BP Marks Return to Libya With $900m Gas Deal

BP is returning to Libya with its largest exploration project, more than three decades after it was thrown out of the north African country when Muammar Gadafy nationalised its oil industry.

The company has been granted the right to explore for gas in offshore and onshore fields in a $900m (£450m) deal that could eventually see the oil group spend up to $2bn over the next decade.

The deal, which was signed last night during a trip by British businessmen accompanying the prime minister, Tony Blair, will allow BP to drill 17 wells in the offshore Gulf of Sirte basin and the onshore Ghadames basin. The Sirte basin has already been shown to be highly fertile, while the Ghadames basin runs close to Libya's border with Algeria, where BP already has extensive operations.

The deal should help plug the hole that will be left in BP's gas reserves if it loses its licence for the huge Kovykta gasfield in Russia. The Russian oil licences regulator is due to meet on Friday to discuss the failure of the TNK-BP joint venture, in which BP has a half share, to meet production targets. TNK-BP is expected to lose its licence for the field, estimated to contain enough reserves to supply the world with gas for almost a year.

TNK-BP maintains that it has been unable to ramp up production to the promised 9bn cubic metres of gas because plans to build a pipeline to China have been blocked by state gas monopoly Gazprom.

Analysts pointed out yesterday, that BP has no Kovykta reserves on its books. But losing the field would be a blow to the company's prestige and further evidence of the Russian government's unwillingness to have assets in the hands of western companies.

Although former BP boss Lord Browne's Russian plans seem to be unraveling, he was also instrumental in BP's return to Libya. The company has been in talks with Libyan officials for some time and the two sides signed a memorandum of understanding in 2005.

The deal last night was signed by Lord Browne's replacement Tony Hayward, who was heavily involved in negotiations with Libyan officials in his previous role as head of BP's exploration activities.

In January BP said it was in talks with officials about an exploration and development opportunity that could result in a multi-billion dollar investment.

After his meeting with Col Gadafy yesterday Mr Blair said BP's return to the country was a "huge investment" that showed a commercial relationship between the two countries "going from strength to strength".

BP first moved into Libya after the second world war. The company was instrumental in the discovery of the huge Sarir field in the Sirte basin in 1961. The size of that field helped ignite the interest of western companies in Libya's potential.

In September 1969, a group of army officers lead by Col Gadafy staged a coup while the Libyan king was out of the country. BP's assets in the country were nationalised in 1971 and like many other firms who suddenly found themselves ousted from the country, BP looked to international arbitration to try to make some return on its lost assets. In 1974 it was awarded £17.4m. The US government imposed sanctions on the country in 1986, amid rising claims that Col Gadafy was sponsoring terrorists, and bombed targets near Tripoli and Benghazi. Always at the fringes of the international scene, Libya became a fully fledged outcast with the bombing in 1988 of a Pan Am flight 103 over Scotland, which killed all 259 people aboard the Boeing 747 jumbo jet and 11 Lockerbie residents.

After more than a decade and a half of intransigence, Libya's attitude to the west started to thaw in 2003 as the government pledged not to pursue nuclear, chemical and biological weapons. That move led to an easing of sanctions. Two years later Shell signed a deal to explore for gas in five blocks in the Sirte basin. Libya's reserves are vast. As of the start of this year its gas reserves were estimated at 53 trillion cubic feet - the 14th largest in the world. Some analysts, however, reckon they could be closer to 70 to 100 trillion. Libya wants to increase its gas production to replace domestic use of oil for power generation, so it can export the oil instead.