Global Policy Forum

By Alan Sipress

A German company is seeking permission from Libya to drill in oil fields that formerly belonged to American companies, whose operations have been frozen by U.S. sanctions since 1986, according to German officials.

The effort by Wintershall represents a major escalation in a running dispute between the United States and Europe over economic sanctions, and it heightens the urgency of a battle brewing in Congress over whether to renew the Iran-Libya Sanctions Act, which expires in August. The law, enacted in 1996 to punish Libya and Iran for supporting terrorism, imposes stringent penalties on foreign companies that invest in those countries.

Although European companies have defied the sanctions law in the past, American officials said the Wintershall proposal was the first that threatens significant U.S. economic interests. The oil fields at issue are estimated to hold more than 3 billion barrels of oil as well as newly identified potential for natural gas.

The Bush administration has not yet staked out a position on renewal of the sanctions law. Some administration officials, sharing the energy industry's view, want to soften or eliminate the law and lift other sanctions to increase U.S. access to Libyan and Iranian oil. Others argue that Libya and Iran must take more steps against terrorism before sanctions are removed. A senior Bush administration official said last week that the German acquisition of assets long held by the Oasis Group, a consortium of three American oil companies - Conoco, Amerada Hess and Marathon - would be "a very serious issue on at least two counts."

First, President George W. Bush could invoke sanctions against Wintershall under the terms of the sanctions law if the German company's investment in Libya exceeded $40 million. Moreover, the senior official said, "It would be particularly disturbing since it would relate to property U.S. companies had to put on standstill some 15 years ago." The ranking members of the Senate Foreign Relations Committee, Jesse Helms, a Republican of North Carolina, and Joseph Biden, a Democrat of Delaware, raised the dispute in separate meetings last week with Foreign Minister Joschka Fischer of Germany. Mr. Helms rebuked the German government for failing to block the initiative, while Mr. Biden warned that it could damage American-German relations, according to Senate staff members.

A German diplomat in Washington said Wintershall was one of several European companies that have applied to the Libyan government for drilling rights. In the case of the property that Wintershall is seeking, he acknowledged, "some American companies" have claims "from before sanctions were put in place." The diplomat said Wintershall and the American companies that make up Oasis should resolve their claims directly, preferably through an amicable settlement but, if necessary, in the courts.

Germany and other European allies object to the sanctions law on grounds that the United States has no right to legislate the behavior of foreign companies operating outside its territory.

A Wintershall spokeswoman, Susanne Ulitzsch, initially contacted for comment last week, issued a brief statement Monday saying: "We don't express our opinion on rumors in the market." A spokesman for the German chemical company BASF, which owns Wintershall, referred all questions to its oil and gas subsidiary.

U.S. companies are precluded from investing in Libya under a presidential order issued by President Ronald Reagan in 1986. At the time, the Oasis Group companies signed an agreement with Libya to protect their exploration and production assets for three years. Though the standstill agreement lapsed in 1989, Libya continued to respect its terms. But within the past six months, the Libyan government twice has written to the Oasis Group indicating that its assets could be at risk.

Since the American companies suspended operations in Libya in 1986, the fields have continued to be tapped by the Libyan National Oil Corporation, which had previously formed a partnership with Oasis. The American oil companies estimate they have lost $5 billion in revenue over that time.

Business officials said Libya may be preparing to transfer its drilling rights in the fields to Wintershall, while continuing to respect those of Oasis. But these officials said this would still deal a significant blow to the U.S. companies. It would establish the German firm as the chief operator of the fields, replacing the Americans and depriving them of control over production, according to the business sources. When the American companies were finally allowed to return, they could face costs for using pipelines and other equipment installed by the German company. Officials from the U.S. oil companies have continued to speak with the Libyan government since they suspended operations. "We made it clear we'd like to go back. U.S. policy will determine what we do and don't do," said Carl Tursi, spokesman for Amerada Hess.

David Mack, vice president of the Middle East Institute, said Libyan steps toward transferring drilling rights could be a ploy aimed at pressuring the United States to ease sanctions. But he said he doubted Tripoli would carry out the threat to give away American assets, since this would eliminate one of the chief incentives for the United States to normalize economic relations. "I think there's a little bit of Libyan gamesmanship going on here," Mr. Mack said. "The Libyans are not so hard up for good production acreage that they have to weaken their leverage for changes in U.S. policy."