With lots of oil reserves, Libya sees bright future

TRIPOLI, Libya — With the last vestiges of U.S. sanctions swept away, Moammar Gadhafi's bid to bring Libya back into the diplomatic mainstream has scored a stunning success. Gadhafi's next goal: an economic revival funded by the doubling of oil production in the coming decade.

High-tech U.S. oil-extraction methods should help, as will geography: Libya, on the North African coast, should be immune from disruptions that could snarl the flow of oil from the Persian Gulf.

Analysts describe Libya as a country with a bright future, whose emergence from diplomatic isolation is balm to an oil-thirsty world.

"Libya and Gadhafi are making all the right moves," said Dalton Garis, an American oil economist at the Petroleum Institute in Abu Dhabi, United Arab Emirates. "The Libyans have done a lot to normalize things, more than anyone would've expected."

Libya is also one of the few countries with huge oil reserves that is actively encouraging foreign companies — especially American firms — to explore and produce oil. In Bolivia and Venezuela, leaders have joined big oil states like Saudi Arabia, Iran and Kuwait in reining in foreign oil companies — or booting them out.

Libya's light sweet crude is ideal for refining into gasoline, and its oil fields are far closer to U.S. and European markets than those in the Gulf, where the Straits of Hormuz — a choke point between Iran and Oman — could be blocked in the event of war.

On Monday, the Bush administration put Libya back in the game by announcing the restoration of diplomatic relations and Libya's removal from a U.S. list of state sponsors of terrorism. The move is under congressional review.

Libya's dramatic rehabilitation comes as the country is emerging from a long period of stagnation. In 1970, the year after Gadhafi deposed King Idris in a coup, Libya's oil production averaged 3.4 million barrels a day, its highest ever.

Production dropped as Gadhafi consolidated power, shut U.S. and British military bases and nationalized oil assets, which restricted oil companies' roles. Libya's oil sector bottomed out in the 1980s at 1 million barrels per day.

Oil production crept up in the 1990s and currently stands near 1.6 million barrels per day. Now, Gadhafi is seeking $30 billion in foreign investment, aiming to bring production to 1970s levels by 2015 or so.

"With the largest reserve base on the African continent, there's no reason that Libya can't restore the capacity it had in the 1970s, and double today's production," said Edward Morse at Hess Energy Trading in New York.

Oil production has been climbing since President Bush ended most restrictions in 2004 and allowed the return — after an 18-year hiatus — of U.S. oil companies Occidental Petroleum, ChevronTexaco, Marathon Oil and Amerada Hess International.

Libya's new production isn't enough to dent sky-high oil prices, Morse said, with yearly global demand growing by 1.5 million barrels daily.

Monday's announcement that Libya had been removed from the U.S. list of terror sponsors allows American companies to bring in technology that was previously blocked.

That, said Julius Walker with PVM Oil Associates in Vienna, means engineers can squeeze more oil from their holdings by repressurizing old wells using steam injections, finding oil using 3-D seismic surveying tools, and tapping tricky reservoirs with horizontal drilling.

Walker and others say Libya's true oil wealth is probably far greater than its 39 billion proven barrels.

With Gadhafi no longer an international pariah, the mercurial leader's global clout is expected to increase as oil exports rise.

Gadhafi's profile is also boosted by being seen to cooperate with the Bush administration's nuclear counter-proliferation efforts, as an example to Iran of the benefits of dropping nuclear enrichment.

"They've got a lot of leverage now," Morse said. "They've become the darlings of American politicians as an example to the Iranians."