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Cloud of uncertainty hangs over Canadian business deals with Libya

Workers work on a pipe at night on the construction site of the Great Man Made River at North Jabal Hassouna in May 2000 in Libya.

Reza/Reza/Getty Images

For the group of Canadians drawn to the African desert by the intoxicating scent of profit in recent decades, Libya was a land of promise.

Its sandy stretches hid vast reserves of oil. Its urban centres and ambitious development dreams burst with opportunity for builders. Its attempts at economic liberalization helped mask the realities of working under an odious regime.

But long before revolutionary war broke out in the Saharan dictatorship, threatening billions of dollars in Canadian assets and potential revenues, it became clear that Libya's promise was obscured behind a fog of mysterious relationships, cash payoffs, ill-defined authority and unpredictable bureaucracy.

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That the country was led by a bizarre colonel and his family only added to the unpredictability of working there - and only helped further blur ethical lines for a small group of corporations whose Libyan ambitions led them to contend with a business culture in which bribes, side deals and enigmatic "consultants" held long tenure.

Concern about ethical lapses was only magnified by the sheer magnitude of money at play. Petro-Canada, the former Crown corporation that has now been folded into Suncor Energy, paid a $1-billion signing bonus in 2007 to maintain access to oil and gas lands in the country - a payment that prompted fresh questions earlier this year when it was arose as part of a Wikileaks dump.

Other oil and gas companies sold millions of dollars of drilling rigs and other equipment to Libya, while engineering company SNC-Lavalin Group Inc. signed deals worth well over $1-billion.

Now, the ultimate outcome of Canadian investments in Libya may take months - perhaps years - to fully emerge, as the fate of the country's leadership hangs in the balance. That uncertainty also places a cloud over foreign investments - including those by Suncor and SNC-Lavalin - that have taken decades to build up.

"Everybody knew that these regimes, the Egyptian regime and the Libyan regime, were tough places to be," said Walid Hejazi, an associate professor of international business at the University of Toronto. "But they were normalizing relations so there was hope that things would improve …There is no question [the upheaval]is going to impact these companies."

The impact is already being felt. On Friday, SNC-Lavalin said it effectively suspended nearly $900-million worth of Libyan projects and that earnings for the rest of the year will be flat because of events in Libya and elsewhere in North Africa. Suncor has offered little official comment on how its investments have fared - although a manager with the company's Libyan joint venture in Tripoli said production has fallen by 25 per cent.

'A reliable partner'

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It was Col. Moammar Gadhafi and his big dreams and unpredictable nature - funding international terrorism for years and then renouncing weapons of mass destruction - who opened the door to western businesses.

Some of the groundwork had been laid long before he took control in a coup more than 40 years ago. Mobil Oil began exploring for oil in Libya in 1955. The first wildcat well was struck the following year, and the world's major oil powers rushed in. Libya's crude was not only abundant, it was light, it was sweet and eminently desirable.

The overthrow of the Libyan monarchy by then-Capt. Gadhafi and other officers in 1969 In 2002, Petro-Canada bought the former Mobil Oil assets, as a part of a $3.2-billion purchase of another company. Petro-Canada was in early. The following two years brought about a major global welcome of Libya. World leaders soon came flocking to the colonel's tent compound in Tripoli, including then Prime Minister Paul Martin who made a private visit to the Libyan leader in 2004 and then announced a string of contracts for Canadian companies.

One of the most lucrative cash cows for western companies has been Col. Gadhafi's grand plan to ship water 4,000 kilometres from reserves in the southern part of the country, across the Sahara to Tripoli and other cities along the Mediterranean coastline. He first unveiled the project in 1983, dubbing it the "Great Man Made River" and promising that it would transform all of North Africa by turning dry desert into rich farmland.

Hyperbole aside, Col. Gadhafi took the project seriously, devoting huge portions of state oil revenues to it and bringing in engineering firms from around the world to make it happen. Those firms included SNC-Lavalin which started as a subcontractor on a small part of the project in 1986. Over the next decade the Montreal company won more work and then got a break in 2001 when one of the project leaders, South Korea's Dong Ah, declared bankruptcy. SNC-Lavalin and others rushed to fill the void and the Canadians ended up winning contracts worth more than $1-billion, the latest coming last October. It also won bids to build an airport in Benghazi and design a prison in Tripoli.

