* Dispute highlights fears of contract revisions
* Big oil players watch outcome of saga
* Canadian government concerned
By Tom Pfeiffer
RABAT, June 23 (Reuters) - A deepening confrontation between Libya and Canadian oil explorer Verenex is shedding light on the risk of doing business in the north African country as it emerges from years of sanctions.
Investors will be watching the outcome of the dispute which began after Libya said it would buy Verenex, blocking a rival bid from China National Petroleum Corp (CNPC).
Libya is now investigating allegations that Verenex was improperly qualified to bid for stakes in Libya's oilfields in 2005, according to a letter received by Verenex. The company says the allegation was without merit.
A senior official at Libya's National Oil Corporation (NOC) was not available for comment on Tuesday.
Verenex is only a small player in Libya alongside super-majors like BP Plc and Exxon Mobil and a bevy of foreign state oil firms all keen for a slice of Africa's biggest proven oil reserves.
But it is the only one to have made big finds in acreage opened up by licence tenders since the end of sanctions.
"Companies always worry that in the event of a significant discovery, governments will seek to revise their contract terms to capture more revenues," said Ben Cahill, North Africa analyst at industry consultants PFC Energy. "Oil companies will be concerned that this pattern could be repeated."
Libya is aiming to boost oil production to 3 million barrels a day by 2012 from 2 million this year, and sees a doubling of gas production by 2012 or 2013 from the current rate of 3.5 billion cubic feet (99.1 million cubic metres) per day.
Foreign oil firms accepted some of the industry's smallest production shares when they bid for acreage in Libya.
Analysts said establishment conservatives there may be lobbying to ensure Libya gets more from Verenex's success by buying the company for less than the value of its assets.
Verenex sank $177 million into Libya and the price put on those assets today implies the company will have doubled its money, said Richmond Energy Partners analyst Keith Myers.
"Maybe the Libyans think that is too much," said Myers. "It's the normal course of business to extract as much benefit from a transaction as possible. What's different this time is that it's being made public."
He questioned whether other oil companies might pull out of Libya, given that they would pay big contract cancellation penalties and would have to write off their Libyan investments.
"Libya remains one of the few places you can explore for big reserves," said Myers. "The geology hasn't changed and neither have the politics, which were always challenging and remain so."
He said the Verenex spat could put off some smaller companies thinking about entering Libya.
Many firms that won exploration rights in the Libyan bid rounds have yet to finalize their contracts or have development plans approved.
"The Verenex story raises an additional above-ground risk for them that NOC will continue to intervene in commercial transactions," said Cahill.
APPROVAL BONUS
The delay to the sale of Verenex is a blow for a company whose expertise lies in finding crude and selling the field, not producing and selling the oil. Verenex shares tumbled on the Toronto Stock Exchange on Monday.
The company said NOC had asked for a C$46.7 million bonus in exchange for its approval of the Verenex sale but the approval had still not come.
Verenex said it thought Libya's General People's Committee was looking to have the bonus raised or the potential sale price cut.
The company said it was reassessing its operations and expenditure in Libya because of the delays and had enough cash to fund its business for the next few months.
Canada's government has expressed concerns to the government of Libya and said it planned to press Tripoli for a response. Verenex is considering arbitration or other legal remedies.
"The NOC's claim that Verenex wasn't properly qualified to bid in a licensing round held nearly four years ago seems suspect, to say the least," said Cahill. "The Libyan government's actions send an important signal to investors on the core issue of contract sanctity."