As the second-largest oil producer in Africa behind Nigeria, Libya holds 36 billion barrels of proven oil reserves, almost three percent of the known world total. But analysts say that only 25% of the country has been explored for oil and gas, and up to 100 billion barrels can be found. Libyan crude oil is particularly attractive due to its very low sulphur content; it requires much less refining than higher sulphur oil. It is extremely high quality crude, whose characteristics are not easily found elsewhere. Despite its unique treasure, Libya's production capacity is relatively small, standing on 1.5 mbd of crude, or 2% of world supplies. This is less than 50% of the country's 1970 production peak level, which was around 3.3 million barrels per day (mbd.)

One reason the country's oil production has been so modest in relation to its reserve base is that since its involvement in the 1988 Lockerbie bombing Libya had been under U.S. and United Nations sanctions which hindered its ability to generate enough investment to develop its oil sector. Libya is not a rich country and its economy is almost completely oil based. Petroleum products account for 94% of exports, 60% of government income, and 30% of its $34 billion gross domestic product. Without access of foreign oil companies to Libya's riches it was impossible to conduct large scale exploration activities.

Fissures in the sanctions regime began to appear a number of years ago when Arab countries increased investments in the Libyan petroleum sector. Statements by Libyan Prime Minister Shukri Ghanem that Libya is turning its swords into ploughshares were received with a warm welcome and open arms among Europeans as well. But it took dramatic steps by Tripoli - introducing a self-imposed disarmament, agreeing to pay reparations to the Lockerbie families and to terminate support for terrorist groups - to allow the European Union to change its policy toward Libya. With the visit of then Prime Minister Jose Maria Aznar at the end of 2003 to Tripoli Spain became the first to move toward Libya's reintegration into the international community. Germany, France, Italy and the United Kingdom followed in Aznar's footsteps. Libya's past seemed to have been forgiven, though not forgotten. Then came the U.S.'s turn.

Libya's decision to embark on a rapprochement with the U.S came at unsurprisingly perfect timing, just as concessions for major U.S. oil companies were about to expire. The removal of a neighboring terrorist sponsoring dictator from power also likely impacted the desire of Libyan ruler Muammer Ghaddafi to improve relations with the U.S. First signs of a thaw between both countries were the visits of several American delegations, including a Congressional delegation. These gestures were complemented by President Bush's April 2004 decision to ease the sanctions and the visit to Tripoli of America's closest ally, British Prime Minister Tony Blair. Though full cooperation still depends on the results of ongoing investigations by international organisations such as the International Atomic Energy Agency, currently examining possible nuclear technology links and processing facilities in the country, it seems that Libya's road to Washington is paved.

The rapprochement with Libya has been a priority of the Bush administration, especially due to current high oil prices, topping $40 per barrel, and the slower than expected recovery of the Iraqi oil industry due to sabotage and violence. These relations will serve both countries well. The U.S. needs cheap oil and Libya needs plenty of dollars. Libyan officials have stated they seek to double their oil production capacity over a period of seven to 10 years and to become once again one of OPEC's leading producers. To do so at least $30 billion of investment would be required, a sum beyond what the North African country can currently afford.

Another aspect of the relations is the possibility that U.S. firms will begin to invest in Libya's as yet unexplored natural gas potential. Libya historically has been a gas exporter, but the sector has been neglected for decades. A new natural gas pipeline to Sicily has been built, and the first gas should be flowing into Europe by September. LNG exports have become a major investment attraction worldwide, and the longer-term goal is to ship LNG directly to the American market, an option that seemed very remote just a few months ago.

No less important a positive aspect of Libya's production growth could be a further increase of instability within OPEC. Libya would surely demand to increase its current production quota of 1.3 mbd to at least 2 mbd. What endangers most OPEC's control over the oil market is Libya's indication that its oil sector will be privatised and that new bid rounds will be presented in the next months.

Washington, for its part, still needs to be convinced that a possible increase of Libyan oil export revenues to $12.9 billion no longer presents a threat to regional security. More critically, it should do everything possible to verify that Libya's change of course is of a genuine nature. It will take some time before it becomes clear whether Libya's president Muammer Ghaddafi has really abandoned radicalism and terrorism or whether economic imperatives have brought him to place them on the back burner for a while.

Dr. Cyril Widdershoven is the editor of Global Energy Security Analysis (GESA) and IAGS associate fellow.

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