Winning those contracts has required more than luck. Doing business in Libya involved personal contacts and lots of patience. "It has always been a challenge for us to get paid and keep cash flow positive" in Libya, SNC-Lavalin's chief executive officer Pierre Duhaime told analysts Friday.

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Like other companies, SNC-Lavalin didn't shy away from currying favour with Col. Gadhafi's sons Saadi and Saif, considered by many to be a successor to his father. The company once sponsored a soccer team in Libya where Saadi played. It also was a major sponsor of the Montreal stop on a global art tour by Saif in 2005. The art display - called "The Desert is Not Silent" - drew controversy and derision, with critics calling Saif's work "lurid" and "a triumph of banality." SNC-Lavalin stood by the show even when another sponsor, Hydro-Québec, pulled out because the exhibition was not connected with a museum.

Saif used the tour to promote his vision for Libya and welcome Canadian companies to invest in the country. "We don't deceive, we don't cheat and we are honest in our negotiations," he told a reporter at the time. "We are a reliable partner."

Future potential

SNC wasn't the only sponsor of that art show. Petro-Canada was on board, too - and the company's involvement did not end there.

"Saif Gadhafi was travelling through Canada, and we hosted a dinner for him in Calgary," said Peter Kallos, who then served as executive vice-president of Petro-Canada's international and offshore division.

That, he said, was the sum total of Petro-Canada's involvement with the Gadhafi family - and he argued that it was not inappropriate.

"If you do business in the North Sea, you sponsor things," he said, speaking from London. "So it's not anything different to what we do here."

Mr. Kallos, who now leads a private oil firm in Britain, joined Petrocan in 2003, shortly after it bought the Libyan assets, which were managed by a joint venture with the Libyan National Oil Corp. and produced 100,000 barrels a day.

The prize, however, lay in their future potential. Those wells had once produced twice as much oil, but years of under-investment and neglect had allowed their output, from fields estimated to contain billions of barrels, to sink. And enormous volumes of oil remained in the ground. Even after decades of production, only about 10 per cent of the crude had been recovered. Petro-Canada believed it could raise that to 30 per cent.

"That was the opportunity - there were literally several hundred million to billions of barrels of further recovery potential on those fields," Mr. Kallos said.

But there was a problem from the outset: the land licences were set to expire in 2015. Without a longer guaranteed tenure, Petro-Canada wasn't ready to pour in more money. That would have to wait for a renegotiation that would prove to be costly to the company.

Murky relationships

There are few parts of the world where controversy doesn't accompany the issuance of oil and gas licences - or, indeed, the signing of any government contract, including for infrastructure work. In countries like Libya, suspicions have long surfaced that such exchanges of money and land title are rarely clean or ethical - and that outsiders, in their quest for profit, have enriched a regime now accused of waging war on its own people.

In part, those suspicions stem from the quirks of a Libyan society that is rife with unfamiliarity for westerners. The country functions almost exclusively on cash, meaning any visitor must come loaded with U.S. dollars or euros that can be exchanged on landing - and tracing a paper trail in a cash economy is difficult. Even simple navigation can be tremendously confusing: Libyans do not generally use street addresses. The location for the Four Seasons in Tripoli, for example, is described as "west of Green Square."

Working with government officials, who control most of the economy either directly or through state-owned companies, is equally challenging.

"The way the government is set up is through people's committees. So there is no one particular person that looks after everything. So you go to these meetings and you always wonder - am I talking to the right person that has the authority to do this? Or is this a dead end?" said Alf Moore, director of corporate and international business development with Hyduke Energy Services Inc., which has sold about $5-million in oil rigs and other equipment to Libya.

Col. Gadhafi's constant quest to hold power creates continual change. The U.S. State Department puts it this way: his "strategy of frequent re-balancing of roles and responsibilities of his lieutenants makes it difficult for outsiders to understand Libyan politics. … Personalities and relationships often play more important roles than official titles."

Those relationships are often murky. Mr. Moore has encountered situations where someone will introduce him to another person described as "the No. 1 man" or "the No. 2 man." A meeting will be arranged, a name provided.

"You get to meet him and talk to him," Mr. Moore said. "But you don't get a business card. It's all very mysterious."

