I have just found a two step answer to my question.
In the scenario #1 above after doing it you have to go the Web Fragment project properties and then go to Deployment Assembly, press the "Add" button, select Java Build Path Entries and select all the libraries you want to be included in the WEB-INF/lib directory of the server.
Once this is done the libraries selected will be copied to the WEB-INF/lib when publishing the server or exporting the war.