Simmering Saharan conflict stirred by offshore oil search

* Morocco pushes ahead with oil search off disputed Western Sahara

* Kosmos Energy (NYSE: KOS - news) set to drill this year

* Independence movement opposes drilling plans

* Dispute over legality of drilling clouds prospects

By Lin Noueihed

LONDON, Jan 13 (Reuters) - Oil firms stepping up plans to drill off the coast of disputed Western Sahara could be diving into murky legal waters and risk exacerbating one of Africa's oldest territorial disputes.

Morocco has issued exploration licenses for blocks in the Atlantic (Frankfurt: 98S.F - news) waters off Western Sahara, a desert tract that it mostly controls but that is also claimed by an Algerian-backed independence movement that deems those contracts illegal.

The Western Sahara dispute has rarely made world headlines since 1991, when a U.N.-brokered ceasefire ended a 15-year war between Morocco and the Algerian-backed Polisario movement.

But the government of the self-styled Saharawi Arab Democratic Republic(SADR), which seeks independence, has threatened to sue firms that drill, saying such moves cement Moroccan control and dash their hopes of self-determination.

Regional tensions are mounting. Morocco recalled its ambassador to Algeria in October after that country called for human rights monitors to be sent to the territory that is larger than Britain but home to about half a million people.

Already, a Moroccan solar project worth some $9 billion could be at risk as international lenders fret that two of the five plants are planned for the Western Sahara.

Activists have successfully campaigned in the past for investors to divest from oil firms active in the region.

"These companies have agreements with Morocco in waters that are not Moroccan," said Erik Hagen, who represents activist group Western Sahara Resource Watch (WSRW).

"By entering into these agreements they give recognition to Morocco's claim to the region. It is a political stand."

U.S. explorer Kosmos Energy plans to drill this year in the Cap Boujdour block some 70 km off Western Sahara. Kosmos says its plans are consistent with international law.

Britain's Cairn Energy (LSE: CNE.L - news) took a stake in the project in October. It declined to comment for this story.

France's Total (NYSE: TOT - news) is also a partner in the larger Anzarane block off Western Sahara, the website of Morocco's National Office for Hydrocarbons and Mines (ONHYM) shows.

It too declined Reuters requests for comment.

Morocco, which sees Western Sahara as part of its historic "southern provinces", says it will respect international law.

Wrangling over who should control Western Sahara, who has the right to exploit its resources and how profits should be spent, could complicate efforts to bring a find to production.

"If oil or gas is found it will either mean controversy - with the Saharwis seeking to warn financiers to stay away and the Moroccans telling the international oil companies to ignore any threats," said Menas Associates Managing Director Charles Gurdon.

"Or it will mean that the two sides come together and reach an agreement rather than letting the desperately-needed reserves just sit there."

HUNGRY FOR ENERGY

Morocco is one of the world's most energy-poor countries, importing 95 percent of its needs, according to the World Bank.

Unlike neighbouring Algeria, which has a surplus of oil and gas and can export any new output, domestic demand could absorb new Moroccan production unless huge deposits were found.

Rabat has promised to invest in Western Sahara and has set up a special council to develop it. It is already pouring in resources, developing infrastructure and encouraging investors.

Kosmos says an oil find would boost the economy and should occur in parallel with U.N.-led talks on the region's future.

"If we are successful, we believe responsible resource development has the potential to create significant social and economic benefits for Western Sahara and its people," William Hayes, Kosmos senior vice president for external affairs, said.

"We have worked in close partnership with Morocco - as the de facto administering power of the territory. They have a vital role to play in ensuring benefit sharing, among other important issues, will happen should we be successful."

A significant oil discovery could ease pressure on Rabat as it cuts subsidies in line with International Monetary Fund demands. Opponents of Moroccan rule say that makes Rabat less likely to share proceeds or accept an independence vote.

"As a non-oil producing country, Morocco, will be even more reluctant to allow the Saharawi people to decide their own future if oil is found offshore Western Sahara," Kamal Fadel, spokesman for SADR's petroleum and mines authority, said.

UNITED NATIONS

Debate centres around a United Nations legal opinion issued in 2002, after Rabat first awarded oil permits for Western Sahara.

It found those contracts were legal, but that further exploration or exploitation would be in violation of international law if it proceeded "in disregard of the interests and wishes of the people of Western Sahara."

Kosmos considers its activities to be in line with the U.N. opinion. Activists disagree. Morocco has dismissed criticism.

"Morocco has to respect international conventions and that's all," Mines and Energy Minister Abdelkader Amara said.

"We don't have to take into consideration what Algeria or another country thinks about what we do in our provinces."

Amara's comments underline Rabat's longstanding objective of reaching a compromise that would see Western Sahara become an autonomous region of Morocco rather than a separate country.

Morocco annexed Western Sahara in 1975 after colonial power Spain withdrew and fought a war with Polisario. The 1991 ceasefire was reached on the understanding that a referendum would be held on the region's fate. That vote never took place because of disagreements over who would be eligible.

Analysts say a vote is unlikely to take place soon, with Moroccans now outnumbering the indigenous population. But if the region did one day become independent, they add, firms that signed contracts with Rabat could face problems.

Even without such a vote, companies that have tried to explore there in the past have not found it smooth sailing.

Total won a license for a block off Western Sahara in 2001 but initially allowed it to lapse in 2004.

In 2006, U.S. explorer Kerr-McGee also let its Western Sahara permit expire. The move came after Norway's oil fund sold its investment in Kerr-McGee because of its activities in the disputed area. Kerr-McGee's block was taken over by Kosmos.

Hagen said WSRW would consider approaching investors again.

SADR said it could take legal action against firms that proceed with drilling and urged the United Nations to step in.

"Illegal drilling could be the last straw that breaks the camel's back," SADR's Fadel said.