Even after business deals are arranged, Libyan bureaucrats, wary of being ripped off by western partners in joint venture deals but often lacking proper experience for their position, often exercise excruciating oversight - demanding financial justifications that could double costs.

Taken together, these factors have tilled fertile ground for corruption. . In 2007, the Norwegian company Norsk Hydro ASA hired independent investigators to look into claims that one of its predecessor companies made millions in payments to sketchy Libyan consultants.

What they found cast a harsh light on how business was conducted in the country, with employees describing a "Libyan system" of middlemen who, for large payments, promised to use ties with high-ranking officials to obtain guaranteed results.

In the company's pursuit of two exploration acreages, it paid millions to a consultant, identified only as "Gammudi." At one point, the relationship began to sour and the company attempted to halt payments. They were forced to resume by threats of violence.

"The security issue was perceived as genuine," the investigators found. "The Lockerbie affair was not forgotten, [and]Gammudi was perceived to have a military background."

Ultimately, the investigators found that Mr. Gammudi was paid $7.4-million (U.S.). A further $1.9-million in questionable payments were made to an oilfield operator.

In late 2008, Terje Vareberg, then chairman of Hydro's board, was forced to admit "that mistakes were made in Libya."

Setting standards

So have Canadian companies, like their Norwegian brethren, found themselves entangled in a mess of suspect transactions and bent ethics?

Leaked memos have pointed to Petro-Canada hiring Jack Richards, an Englishman who used his personal friendship with the Gadhafi family - and his offers of shooting trips on British royal estates - to help cement deals.

Mr. Kallos, the former Petro-Canada executive, calls those allegations "complete nonsense."

Apart from the Canadian trip by Saif Gadhafi, Mr. Kallos says his company had no dealings with the Gadhafi family. When it signed a set of new 30-year licences in 2007 and 2008, Petro-Canada did commit to spending $500-million in exploration, and discussed an estimate $3-billion in additional capital. It also paid a $1-billion signing bonus. But Mr. Kallos said that was little different from buying access to land in any other country, including Canada. And, he said, at $1-a-barrel for the one billion barrels it thought it could extract, it was a good deal.

"We didn't do anything we weren't comfortable with," he said.

"We could debate - for longer than it would take us to make a $1-billion investment decision - on whether or not it was acceptable to pick up a $150 hotel room for a government official. I'm not exaggerating. We took these things extremely seriously."

Today, Suncor says its codes of conduct prohibit any bribes or kickbacks.

"We have provided to employees in Libya regular (most recently in December, 2010) training to ensure our people clearly understand the boundaries for ethical behaviour," spokesman Brad Bellows said in a statement.

Outside observers largely corroborate Mr. Kallos' account, and some say that Libyan reforms in 2005 largely succeeded in cleaning up the process of buying exploration rights.

That's not to say business in Libya is all above-board. After gaining land rights, companies must then drill - and the use of local workers and local services opens up all sorts of issues.

Even Mr. Kallos acknowledged that "in an organization of 2,000 people - especially one that's a joint venture, so it's arms length - it's very hard to know exactly what's happening with every contract that's being awarded."

But, he said, "as best we could, we insisted on standards being applied within the joint venture organization."

Going back to Libya

Amid the //ugliness of what is now transpiring in Libya, some argue that western firms have actually been a force for good. Not only have they employed local workers, but they have, some believe, opened a window on to the outside world that has served as an important precursor to the current revolution in the country.

And there is little doubt that the business world continues to see Libya, fraught as it is with murkiness and uncertainty, as a prize to be pursued. Mr. Moore, the oil rig salesman, is eager to return.

"I have no problem going back to Libya," he said.

Mr. Duhaime of SNC-Lavalin also made it clear Friday that his company wants back into Libya. He said the company will be seeking exemptions to the various government asset freezes so that it can resume operations once the situation stabilizes.

"I have good hope we will be back in Libya soon," he said.

With a file from reporter Julian Sher in Montreal

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Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

European Correspondent

Paul Waldie has been an award-winning journalist with The Globe and Mail for more than 10 years. He has won three National Newspaper Awards for business coverage and been nominated for a Michener Award for meritorious public service journalism. He has also won a Sports Media Canada award for sports writing and authored a best-selling biography of the McCain family. More

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