The battle for Saddam's oil

There may be 300 billion barrels of the black stuff under Iraq, says Leo Lewis, and companies all over the world can't wait to get digging

Grainy satellite shots of a missile silo are all very well, but they are nowhere near being the most interesting photo-graphs of Iraq. The footage that will really keep the world on the edge of its seat will be the first 3D seismic survey of the desert west of Baghdad.

The focus on US and UK activities on the political stage has disguised a game of far greater subtlety being played between the world's biggest oil companies. The race for Saddam's crude is already well under way, and corporations across the globe are gearing themselves up for a breathless sprint to the finish line.

Clearly in the lead are the Russians, who now have six companies in the frame. Behind them are the French and behind them is a vast international mix of prospectors that include companies large and small from China, Indonesia, Canada, Ireland and Vietnam. A piece of Deutsche Bank research published in October last year suggested there might be around 20 companies that, in 1998, established contracts with Iraq that would come into play once sanctions were lifted. Recent revelations by sources at Iraq's oil ministry suggest that the figure is closer to 40.

What is still not clear is how far the preparations of British and American companies have gone. Their interest in the region is beyond doubt but their strategy remains a secret. Many industry veterans believe that last week's $6.75bn (£4.1bn) partnership deal between BP and Russia's third-largest oil company, Tyumen Oil (TNK), could provide a big clue to the direction British companies will take. Experts think that BP may be planning to use Russia's historic success in dealing with Saddam as leverage when Iraq finally opens up.

The importance of Iraqi oil has been highlighted by the war footing. Some 66 per cent of the world's reserves are locked up beneath the Middle East, and about a fifth of that lies under Saddam's control. Despite the heightened tension, the US last month bought 75 per cent of all the crude exported from Iraq.

The prize at stake is as attractive as these things get. Current estimates vary, but groups like the International Energy Agency (IEA) reckon there are about 115 billion barrels of "proven" reserves under Iraq, of which around 35 billion are available for immediate extraction. But everyone in the industry believes this figure wildly understates the reality. Along Iraq's border with Saudi Arabia, there is an unexplored strip of land that the French Petroleum Institute (IFP) thinks could contain a further 200 billion barrels.

For the world's oil companies, one of the chief problems in dealing with Iraq has been its effective long-term isolation from the rest of the industry. The estimates of Saddam's crude reserves are mostly based on surveys made before the Iran-Iraq war of the 1980s, using techniques that dated from the 1960s.

As Michael Yeaman, a director of Accenture's energy advisory division, explains: "It has been 20 years since the radically improved new technology has been deployed in that area, and it is almost certain that the result of employing this would be a major upward revision to Iraqi reserve estimates."

Also part of the Iraqi prize are wells that have now been closed but could yield significant volumes if reopened and exploited properly. That pattern would match the one in Russia in the early 1990s, when Western companies were able to use modern techniques to add several years to the productive life of redundant Soviet-era wells. Better technology would also mean that wells damaged either accidentally or deliberately in a war could now be brought back on line far quicker than they were in the wake of Saddam's withdrawal from Kuwait in 1991.

The true extent of Saddam's crude riches are well known to oil companies and governments everywhere, and the emerging prospect of a regime change – or even just a negotiated lifting of sanctions – has set them rubbing their hands. But it is the French and Russians who have stolen a march on their rivals in Britain and America. Between them, Russia's Lukoil and France's TotalFinaElf have already secured options on one quarter of Iraq's total reserves. Even if the lowest reserve estimates are used, that gives the pair the chance to add at least 30 billion barrels to their long-term portfolios – a magnificent bounty even if crude prices tumble from their current two-year highs of $33.50 per barrel.

So far the two British titans, BP and Shell, have kept their comments on the Iraq issue very cautious, and a broadly similar course is being adopted by big US players such as ExxonMobil and ChevronTexaco. In all cases, say the analysts, the companies are forced to tread a delicate line to avoid accusations that war is being waged for their benefit. Using very similar wording, however, both BP and Shell have signalled to the City that they will actively examine Iraq once the situation – either with the regime or sanctions – has changed.

