Manoeuvres shaped by horsetrading between America, Russia and France over control of untapped oilfields

Ed Vulliamy in New York, Paul Webster in Paris, and Nick Paton Walsh in Moscow
Sunday October 6, 2002
The Observer

Oil is emerging as the key factor in US attempts to secure the support of Russia and France for military action against Iraq, according to an Observer investigation.

The Bush administration, intimately entwined with the global oil industry, is keen to pounce on Iraq's massive untapped reserves, the second biggest in the world after Saudi Arabia's. But France and Russia, who hold a power of veto on the UN Security Council, have billion-dollar contracts with Baghdad, which they fear will disappear in 'an oil grab by Washington', if America installs a successor to Saddam.

A Russian official at the United Nations in New York told the Observer last week that the $7 billion in Soviet-era debt was not the main 'economic interest' in Iraq about which the Kremlin is voicing its concerns. The main fear was a post-Saddam government would not honour extraction contracts Moscow has signed with Iraq.

Russian business has long-standing interests in Iraq. Lukoil, the biggest oil company in Russia, signed a $20bn contract in 1997 to drill the West Qurna oilfield. Such a deal could evaporate along with the Saddam regime, together with a more recent contract with Russian giant Zarubezhneft, which was granted a potential $90bn concession to develop the bin Umar oilfield. The total value of Saddam's foreign contract awards could reach $1.1 trillion, according to the International Energy Agency's World Energy Outlook 2001.

The Russian official said his government believed the US had brokered a deal with the coalition of Iraqi opposition forces it backs whereby support against Saddam is conditional on their declaring - on taking power - all oil contracts conceded under his rule to be null and void.

'The concern of my government,' said the official, 'is that the concessions agreed between Baghdad and numerous enterprises will be reneged upon, and that US companies will enter to take the greatest share of those existing contracts... Yes, if you could say it that way - an oil grab by Washington'.

A government insider in Paris told The Observer that France also feared suffering economically from US oil ambitions at the end of a war. But the dilemma for Paris is more complex. Despite President Jacques Chirac and Chancellor Gerhard Schröder of Germany agreeing last week to oppose changing the rules governing weapons inspectors, France may back military action.

Government sources say they fear - existing concessions aside - France could be cut out of the spoils if it did not support the war and show a significant military presence. If it comes to war, France is determined to be allotted a more prestigious role in the fighting than in the 1991 Gulf war, when its main role was to occupy lightly defended ground. Negotiations have been going on between the state-owned TotalFinaElf company and the US about redistribution of oil regions between the world's major companies.

Washington's predatory interest in Iraqi oil is clear, whatever its political protestations about its motives for war. The US National Energy Policy Report of 2001 - known as the 'Cheney Report' after its author Vice President Dick Cheney, formerly one of America's richest and most powerful oil industry magnates - demanded a priority on easing US access to Persian Gulf supplies.

Doubts about Saudi Arabia - even before 11 September, and even more so in its wake - led US strategists to seek a backup supply in the region. America needs 20 million barrels of crude a day, and analysts have singled out the country that could meet up to half that requirement: Iraq.

The current high price of oil is dragging the US economy further into recession. US control of the Iraqi reserves, perhaps the biggest unmapped reservoir in the world, would break Saudi Arabia's hold on the oil-pricing cartel Opec, and dictate prices for the next century.

This could spell disaster for Russian oil giants, keen to expand their sales to the West. Russia has sought to prolong negotiations, official statements going between opposition to any new UN resolution and possible support for military action against an Iraqi regime proven to be developing weapons of mass destruction.

While France is thought likely to support US military action, and China will probably fall in line because of its admission to the World Trade Organisation, Putin is left holding the wild cards.

Russia recognises potential benefits of reaching a deal with the US: Saddam's regime is difficult to work with. Lukoil's billion-dollar concessions are frozen and profitless to Moscow and Baghdad under UN sanctions, leading to fears that Saddam might have declared the agreement null and void out of spite. Iraqi diplomats say Zarubezhneft won its $90bn contract only after Baghdad took it away from TotalFinaElf because of French support for sanctions.

Russia stands to profit if intervention in the Gulf triggers a hike in Middle East oil prices, as its firms are lobbying to sell millions of barrels a day to the US, at two-thirds of the current market price.

Moscow's trust of Washington may be slipping after what a Russian UN official calls 'broken promises' that followed negotiations over Moscow's support for the Afghan campaign.

Russia turned a blind eye to US troops in central Asia, on the tacit condition that US-Russian trade restrictions would be lifted. But they are still there, and other benefits expected after 11 September have also not materialised.

'They've been making this point very strongly,' a senior Bush administration official conceded to the Washington Post , 'that this can't be an all-give-and-no-get relationship... They do have a point that the growing relationship has got to be reciprocal.'