countries where the regime is perhaps distasteful, the people are not."

It's not an easy calculation, especially since things often sour. In addition, countries responsible for heinous acts have often held substantial promise. Take Colombia, which has wooed major investments in part through its substantial success in attacking violence. Then, earlier this month, 23 Talisman workers were briefly kidnapped.

Or take Libya, which in the early 2000s was home to an international swooning that saw the United Nations lift sanctions, hosted visits by global leaders - including Canada's Paul Martin - and gave off a general sense that its terrorist past was no more.

"It was a wave of, I guess, goodwill at the time," said Jim McFarland, the former chief executive of Verenex Energy Inc., whose success in Libya was complicated by government interference when it attempted to sell.

When regimes sour, however, the questions become trickier.

The same was true in Sudan. Talisman is most often remembered for helping create wealth for a government that was bombing killing its own people. What is sometimes forgotten is that the company's investment was made during a time of promise.

"They were going to hold elections in four years time," Mr. Buckee said. "It seemed to be all pointing in a positive direction."

Then things fell part. Days after Talisman announced a deal to buy in to a Sudanese oil investment, for example, the U.S. bombed suspected terrorist sites in the country. Then Sudan's killing of its own people began to attract substantial international attention.

So why not pull out? This question has confronted numerous oil companies operating around the world. Talisman was accused of helping create wealth for a murderous regime, and endured massive public pressure to retreat. It eventually did, selling to an Indian energy firm.

But was that the right move? Talisman had, after all, supported local social efforts.

"We had model farms. We had clinics. We drilled wells. We drilled latrines. We did much more, certainly, than any of our partners did," Mr. Buckee said. "When the Indians took over from us, they built a friendship hall."

And, he argued, because Talisman was trying to produce oil, it had access to power, meeting high-level ministers and even the president. The company did not threaten to halt its investment. But Mr. Buckee said it made good on opportunities for moral suasion few others could match.

"I could get in and would see the energy minister, quite often the defence minister - I saw [Sudanese president Lt-Gen Omar al-]ashir periodically. And I'd get the chance to say to them, 'this is craziness, bombing people in the south. It does you so much more harm internationally than it ever does good on the ground,'" Mr. Buckee said. "And they'd listen and stop for a bit."

This, of course, is the image industry would like to present. The reality, often, is far murkier. Take Libya, where in the early 2000s - about the time Petro-Canada gained a foothold in the country - dinner at the Canadian ambassador's house was a chance for shadowy middlemen to offer their services on behalf of the Gadhafi regime. Those same middlemen pressed Canadian companies to sponsor an art show by Saif Gadhafi. Petro-Canada and SNC-Lavalin agreed. Talisman did not.

It's unclear which companies availed themselves of middlemen, and which did not - Canadian companies insist they have operated ethically and not paid bribes. By 2005, Libya had taken strong steps to avoid influence-peddling, to the point where it opened and awarded bids for exploration land on live television. Even then, however, oil executives like Mr. McFarland met Libyan figures like Col. Gadhafi's son Saif - although Mr. McFarland says Verenex's corporate work was professional and conducted through the Libyan national oil company.

But the use of "contractors" or "consultants" - whatever they call themselves - is an especially perilous aspect of work abroad. Canadian anti-corruption laws forbid the payment of bribes, either indirectly or through a third party. It can, however, be incredibly difficult to establish whether a consultant is independent, or merely a front for a highly placed official.

"It is often very difficult to get in behind to see who is really getting paid," said Kris Robidoux, a global business integrity lawyer with Gowling Lafleur Henderson LLP, whose work includes extensive background checks. "You may think you're paying an energy entity, or a joint venture partner, when in reality there is somebody in behind who is receiving a kickback."

Adding to the difficulty, in Canada and the U.S. - unlike in many other countries - companies are allowed to use "facilitating payments." Such a payment is designed to speed up a function that a public official is already obligated to do, such as expediting a customs approval, but critics have called for an end to the practice.

"There's a lot that's grey in these areas," said Bronwyn Best, executive director of Transparency International Canada.

And Canadian enforcement has substantially lagged that of other countries. Federal authorities have successfully prosecuted only one case since the Corruption of Foreign Public Officials Act was enacted in 1998. The RCMP employs a 15-member foreign corruption team, which, as of late January, was involved in 23 investigations. But the only decided case involved a fine of just $25,000.

In the U.S., by comparison, 2010 alone saw the Department of Justice lay $1-billion in penalties under that country's Foreign Corrupt Practices Act.

"The thing with corruption," said Ms. Best, "is it's very, very hard to prove."

LESSONS FROM LIBYA

Jim McFarland gets asked a lot what Libya taught him. It's a natural question: The company he led, Verenex Energy Inc., succeeded in winning access to land in the country, finding oil and then finding a buyer. It also succeeded in finding a mess: when that buyer happened to be China National Petroleum Corp., the Libyan government decided to step in, saying it wanted Verenex instead. What ensued was a protracted negotiation that resulted in Verenex selling to Libya for 30 per cent less than it agreed to sell to the Chinese firm. What Mr. McFarland learned is now part of his corporate presentation at his new company, Valeura Energy Inc.

• "Go where the oil is"
• Seek out first mover advantage
• Operate and choose partners wisely
• Invest in good science, data capture and quality of technical analysis
• Aggressively apply "Western" technology and work processes in operations
• Ensure experienced, on-the-ground, execution oversight
• Actively involve local employees in managing the business
• Build relationships with national oil company partner and regulator
• Know the exit strategy, as required
• Beware of "above-ground" risks [i.e., political risks]/li>
• Integrity, patience and perseverance required

PAYING THE PRICE

Top 10 U.S. Foreign Corrupt Practices Act penalties

2009

• $798.5-million to Siemens for falsifying books and bribery in Iraq, Argentina, Venezuela and Bangladesh
• $597-million to KBR/Halliburton for bribing Nigerian officials to obtain a $6-billion natural gas plant contract

2010

• $400-million to BAE for deliberately failing to ensure compliance with anti-bribery legislation
• $365-million to Snamprogetti Netherlands for giving Nigerian officials briefcases stuffed with cash, alongside KBR/Halliburton
• $338-million to Technip SA for bribing Nigerian officials
• $185-million to Daimler AG for paying kickbacks in 22 countries
• $81.8-million to Panalpina for bribing officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan to gain customs clearance
• $58.3-million to ABB Ltd. for bribing Mexican officials to gain contracts and paying kickbacks to Iraqi officials to gain contracts under the UN oil for food program
• $56.1-million to Pride International Inc. for illegal payments to officials in Venezuela, Mexico, Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola, India and Republic of the Congo
• $48.1-million to Shell Nigeria Exploration and Production Co. for bribing Nigerian customs officials

Top 1 (and only) Canadian Corruption of Foreign Public Officials Act penalty

2005

• $25,000 to Hydro Kleen, for bribing U.S. immigration officer. All charges against individuals were stayed.