In looking at the future of Iraq, the analysts are using two scenarios. The first is one where US and UK military action forces a regime change, leaving the fate of Iraqi oil in their hands. As Robert Mabro, director of the Oxford Centre for Energy Studies, says: "That could create a big struggle between the oil interests. BP and Shell would be able to negotiate on favourable terms. The French and Russians could end up with much less than they are hoping for."

While that scenario is a distinct possibility, most prefer to believe a post-Saddam Iraq would emerge as a level playing field for companies around the world. It is this set of circumstances that has so whetted corporate appetites. Italy's Eni, Spain's Repsol, Malaysia's Petronas and a variety of state oil concerns from Japan, Australia, Algeria and Turkey are all understood to have set up contracts that would work in a post-sanctions Iraq.

For BP, its bold move into Russia gives chief executive Lord Browne (pictured below) the chance to get the best of both worlds. In the first scenario, it is certain BP would plant its flag in Iraq. In the second, it would be able, in the words of one of Opec's senior advisers, "to exploit the Russian-ness of Tyumen, and the fact Iraq would see itself as dealing with familiar faces and not all-conquering Brits".

George Bush's rhetoric in the past few months has left commentators divided on the central role of oil. Some have played down the extent of oil interests in the White House, dismissing the importance of Iraq's reserves as a red herring. It is just possible Saddam's oil doesn't matter to the politicians, but it is clearly critical to everybody in the industry. As John Paul Getty Jnr once quipped: "The meek shall inherit the earth, but not the mineral rights."

'Green' BP buys into the dark side

The global oil industry is a murky place at best, but with last week's $6.75bn (£4.1bn) investment in Russia, BP has gone into one of the darkest corners.

As BP expands, Russia, with its huge potential reserves and new status as the world's second-biggest crude producer, is the logical way to go. And Tyumen, BP's new partner and driller of one in seven exported Russian barrels, is a logical choice.

Analysts have welcomed the deal, but not without reservation because business in Russia carries almighty risks. "Apart from the physical challenges of the drilling itself, you can get awfully tied up in the issue of who exactly you are dealing with and whether they are legit," says one Wall Street oils analyst.

A bigger problem, cited by analysts at Dresdner Kleinwort Wasserstein, is that the image of BP could suffer through its association with Tyumen – a company that has come to represent many of the darker sides of business in Russia.

The first such blow will come as BP continues its efforts to appear "green" to the outside world. Some years ago, when Tyumen started to produce enough oil to trade on international markets, its parent, Alfa, set up Crown Resources as a sister company for it. Crown most recently hit the headlines when it emerged at the centre of the tangled web of firms involved in the Prestige, the tanker that sank off the Spanish coast last year. According to the experts, it is "99 per cent certain" that the 77,000 tonnes of heavy crude still leaking from the sunken hull were originally drilled by Tyumen.

That isn't the only stain on Crown's name. Allegations by the Cyprus-based NoreX Petroleum, filed in a New York court, claim that Crown Commodities, the company's London unit, was used to evade tax of around £18.5m by Alfa and other Russian companies.

A potentially even greater problem is presented by Alfa. Tyumen's parent, which still holds 50 per cent of the stock, is run by Mikhail Fridman, an ultra-aggressive entrepreneur from the "new Russian" school of business. The 38-year-old began his career as a Moscow ticket tout, and via interests in oil and banking has become Russia's third-richest man. His business history is fraught with alleged vote rigging, bribery and bankruptcies. Alfa is facing a $3bn claim against Tyumen alleging involvement in racketeering during the 1990s and the "illegal takeover" of Yugraneft, a Russian oil rival.

In a recent interview, Mr Fridman said: "Everyone lies. Russians lie. They may lie more, others may lie less, but that's a difference in quantity not quality."