A Perilous Prize — Big Oil’s quest for Iraq’s vast oil reserves.

Last week was marked by two separate but related events concerning Iraq. One was the fifth anniversary of the US and coalition forces’ invasion of Iraq that sought to topple the Saddam Hussein regime and eliminate the dictator’s supposed weapons of mass destruction. The other was the decision by Russian oil giant LUKOIL to get back into the oil exploration business in Iraq, where it held pre-war oil concessions.

The Russian government has been pushing for some time to revive some of the Iraq contracts lost after the 2003 invasion, including a $3.7 billion deal to develop the West Qurna oilfield in southern Iraq. It also seeks to participate in a project to rebuild a pipeline from Iraq’s Kirkuk oilfield to Syria’s Mediterranean port terminal of Bania.

Two road blocks have stood in the way of the re-engagement of LUKOIL. One is the fact all the old oil contracts had been scrapped under the new sovereign government of post –Saddam Iraq; the other is that Iraq owed Russia about $12.9 billion for its canceled oil deals.

But last month Russia wrote off most of Iraq’s debt and signed a cooperation treaty in which Iraq would open up the country for $4 billion in investment from Russian companies.

What is attracting LUKOIL and other oil multinationals such as BP, ConocoPhillips, Repsol YPF, Royal Dutch Shell, and TOTAL to engage and invest in Iraq oilfields is that it has the third largest oil reserves in the world (about 115 billion barrels) and that those reservoirs are accessible and theoretically inexpensive to develop.

The factors discouraging foreign investment are the levels of violence from the simmering civil war that the American military is stretched thin trying to tamp down as well as the fact that a new Iraq federal oil framework — that would outline a revenue-sharing arrangement and the rights and obligations of foreign companies — is bogged down in endless squabbling between the various Kurdish, Shia, and Sunni government factions.

Confronted by the delays in shaping a national oil policy, some oil companies have tried to cut deals with the semi-autonomous Kurdish region in the north, bypassing the national government. Hunt Oil signed an agreement with the Kurds last September to jointly explore for oil in the Kurdish enclave. Impulse Energy has signed a similar deal. The legal and operational future for these deals? Uncertain.

In February, Iraq was producing 2.4 million barrels a day (still less than the prewar production of 2.8 million barrels), but the country hopes to use foreign investment and expertise to boost that to 3 million barrels per day by the end of the year. A legal framework and, above all, security (the prevention of sabotage and the safeguard of oil workers) are key to that happening.

But a National Oil Policy is still not finalized, and security remains fragile. According to the Energy Information Administration, between April 2003 and May 2007, there were 400 individual attacks on Iraq’s oil infrastructure. Last Thursday, the Basra oil pipeline was bombed during the latest outbreak of violence in Iraq.

Foreign oil companies can see the prize, and smell the money, but the path to those riches is perilous.