Image: Moammar Gadhafi
Ben Curtis  /  AP
Western governments and companies have long known about the political hazards of dealing with Libya and its unpredictable and flamboyant leader Col. Moammar al-Gadhafi.
updated 9/4/2009 2:32:15 PM ET 2009-09-04T18:32:15

The indignation and outrage in the U.S. and Britain over Libya's warm welcome home for the Lockerbie bomber may just be a speedbump in the North African nation's drive for political and business rapprochement with the West.

The reason, analysts say, is that Libya has too much to offer the West, which is yearning for energy security — huge oil reserves and, perhaps equally important, an untapped wealth of natural gas on Europe's doorstep. Moreover, Libya is flush with cash that it has already started investing in Europe.

"Everyone knows that in the future, they're going to need Libya," said John Hamilton, a Libya expert with Cross-Border Information and contributing editor to an industry publication, African Energy.

Western governments and companies have long known about the political hazards of dealing with Libya and its unpredictable and flamboyant leader Col. Moammar al-Gadhafi — including bad press — and that hasn't kept them from dramatically stepping up trade and investment in recent years.

Scotland freed Abdel Baset al-Megrahi, the only man convicted in the 1988 bombing of Pan Am Flight 103 over Lockerbie, on compassionate grounds since he is dying of cancer. But the move fueled talk that Britain pressured Scotland into doing so to ensure commercial interests and boost oil deals in Libya.

British Prime Minister Gordon Brown has been put on the defensive, staunchly denying he gave any assurances to Libya's leaders that the bomber would be freed in exchange for oil contracts.

British energy giant BP PLC issued a statement Friday admitting that in 2007 it expressed concern to the British government that slow progress in sealing a separate prisoner transfer agreement with Libya could have "negative consequences" for an exploration deal with Libya. But BP underlined that it did not specify al-Megrahi's case.

Anger was fanned when al-Megrahi was greeted in his homeland by a crowd of cheering Libyans at the airport, despite demands from the U.S. and British leaders that he not receive a warm welcome in consideration for the families of the 270 people — mostly Americans — killed in the bombing.

Still, even amid the fervor, there have been few calls to slow down economic ties.

Libya, with over 43 billion barrels in crude, has the biggest reserves in Africa. In recent years, BP PLC has committed over $1 billion in exploration projects in the country, while other majors like Royal Dutch Shell PLC and U.S. Exxon Mobil Corp. also have extensive interests through bilateral agreements. Others at work in Libya include Petro-Canada, Italy's ENI SpA, Occidental Petroleum Corp. and Norway's StatoilHydro ASA.

Hamilton said a main reason why European leaders have been "paying court to Gadhafi" over the past few years is Libya's estimated 54 trillion cubic feet of gas reserves. Little exploration or development was done in the gas sectors during Libya's roughly 15 years under sanctions, and analysts say the true reserves could be as high as 70 to 100 trillion cubic feet.

"Obviously oil is important. But I think Libya, if it turns out to have large reserves of gas, will be a major player in European gas supply for the future," said Hamilton.

Much of Europe faced gas shortages over the past two winters as Russia shut off supplies as part of a pricing dispute with neighboring Ukraine. The dispute highlighted western Europe's reliance on Russian gas, and left governments scrambling for alternative sources.

Libya emerged from its longtime pariah status after it handed over al-Megrahi for trial in 1999, agreed to compensate Lockerbie victims' families, dismantled its program from weapons of mass destruction and renounced terror. Since then, trade between it and the U.S., Britain, Germany and former colonial ruler Italy has shot up.

British exports of goods to Libya, for example, were 48.5 percent higher in the first five months of 2009, compared to the corresponding period in 2008. U.S. imports from Libya over the same period were down sharply, likely because of waning oil demand in the United States because of the global meltdown. U.S. exports to Libya were also down by about 6 percent, according to U.S. Census Bureau statistics.

Across Tripoli, signs of the country's reopening are evident. New apartment blocks and road projects are being built, hotels are being erected, new airports planned and others renovated. Western consultants helped in preparations for the lavish Sept. 1 ceremonies marking the 40th anniversary of the military coup that brought Gadhafi to power.

Libya's sovereign wealth fund, the Libyan Investment Authority, is believed to have a roughly $100 billion war chest, and has reportedly been flexing its muscle in London and in Italy.

Western leaders are charting a course to the country, the most recent being Italian Premier Silvio Berlusconi, who visited days after al-Megrahi's return. In August, a delegation of U.S. senators led by 2008 Republican presidential nominee John McCain met with Gadhafi to discuss the possibility of non-lethal defense equipment.

If political leaders are willing to meet the controversial Gadhafi, companies are unlikely to be scared away by bad press over being linked to al-Megrahi's release.

"I tend to think that this will blow over," said Samuel Ciszuk, Mideast energy analyst with consultancy IHS Global Insight in London. "Everyone knew it was one of the most politicized places to do business."

More likely to dissuade firms is a general sense of disappointment with Libya, which is struggling — and failing — to boost production above the current level of roughly 1.7 million barrels per day.

A number of oil companies that waded back into the country since 2005 have met with lackluster results or poor luck, drilling a number of dry holes.

Moreover, Libya's National Oil Corporation is squeezing companies for a bigger share of the production and requiring companies to pay bigger signing bonuses. That has made such deals unattractive for any but the largest majors and national oil companies. The last licensing round saw mostly national oil companies like Algeria's Sonatrach and Russia's Gazprom snapping up acreage for gas drilling.

"Terms have been very restrictive and there is no real sort of feeling that they might loosen terms even though interest seems to have fallen," said Ciszuk.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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