Libya: Oil JVs must be led by Libyans

In Brazil it's local content; in Libya, it's local managers.

A government directive instructs all companies with foreign participation to appoint Libyan heads, according to a foreign oil executive and a western diplomat. All foreign companies, including those which are involved in oil production, operate as joint ventures.

Every country with oil (or any other depletable natural resource) faces the challenge of how to translate the fixed value of that resources into more renewable sources of economic value. Oftentimes this is by encouraging the development of domestic technical capabilities and companies (see Brazil) or value-added industries (like refining and petrochemicals in Saudi Arabia). Libya's latest move will strike some as more pernicious. Libyan mid-level managers could be passed off as capability-building; Libyan executives sounds more like empire-building for well-connected figures, and increasing control of oil production at the expense of foreign partners.

Obviously the news isn't being received enthusiastically by Western executives.

“This is not good for the Libyan economy,” said the western executive. “Companies which are here will stay but if you are still deciding you will think twice.”

... and...

“The usual way is at least for the general manager to come from the [foreign] company which pays the costs,” said an oil executive. “Exploration is paid for 100 per cent by the foreign partner. It is very difficult to believe that international companies will agree to a Libyan general manager.”

Libya is one of the most exciting locations in the world for new oil exploration (worth making major diplomatic sacrifices for, depending who you believe). But even so, this latest news will chill foreign interest, as companies increasingly worry about the specter of an old and familiar game - invite foreign companies in, find resources, commence extraction, acquire capabilities... and then kick them out and keep the full proceeds for your country.

Brazil's oil policy: cost vs. jobs

Brazil has prioritized local job creation over speed and lowest cost to develop its considerable pre-salt oil reserves.

Brazil has instated heavy local content rules for production of equipment such as oil platforms to ensure the development of the deep-sea reserves provides jobs and economic growth while fortifying domestic industry.

Note the euphemistic use of the word "rhythm" by Petrobras CEO Jose Sergio Gabrielli:

"The rhythm (of bidding) for those new areas will be heavily determined by the capacity of domestic industry to provide goods and services for the gigantic investment program," Petrobras Chief Executive Jose Sergio Gabrielli said in a conference call. "That is for me the driving force for the rhythm of bids in those areas."

This may seem like a poor decision from the traditional Western capitalist mindset - it will both delay the onset of production and result in higher costs than internationally open bidding would. But the Brazilian government - particularly Lula's, which has deep left-leaning roots despite its generally careful and centrist stewardship of Brazil's economy - is trying to optimize a different objective function. Local oilfield equipment manufacturing will need to spring up to supply the demand, creating jobs and potentially companies that can then compete internationally as other countries make ultra-deepwater discoveries. Viewed through that lens, the local content rules make more sense.

And while Petrobras would object if they were an independent private company, I suspect they are actually largely aligned with the government. After all, the chairwoman of their board, Dilma Rousseff, is Lula's heir apparent. And more broadly speaking, the culture of Petrobras is of a proud organ of the state. A friend who works there once described it to me as a bizarre combination of world-class technical expertise and massively inefficient and overstaffed management bureaucracy.