(FORTUNE Magazine) – Squinting against the harsh Libyan sun, the American oilmen emerge from a line of idling black Mercedes sedans and make their way into a low-slung building near Tripoli's sleepy international airport. This is the home of Libya's National Oil Corp., and the U.S. execs in their starched white shirts and dark suits have come from Texas and California to see one man: Abdulla Salem El-Badri, the company's chairman. He is the gatekeeper to Libya's energy industry, and since the Bush administration eased the 18-year-old embargo against Libya in April, El-Badri's appointment book has read like a Who's Who of Big Oil.

Among the most recent visitors was Occidental Petroleum CEO Ray Irani, who came to Tripoli at the end of May to meet with El-Badri, Libyan leader Col. Muammar Qaddafi, and other top officials. It was Irani's second trip to Tripoli this year. He received special approval from the U.S. to visit in March, leasing a Swiss plane because it would have taken weeks to get Washington's permission to fly the Oxy corporate jet to Tripoli, and the always competitive Irani was eager to be the first major American CEO to return to Libya.

It looks as if Irani's race to Tripoli is about to pay off. El-Badri says Occidental is ahead of its rivals in negotiating a deal and could sign an agreement in the next few months to resume production. Irani is more cautious about the timing, but Occidental has already appointed a senior executive to run its Libyan operations. "On both the Libyan side and our side, there's a great desire for Oxy to return," Irani told FORTUNE during an interview in Tripoli. "And when there's a desire, things can happen."

For Occidental--and other American oil giants like Exxon Mobil, ConocoPhillips, Amerada Hess, and Marathon--going back to Libya would mean more than just clinching a deal to enter a new market. American companies made the North African country into an oil powerhouse in the 1960s and 1970s, and booming sales of Libya's black gold helped turn Oxy and its legendary CEO Armand Hammer into household names.

After nearly two decades as a province more remote than Siberia for American oil companies, Libya is on the verge of resuming its historical role as a major source of energy for the U.S. With gasoline prices averaging more than $2 a gallon across the country, that's good news. And it could also be a tremendous opportunity for the companies now negotiating with Qaddafi--unless it turns out, as recent reports about a Saudi plot suggest, that he hasn't really turned his back on terror. If that happens, Americans could end up walking away from Libya empty-handed, much as they did after sanctions were imposed in 1986.

But it's easy to see why they would take the risk. At their peak in 1970, fields operated by Oxy produced 660,000 barrels a day, more than the company's total oil production last year. Today those old fields, operated by National Oil, produce fewer than 100,000 barrels a day. Libya's oil industry is in dire need of new investment, which is one major reason Qaddafi renounced his earlier efforts to acquire nuclear arms and agreed last year to cooperate closely with American weapons inspectors. "The Libyan oil industry needs a lot of investment," says Shukri Ghanem, Libya's new Prime Minister. "American oil companies will be able to spend and can take risks." At the same time, says Ghanem, "Libya needs to be exposed to international society and foreign investors."

The White House has its own needs: Eager for partners in the war on terror, especially in the Arab world, the Bush administration has moved quickly to lift most economic sanctions against Libya and eliminate travel restrictions. Although Libya is still branded a "terrorist nation" by the U.S., it may soon reopen the Washington, D.C., embassy that President Reagan ordered closed in 1981.

Moreover, with an election-year uproar over high gas prices and Saudi Arabia experiencing a wave of attacks, the prospect of a secure source of fresh petroleum may be enough to help the administration forget Qaddafi's past support for terrorists. Libya's high-quality, low-sulfur crude is ideally suited to meet the needs of U.S. refineries. What's even better for American oil companies is that tankers from Libya can reach U.S. ports in half the time it takes ships coming from the Persian Gulf. And with estimated reserves of roughly 36 billion barrels--the 9th-largest in the world--Libya is not about to run out of oil anytime soon.

Although the sanctions were only eased on April 23, Tripoli's one business-class hotel--the brand-new Corinthia--is filled with U.S. executives hunting for deals. Representatives from telecom companies are here, and Coke is already being bottled locally. Not surprisingly, the lawyers aren't far behind--major U.S. firms like White & Case, Vinson & Elkins, and Baker Botts have all sent partners to Tripoli.

But it's the oilmen who are leading the way. ChevronTexaco has sent a team, according to El-Badri, and he expects Exxon Mobil shortly. Besides Occidental's Irani, the CEOs of Marathon, ConocoPhillips, and Amerada Hess have also been to Tripoli in recent weeks. The latter three companies form the Oasis Group, the other major American oil operator when the sanctions went into effect in 1986. At the time, both Oasis and Occidental signed standstill agreements with the Libyan government that froze the companies' stakes in Libya for the eventual day of their return. Libyans and Americans alike expected the embargo would be a short-term affair. "Nobody thought it would be for 18 years," says Irani. Because output has gradually waned since then, the concessions once run by the Americans don't hold the same appeal they did. In addition, more sophisticated seismic techniques may reveal that the blocks Oasis and Occidental committed to exploring back then may not hold as much oil as first thought.

