Libya's largest oil refinery, in Ras Lanuf, has been closed since the uprising against Colonel Gaddafi and will remain closed for at least another month while the company that operates it is restructured, 
the Tripoli Post reports.

Behind this rather bland announcement is a controversy that has been rumbling ever since the refinery was put into the hands of the Libyan Emirati Refining Company (Lerco) in 2009. Lerco is jointly owned by the Libyan state's National Oil Corporation (NOC) and the Dubai-based Al Ghurair group.

Opening up the refinery to private investment by Al Ghurair was "one of the most controversial business decisions at the time," the Tripoli Post's report says. 

Libyan economic experts and oil officials voiced their opposition to the way the whole venture was handled by Gaddafi officials. 

The Ras Lanuf "fiasco" as some like to call it has been viewed as an example of corrupt practices by the former regime whose oppressive governing did not give room to the economic interest of the country or the views of national expertise on these matters.

There are three main allegations (all of which are denied by some of those involved):

1. That the refinery's assets were undervalued at the time of the deal with Al Ghurair;

2. That crude oil for refining was supplied too cheaply;

3. That Lerco was allowed to delay payments on its supplies of crude – in effect, getting a huge interest-free loan.

Late last year, Reuters obtained copies of "The Annual Report by the Control Board for 2010" which had been produced by the Gaddafi regime's Ministry for Inspection and Popular Control. The purpose of the report was not entirely clear but it detailed various cases of government maladministration. Reuters said:

The document, along with private letters, contracts signed with foreign partners and the results of other investigations carried out by the ministry over the years, catalogues allegations of shoddy dealings, particularly in oil. These include tardy financial reporting, false dates on contracts, multiple bank accounts, undervalued assets and oil or money gone missing.

Part of the report dealt with the Ras Lanuf refinery affair, and here is what Reuters said about it:

1. On the valuation of assets ...

According to Libya's 2010 report, the refinery's assets and operations were assigned in the 2009 deal to a new company, the Libya Emirates Refining Company (Lerco). Lerco is a joint venture between the NOC and Trasta Energy, part of the Al Ghurair empire. The agreement included an upgrade of the 1984 refinery which would be a $2 billion investment.

However, according to the report, the sale was based on an undervaluation of Libya's main oil asset. "The assessment ... was based on its book values, which were very low," concluded the editors.

Asked to comment, Ghanem [former prime minister Shokri Ghanem] said any deal would have attracted contrasting views, and London-based law firm Ashurst had been hired to complete the evaluation. Ashurst declined to comment.

2. On the pricing of crude supplies ...

The report ... says 25-year agreements were put in place to supply Ras Lanuf with 200,000 barrels of oil daily, but no official price was specified. The price that was later set gave the refinery access to "unjustified discounts" on the crude. A separate investigation by the ministry in 2010 said the formula for pricing had been inappropriate, and the NOC lost money as a result.

Ghanem said the price had been set by a committee and at the time it had seemed like a good deal for the NOC. "Whether the committee is competent or not, I inherited them," he said. "If the committee doesn't understand, what can I do?"

Muhssn Abdulhafid Almaswry, who joined the NOC in September as new marketing manager for crude oil, confirmed the deal had gone ahead without a price being agreed for all the oil. But he said he did not think the refinery was supplied too cheaply ...

3. On late payments ...

Payment for the oil was also a problem, according to the report. Investigators found the joint venture had not met its 30-day payment terms, which may enable the refinery's owners to pocket the interest on over $2 billion in unpaid bills.

Essa Al Ghurair, the United Arab Emirates businessman, declined to comment. Speaking on his behalf, an official for Trasta [the subsidiary of Al Ghurair that is involved in Lerco] denied the refinery had missed payment dates. Lerco "always paid the invoices for crude received from NOC within the contractual requirement", the official said in an email.

Assertions that it received its crude oil too cheaply were "way incorrect", the official added. "Lerco has never used any discount on crude."

It will be interesting to see what happens next. Rightly or wrongly, there are suspicions that the Libyan people were ripped off by the Gaddafi regime's Rad Lanuf deal – hence the pressure to renegotiate it. At the same time there is pressure in the opposite direction – not to get too tough with an Emirati company, since the UAE was one of the anti-Gaddafi uprising's more prominent Gulf supporters.

Posted by Brian Whitaker, 28 April 2012