San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The History of the Development
of Libyan Gas and Oil Resources

Because of its desert condition there was a lot of drilling activity in Libya long before there were any suspicions of there being petroleum. The search for water involved drilling very deep wells. Back as far as 1915 deep water wells drilled by Italians sometimes found natural gas. This was of interest but natural gas was not a prime commodity at that time. In the U.S. the natural gas from oils was burnt off (flared) as a nuisance.

In 1935 a professor from Milan University who was in charge of a water well drilling program made it a point to watch for petroleum. This was probably more out of academic interest than a serious concern for finding a significant economic resource. A couple of year later petroleum was detected in a water well drilled near Tripoli.

This find was enough to prompt a geological survey in Tripolitania. One well was drilled searching for petroleum but none was found. Nevertheless in 1940 a program of exploration was initiated but the available equipment was inadequate to deal with the severe conditions of the Saharan Desert. Shortly thereafter war came to Libya and all exploration stopped.

Immediately after World War II the political status of Libya, which had been controlled by Italy, was uncertain. There was no state which could guarantee petroleum exploring companies the rights to what they might find. Therefore no exploration was carried out until after Libya became an independent kingdom in 1951. The new kingdom developed mineral rights law through consultation with the international petroleum companies. In 1953 Libya granted prospecting permits to eleven petroleum companies. Geologic surveys were undertaken by those companies. In 1955 a petroleum well was successfully drilled under desert conditions just across the border in Algeria.

The Lidyan leaders were determined to keep the market for exploratory permits in Libya rather than granting a concession to one company or a consortium of a few companies. Further more even when one company was given a concession in a particular area it would have to relinquish one quarter of the concession after five years. This was to allow the government to grant that territory to a new company in hopes that a new company might succeed where another had failed.

The conditions were that the oil companies would have to pay a 12.5 percent royalty on their revenues and a 50 percent tax on profits. The royalty and other operating expenses were of course deductible in computing the profits of the company.

Oil companies were highly interested in developing sources of petroleum in Libya because it was located on the Mediterranean Sea. Their sources from Iran were limited by a politcal crisis there in the years 1951 to 1954. The Suez Crisis of 1956-57 resulted in the closing of the Suez Canal. All petroleum from east fo Suez had to be brought around the souther tip of Africa at great additional expense. Additionally Libya was thought to have a stable, pro-Western govenment.

By 1957 there were about a dozen companies operating in Libya on about sixty different concessions. The companies operating there included the seven majors and the French para-statal Compagnie França;aise des Pétroles. There was also Oasis, a consortium of three companies new to international petroleum exploration, Amerada Hess, Conoco and Marathon. There was also the oil company of Bunker Hunt, the son of the American oil magnate H.L. Hunt.

In 1957 Esso decided to drill in the area across the border from where the Algerian oil well had been brought in. It drilled three wells and one of them was successful. It was brought in in January of 1958 with a flow of 500 barrels per day. This was not much considering the expenses of drilling.

In 1959 Esso drilled in the Siritica region, which is the north central part of the country. It brought in a well flowing at 17,500 barrels per day. This followed by another well flowing atg 15,000 barrels per day. Later in 1959 other oil wells in Siritica were brought in. Altogether six major oil fields in Libya were discovered in 1959. Esso and Oasis were the leaders in the field.

The Pipelines

In 1960 Esso decided that its discoveries and the prospect for more justified its building a pipeline and export terminal. It chose Marsa Brega as the site for the terminal and contracted for the construction of a 110 mile long 30 inch in diameter pipeline from its Zelten field. That gave it a capacity for delivering 200 thousand barrels per day for export. The terminal was inaugurated on October 25th of 1961 and the first shipment went to Great Britain. The total shipments of Libyan oil for 1961 was in the neighborhood of seven million barrels.

The Oasis group was not long behind Esso in developing a pipeline and export terminal. By May of 1962 it had an 88 mile pipeline linked to an export terminal about a hundred miles west of the Esso terminal, at a place called Es Sidra.

At the end of 1964 a third terminal was opened at a site about twenty miles east of Es Sidra by a subsidiary of Mobil and Amosea oil companies. It received oil from a pipeline about 170 miles long.

As a result of new discoveries Esso and Oasis extended their pipelines.

British Petroleum was eager to develop sources of petroleum that were not vulnerable to closures of the Suez Canal. It had eight concessions in Libya but found no oil. It then decided to buy a half share of the concessions owned by Nelson Bunker Hunt. On the Hunt concession British Petroleum brought in a four thousand barrel per day well in November of 1961 and then went on to develop other wells which brought in about 21 thousand barrels per day. The drawback for this field is that it is located more than 300 miles from the coast in eastern Libya. The terminal was built at a natural deep water harbor near the city of Tobruk at a place called Marsa Hariga. The petroleum from this field was so waxy that it had to be heated to get it to flow in the pipeline. Given the length and other difficulties it was not surprising that it was not until 1967 that the British Petroleum did not commence exporting Libyan oil until 1967.

Occidental Petroleum

A distinctive feature of the Libyan concessions was that one quarter of the original concession had to be relinquished after five years and more after eight and ten years. This was to give other companies the chance to try to find oil at sites where the original concessionaires had failed. Concessions on the land that was handed back were awarded on a compeitive basis. This system allowed the entry of new companies into the Libyan search for oil.

One of the companies new to the field was Occidental Petroleum, a company being created by Armand Hammer. Hammer was from a New York Jewish family with close ties to the Communist Party. Armand Hammer successfully managed a medical supply and pharmaceutical business as a young man. Later he created a system in which he could safely trade with the Soviet Union in the 1930's. Hammer would send a ship loaded with the commodities the Soviets wanted and they would load the ship with their trade goods. Initially those trade goods were art treasures of Russia. Armand Hammer was adept at dealing financially successfully with politically sensitive situations.

Occidental did acquire a concession, in part because its bid involved a proposal to invest five percent of its profits in an agricultural project in Libya. Soon after the award of its concession in 1966, on land handed back by Oasis and Mobil, Occidental had survey teams operating and within six months had drilled its first well. In November of 1966 Occidental had brought in a fifteen thousand barrel per day well and in early 1967 had discovered a new oil field. By the end of April of 1967 the Occidental oil well on that field were producing sixty thousand barrels per day. In May of 1967 Occidental brought in a well on a new field that produced forty thousand barrels per day.

In February of 1968, only two years after Occidental had received its concession, it was exporting oil from a terminal at Zueitina on the east coast of the Gulf of Sirte. The terminal was fed by a pipeline 40 inches in diameter and 125 mile long. By 1970 Occidental Petroleum was vying with Esso and Oasis for being the second largest exporter of oil from Libya.

The Italian para-statal Azienda Generale Italiana Petroli (AGIP) in 1968, after years of failure, found a new oil field near the Occidental operations. It was going to be able to feed its production into Occidental's pipeline and export from Occidental's terminal. However in 1969 a group of military officers carried out a coup de'état, deposed the king and began restructuring the rules of government. The oil companies in Libya survived but only with diminished opportunities.

(To be continued.)

For more on the economic history of Libya see Libya.

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