Libyans like El-Badri want the Americans to simply pick up where they left off. Says El-Badri: "We told them, 'You left in 1986, so why not come back with the same conditions?'" That's not likely to happen, because Oxy has also changed. The company is more focused on domestic production today and doesn't venture abroad unless there's a big benefit to the bottom line. "It's quite clear that Libya is very important in Oxy's history, and vice versa," says Irani. Nevertheless, he warns that "there's no point in going outside the U.S. unless there are higher returns. High risk should mean high reward." Unfortunately for Irani, Oxy's old contract was anything but generous. Irani won't go into details, but one oil executive close to the negotiations says following the old agreement would mean a margin of about $2 a barrel for Oxy--far less than the $5 to $10 margin that most companies demand these days.

So now Irani and the other American CEOs are hoping to iron out new deals that will let their companies return on sweeter terms and with the potential to develop new fields, rather than simply going back to the old concessions. While El-Badri is confidently predicting that a deal with Occidental could be signed this summer, Irani hopes it will happen before the end of the year. "We're assuming we are coming back," he allows. "Otherwise, we wouldn't be assigning personnel here."

If Sirte Oil's Brega plant on the shores of the Mediterranean resembles an Exxon facility in Texas, that's because Brega was an Exxon facility until the company withdrew in 1982 as relations between Washington and Tripoli were deteriorating. Signs on the walls of the control room still read ESSO LIBYA (Esso is Exxon's brand name outside the U.S.), and Sirte managers talk fondly about the trips they made to Texas for Exxon training in the late 1970s. Unlike at petroleum operations in other developing countries, there are no pools of oil on the ground at Sirte's Brega plant or toxic fumes filling the air.

Even more impressive: The control rooms in Brega brim with modern computers running Windows software and digital monitoring systems. While sanctions crippled Iraq's oil industry, the embargo against Libya proved as porous as the sedimentary rock that holds its oil.

"I don't see that we've had any difficulty getting what we wanted," says one Libyan manager. "It just means more lead time and more money." In some cases, a lot more. Buying embargoed American oil parts often meant markups of as much as 300%. But with oil exports generating $30 million to $40 million a day over the past several years, finding the money wasn't a problem. Nor was using third-party suppliers or the European subsidiaries of American firms. For example, GE did business in Libya during the sanction years through its Italian subsidiary Nuovo Pignone.

Along with its emphasis on technology, Sirte's corporate culture would be familiar to anyone who knows the ways of Exxon CEO Lee Raymond--a relentless focus on maintenance and safety, a no-nonsense formality among top managers, and offices where floors are polished and everything runs like clockwork. There's even a formal dining room with waiters and chefs on hand for executive banquets, just like in Dallas.

Despite the 1986 U.S. raid on Tripoli by U.S. jets, the embargo, and Qaddafi's reputation among Americans as "the mad dog of the Middle East," in Ronald Reagan's famous phrase, Libyans themselves are oddly nostalgic about America's onetime domination of their oil industry. "American oil companies were the first to come to Libya and the first to export from Libya," says Prime Minister Ghanem. Now, he says, the U.S. companies "are coming back home."

Older members of the Libyan elite like Ghanem and El-Badri also have warm memories of the U.S. because they studied there in pre-embargo days. The sanctions only intensified the nostalgia, so talking to these technocrats about the U.S. can have a Rip Van Winkle quality. "Ask me what my favorite TV show is," says Khalid Jarnaz, who lived in the U.S. in the early 1980s and now works in Tripoli for Repsol, the Spanish oil giant. He answers his own question: "I love M*A*S*H. My favorite comedian is Bill Cosby."

Within Libyan companies, the fondness extends to U.S. business habits. "We follow the same practices as Esso because that's what we know," says Sirte executive M.S. Abulaiha. "Anything else would be unfamiliar." At Sirte's Zilten oilfield, 105 miles south of Brega, the electric current runs according to American settings, not those of Europe or the Middle East. Zilten is Libya's oldest commercial field. Esso geologists made the initial discoveries here in the mid-1950s, and people like field maintenance supervisor Mohammed Shubani are hungry for new equipment. But he wants it to come from the U.S. "I want GE parts," he says, pointing to the GE gas turbines that power the pumps and rigs. "The standard here is American, and the machines will be so much easier to maintain."

Like members of a South Pacific cargo cult, Libya's oil technocrats venerate the ways of the long-vanished Yankees. The red and blue logo of Zueitina Oil, which used to be operated by Occidental, is identical to that of its former American parent except for the Arabic letters that spell out Zueitina. "We just changed the name--we left the rest as it is," says Zueitina field superintendent Mohammed Saad.

Saad worked for Oxy from 1975 until it left in 1986 and he now runs Concession 103, the oilfield that was the backbone of Oxy's Libyan operations. In the pumping stations around 103, in the heart of the Libyan desert, old Occidental manuals sit alongside newer guides. Saad proudly notes that the tanks are still painted the lime tones he calls "Oxy green." Saad may be fiercely critical of President Bush's policies on Iraq and Israel, but when it comes to Oxy, he still sounds as if he were on the payroll. "This is where Oxy was born," he says. "When Oxy returns to 103, I'll turn it over to them and retire."

