VZCZCXRO3891
PP RUEHBC RUEHDE RUEHDH RUEHKUK RUEHROV
DE RUEHTRO #0517/01 1821602
ZNY CCCCC ZZH
P 011602Z JUL 09
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC PRIORITY 4972
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0025
RUEHGA/AMCONSUL CALGARY PRIORITY 0005
RUEHTRO/AMEMBASSY TRIPOLI 5507

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000517 
 
SIPDIS 
 
STATE FOR NEA/MAG; ENERGY FOR GINA ERICKSON; COMMERCE FOR NATE 
MASON; PARIS AND LONDON FOR NEA WATCHERS 
 
E.O. 12958: DECL:  6/25/2019 
TAGS: EPET EINV LY CA EFIN PGOV ECON

¶1. (C) Summary: Verenex, a Canadian oil firm, continues to experience delays from the Libyan National Oil Company (NOC) on approving the proposed sale of Verenex to China National Petroleum Company International Ltd (CNPCI) in a deal estimated at 400 million U.S. dollars. In the latest round of stalling, the NOC introduced allegations of misconduct during Verenex's initial bid. The head of Verenex believes the Libyan authorities are trying to force down the proposed share price (10 Canadian dollars) in order to buy the company itself. The reasoning behind the NOC's stone-walling remains elusive, but may be related to a number of issues, including: Libyan concerns about the Chinese offer, NOC's interest in accumulating funds for the Compensation Fund agreed to with the U.S., or bureaucratic incompetence. Regardless of the NOC's reasoning (or lack thereof), Verenex's troubles may have broad implications for other foreign firms doing business here, as GOL's actions to stall the sale appear to violate the sanctity of its contract with Verenex. End summary.

¶2. (C) On April 23, Jim McFarland (strictly protect), President of Verenex, a relatively small Canadian oil firm with exploration activities in Libya, provided an update on the proposed sale of Verenex to CNPCI. As reported in Refs A and B, the proposed sale requires the approval of Libya's NOC under the terms of Verenex's Exploration and Production Sharing Agreement (EPSA) with the NOC and contains a clause allowing the NOC to pre-empt any bid that has been offered. McFarland believes that the Libyans are dragging out the approval process in an attempt to drive down Verenex's share-price and pre-empt the CNPCI offer of 10 Canadian dollars per share (a deal that would amount to roughly $400 million USD). He also stated that while the Libyans have political concerns about the Chinese offer, they want to avoid offending the Chinese government.

¶3. (C) The sizable profit that NOC stands to gain in acquiring Verenex could be intended to repay the GOL entity (reportedly NOC) for its contributions to the Libyan terrorism compensation fund agreed to by the U.S. and Libya and completed on October 31, 2008. NOC Ghanem has reportedly been under intense pressure to make up for the Libyan funding that resolved the issue. xxxxxxxxxxxx told Pol/Econ Chief on June 28 that NOC is developing various creative ways to try to collect money from the IOCs for the fund. NOC's acquisition of Verenex's fields would be consistent with that goal. On April 23, McFarland noted that an NOC-owned subsidiary, African Gulf Oil Co. (AGOCO), which previously operated in Verenex's block, may be trying to re-acquire the area.

¶4. (C) McFarland said the consideration of the proposed sale of Verenex has shifted from the NOC to the General People's Committee (GPC), which is led by the Secretary of the GPC (prime minister-equivalent) al-Baghdadi Ali al-Mahmoudi. McFarland commented that the chair of the NOC Shukri Ghanem, had been straightforward with him regarding the deal and wanted to avoid tarnishing the NOC's reputation.

¶5. (C) In addition to regular meetings with al-Baghdadi, Verenex is now meeting with the GPC's legal counsel. The lead attorney is Ahmed Messalati. Verenex's lawyers "did some checking" on Messalati, including asking the State Department about him. It appears he was one of the main negotiators on the 2008 claims compensation agreement between the U.S. and Libya. McFarland said the reports he received about Messalati were positive and that Verenex appreciated knowing that a serious interlocutor would be working on the case. Verenex also expects Messalati to be a shrewd negotiator, who will try to win the best deal for the Government of Libya (GOL).

¶6. (C) McFarland said Verenex had recently received letters from the NOC saying the legal authorities in Libya were investigating allegations that Verenex was improperly pre-qualified to bid in the EPSA IV first bid round in January 2005, under which Verenex acquired its rights to its exploration zones (Area 47) in Libya (see Ref A). xxxxxxxxxxxx He believes the investigation is being carried out by the auditors of the GPC, as part of their review of the Verenex "file." He said they had had plenty of time to investigate the deal, including since last September when the process for selling Verenex began. He noted the first EPSA bidding round did not have clear criteria in the first place; thus, GPC allegations had no real basis. TRIPOLI 00000517 002.2 OF 002

¶7. (C) Verenex is also keeping the Canadian Embassy informed of the progress of their negotiations and the ongoing challenges. The Canadian Ambassador told the Ambassador that he has raised the Verenex issue with high-level officials in Tripoli and has requested a meeting with Muammar al-Qadhafi to discuss Verenex, among other issues. Verenex has also kept the UK Ambassador apprised of the latest developments, given the important role British companies play in the oil and gas sector in Libya.

¶8. (C) Comment: A number of reasons could be driving GOL's blocking of the Verenex sale, including Libyan concerns about the Chinese offer, NOC's interest in accumulating funds for the compensation fund, revenge on the part of Libyan stakeholders whose ox had been gorged by the initial permission for Verenex to operate, or simple bureaucratic incompetence. While it would appear the Verenex saga is not of direct concern to us (although there are a considerable number of American shareholders) given its status as a small Canadian company that perhaps entered the Libyan market to make a quick profit and then exit, the case has broader implications for other foreign firms doing business here. GOL's stone-walling of Verenex's sale to the Chinese, and the last-minute introduction of allegations of misconduct in initial bidding rounds, raise strong concerns about Libya's commitment to the sanctity of contract, a principle that is essential for companies operating in Libya. We intend to raise this troubling aspect of the case in future discussions with GOL officials. End comment. CRETZ