Shell first off blocks in race to cash in on UK's new friendship

Shell signed a deal with Libya yesterday which could open up billions of pounds worth of natural gas reserves as British firms began a rush to develop commercial opportunities in the former pariah state.

Under the agreement, the Anglo-Dutch energy giant will search the Libyan desert for oil and gas over the next seven years. Shell executives have spent three years negotiating the deal to explore inland fuel reserves and redevelop the country's facilities to produce liquid natural gas.

The deal heralds a potentially major development in trade between the two countries.

BAE Systems, the defence and civil aviation giant, is currently negotiating to provide civil airport services, while other British companies are thought to be anxious to exploit thawing relations between London and Tripoli.

Mike O'Brien, the Foreign Office and Trade minister, will lead a delegation of British business leaders to the Libyan capital next month.

The British Government said it saw "potential" for UK business in Libya across a number of sectors including oil and gas, airports, ports and logistics, education and training, healthcare and tourism.

Malcolm Brinded, head of exploration and production at Shell, said the deal with Colonel Gaddafi's regime was potentially highly significant for the country's future prospects.

He said: "Libya has the chance of being a top 20 country, I would put it that way."

Mr Brinded welcomed the improving relations saying: "It just gives everybody confidence on both sides, as political relationships improve the climate for improving trade and commercial relationships goes hand in hand.

He continued: "One should stress this is an exploration programme and there is always a significant risk that it doesn't lead anywhere. If successful I would expect it to be a multibillion-dollar investment and I would expect there to be the potential in this place.

"We were in Libya in the Fifties and we were in Libya in the Eighties for an exploration programme, but for this one we came back in 2001 and so this is the culmination of discussions over that."

Libya could rapidly become more important as a trading partner for Britain. Exports to Libya in 2003 amounted to £241m, making it Britain's 58th most significant foreign market. Imports to the UK from Libya last year were worth £202m.

There are extensive gas reserves in Libya and even bigger known oil deposits - it has the eight largest oil reserves in the world, even though exploration in the country has been hampered for the last 20 years by lack of Western investment and technological know-how.

BAE said it was negotiating a deal with the Libyans for airport and air traffic infrastructure work, to modernise the country's outdated civil air travel facilities.

The deal, when signed, would cover everything from helping to manage the country's air traffic control to providing specialist equipment to the fire crew at Libya's airports.

In time, the relationship could extend to selling Libya commercial aircraft or leasing civil planes, said Richard Coltart, a BAE spokesman. He added that talks had been going on for a "some years". Mr Coltart insisted that the agreement would not cover military equipment or expertise. "This is civil. Defence matters are not under discussion," he said.