The first sign of the El-Sharara field in the heart of the Sahara is the ghostly glow cast across the desert sands by two natural gas flares. It doesn't yet pay to ship the gas north, so it's simply burned off, substituting day for night near many wellheads. Located about 500 miles south of Tripoli, El-Sharara is one of Libya's newest oilfields. It is operated by Spain's Repsol, which, along with France's Total, and OMV of Austria, controls 25% of production. Libya's National Oil owns the rest. In the eight years since pumping started, the oilfield has proved a wise investment: Roughly 200,000 barrels of oil flow out of the ground every day at El-Sharara. The nearby Elephant field operated by Italy's Eni and Libya's National Oil should generate another 150,000 a day by 2007.

European oil companies were able to take the lead because Washington's sanctions were more severe than the UN's during the 1990s. While sales of military hardware were banned and direct air service was almost impossible, the UN didn't prohibit foreign companies from dealing with Qaddafi. So firms like Repsol and Total were able to develop new fields without too much difficulty. Before UN sanctions were suspended in 1999, European managers would simply fly into Tunisia, then proceed overland to Tripoli or to the desert oilfields. Back when the Americans were in Libya, El-Sharara and the surrounding Murzuq basin were terra incognita. Now, says a Repsol manager at El-Sharara, "the future of oil in Libya is in this area." Across the trackless desert, drilling rigs operate day and night despite temperatures that by early June were already hitting 100 degrees. While it may not be pleasant for the Libyans and the expats who man the rigs, working around the clock pays off. The oil reservoirs in this area are located a comparatively shallow 5,000 feet below the surface, and the crude flows abundantly. That keeps production costs down to just a few dollars per barrel--compared with $5 to $10 in Texas or the North Sea. With crude selling at about $38 a barrel, El-Sharara is proving to be a gusher for National Oil and its European partners.

So while Oxy and Oasis negotiate with the Libyans about their old concessions, it's the unexplored parts of the country that have both American and international oil giants salivating. This summer National Oil plans to auction ten new blocks for exploration. The American companies with roots in Libya hope they have an advantage, but they're up against some deep-pocketed international rivals, including Total, Repsol, and Norway's Statoil. "It's been a long time since you've had blocks like this come on to the international market," says Matthew Simmons, a veteran Houston energy banker who visited Tripoli in early June. "Libya was a company maker for Occidental, Amerada Hess, Marathon, and Conoco, so anyone would be crazy not to look at these blocks."

Still, there are some big risks. First, it will take a decade of seismic work and analysis to determine just how much new oil lies under the desert sands, says Simmons. Then there's the question of how genuine a conversion Qaddafi has made. While Libya has received praise from the U.S. for its cooperation with weapons inspectors, Qaddafi's past support for Palestinian terrorist groups and the IRA is troubling. And new reports have surfaced that Libya's intelligence service may have plotted to assassinate the Crown Prince of Saudi Arabia. Also unknown is whether the mercurial Qaddafi will decide that foreign oilmen aren't entitled to make the kind of profits that usually come with high-risk projects. Indeed, Qaddafi was among the first Arab leaders to demand better deals from foreign oil giants and to nationalize fields.

For European companies that have been operating in Libya and have dealt with Qaddafi, these issues don't loom so large. "People believe Libya is totally wild, but they are mistaken," says Helmut Langanger, who heads up exploration and production for Austria's OMV. "We've been there since 1983, and it's a very good country to do business in. Sun or rain, the Libyans honored their agreements." Georg Wachtel, the general manager of OMV's Libyan operations, has been in and out of the country since 1985 and says that unlike in Saudi Arabia, "living here is very safe. You're not forced to have a driver or security to move around, and you can travel freely."

So while the Americans weigh their return to Libya, European companies have been moving aggressively. Italy's Eni is months away from switching on a $1 billion pipeline between Libya and Sicily that will substantially increase Libya's gas exports. And in March, Royal Dutch/Shell signed a $200 million agreement to explore for oil and develop liquid natural gas facilities with National Oil. Offshore blocks are also drawing interest, with France's Total pumping 20,000 barrels a day in the Mediterranean near Tunisia, while Repsol and OMV focus on prospects further east.

Although El-Badri happily welcomes American visitors to his Tripoli office, the reunion of Big Oil and the regime of Col. Qaddafi is far from assured. No administration in Washington is likely to countenance U.S. companies spending billions in Libya if Qaddafi returns to his old ways--even if European competitors are willing. Nor is it clear just how flexible Libya will be about the terms of the new contracts. Still, as he sits in a 15th-floor Corinthia Hotel conference room overlooking the Mediterranean, Occidental's Irani seems unfazed by these worries. "We assume the rapprochement between the U.S. and Libya will continue," he says. "Otherwise, I wouldn't be visiting this frequently."