Compensation payout may open up oil-rich Libya to the West

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For three decades Colonel Muammar Gaddafi has willingly posed as the West's poster-boy of evil. He has – when it has suited the United States and Britain – been considered a maverick, a pariah, a terrorist mastermind or just a plain old lunatic tent-dweller.

But as unlikely as it seemed three or four years ago, the man with the taste for haute couture who models himself on the revolutionary Egyptian leader, Gamal Abd al-Nasser, is undergoing something of a transformation. At its heart lies one commodity: oil.

The decision announced yesterday at Camp Zeist is the latest process that paves the way for Libya's return to the international fold. Once the country fulfils United Nations demands to pay compensation and accept responsibility for Lockerbie, the 1992 sanctions – suspended in 1999 – will be formally lifted.

One Western diplomat said yesterday, referring to Colonel Gaddafi's condemnation of the 11 September attacks: "I think that the US has accepted that Libya has moved away from support for terrorism. I think there is a danger, however, to think that [the relationship will change] rapidly. The process is almost glacial."

The prize at stake is the wealth that lies beneath Libya's vast desert expanses and, with the situation in Iraq threatening to destablise supplies of oil from the Middle East, it has never been more important. Before relations between the north African country and the West soured utterly, a number of Western oil companies drilled in Libya. The head of the country's National Oil Corporation has held meetings with representatives from Conoco, Marathon, Amerada Hess and Occidental to discuss deals worth hundreds of millions.

Britain has already reinstituted full diplomatic relations, which were severed in 1984 when PC Yvonne Fletcher was killed while on duty outside the Libyan embassy in St James's by a shot fired from inside the building.

America broke off relations in January 1986 after a series of Libyan attacks on US targets overseas. Ronald Reagan, President at the time, retaliated with air strikes launched from bases in Britain. They struck parts of Tripoli and killed 101 people, including Colonel Gaddafi's adopted daughter.

The breakthrough in relations came in 1999 after Colonel Gaddafi agreed to hand over for trial the two Lockerbie suspects. Tellingly, President Bush did not include Libya in his "axis of evil" and last year froze the assets of the Libyan Militant Islamic Group, which has tried to assassinate the colonel.

The cost to Libya of a Lockerbie payout may be high, but much more is at stake.