Given that the Middle East has traditionally been thought of as virtually off-limits when international oil companies (IOCs) scan the upstream investment horizon, there are a surprising number of doors creaking open. Recent months have seen major opportunities being offered or taken in Iran, Qatar and Saudi Arabia as well as in Libya, while more marginal players are also coming to market. And the chances could not be more timely for the majors - not least for Shell. Shareholders are clamouring for improved reserve replacement. And IOCs are finally allowing themselves to believe that strong oil prices are here to stay, adjusting their capital expenditure budgets accordingly.

Access to Saudi Arabia's upstream has long been considered the glittering prize. So a few eyebrows were raised when of the four IOCs making their way to Riyadh to sign landmark deals for exploration, development and production of non-associated gas reserves in early March, none of the majors were among them. Instead, Russia's Lukoil, China's Sinopec and a consortium comprising Italy's Eni and Repsol of Spain were the winners of the three licences for North Rub al-Khali acreage in the southeast of the kingdom. But the value of their prize is questionable. 'The three successful bids were way over the odds,' says a UK-based analyst. 'The winners were bidding for a foothold in Saudi and the Middle East, not for the assets themselves. The terms are poor. Any oil must be returned. So if the gas is too dry, it's not valuable. If it's too wet, it's classed as 'oil' and taken away.' Of the dozens of oil companies that were prequalified for the licences, fewer than 10 submitted bids.

In November, Shell scored another Middle East goal at the head of a consortium that signed a similar agreement covering the southern Rub al-Khali. Shell led one of the three consortia engaged in protracted negotiations over the Saudi gas initiative, before the last spark of life was snuffed out of the project in July. The UK's BP and ExxonMobil of the US, leaders of the other two core ventures, even chose not to bid when the scheme's upstream components were hived off. Debate as to why was inevitable. Some speculated that the majors had come to doubt the quality of the acreage on offer. Others that the two firms were so burned by their gas initiative experiences, a decision was taken to give the kingdom a wide berth.

However, more important may be the fact that opportunities opening up elsewhere allowed ExxonMobil and BP to indulge their frustration with Riyadh, and led other majors to adopt a more relaxed attitude towards securing Saudi concessions. BP has identified six core regions for investment, none of which covers the Gulf, and is preoccupied with its $6,000 million tie-up with Russia's TNK.

Within the region, Qatar is flavour of the month. ExxonMobil has taken equity stakes in all but one of the massive liquefied natural gas (LNG) projects under way in Qatar - most recently signing a heads of agreement (HoA) in October with Qatar Petroleum (QP) for construction of two 7.8 million-tonne-a-year (t/y) LNG trains under the Ras Laffan Liquefied Natural Gas Company II (RasGas II) venture. In July, fellow US giant ConocoPhillips signed an HoA on the Qatar Liquefied Gas Company III (Qatargas III) project, entailing one train of 7.5 million t/y. The majors are also moving into the gas-to-liquids (GTL) schemes that have been flowing of late. In the closing months of 2003, ConocoPhillips and Shell both struck deals with Qatar Petroleum on setting up integrated GTL ventures worth billions of dollars. Compared with Saudi Arabia and other regional hydrocarbons giants, Qatar offers a benign investment climate and is perceived as providing a safer operating environment. 'As well as being the biggest story in the Gulf at the moment, Qatar is also the easiest place to work, even if the fiscal terms are not exactly generous,' says Wood Mackenzie analyst Craig Pearson.

Tehran has had a rocky relationship with IOCs and has had difficulty attracting investment on terms perceived as unfavourable. However, as in Riyadh, early 2004 saw a breakthrough. After drawn-out negotiations, with threats of US sanctions looming in the background - and occasionally in the foreground, a Japanese consortium led by Inpex Corporation signed an agreement worth an estimated $2,000 million to develop the giant Azadegan field, due to produce 260,000 barrels a day by 2012. The sheen was taken off the deal by the subsequent break-up of the consortium in early March. France's Total is widely rumoured to be considering involvement.

Opportunities are also opening up off the beaten track. Algeria and Syria are both planning licensing rounds before the end of the year. How the threat of US sanctions against Damascus will affect the oil industry is unclear. Yemen and Sudan are in the process of apportioning new concessions. Sanaa's latest bid round attracted the interest of more than 20 companies. While still considered frontier territory, Yemen - like Libya - is often cited as an area of enormous untapped potential.

Their allure pales, however, in comparison to that of Iraq. IOCs, with some notable exceptions, have been publicly cautious about their Iraq plans, noting the need for a sovereign government and clear investment terms before negotiations can begin. In private, the possible opening up to foreign investment of a country with proven reserves of 130 million barrels is impossible to ignore.

The oil authorities in Baghdad remain preoccupied with sorting out the legacy of the former regime. Russia's Lukoil is determined to see its contract to develop the giant West Qurna field honoured. Saddam Hussein's government cancelled the agreement shortly before the US-led invasion, on the grounds of non-performance. Lukoil argues that UN sanctions against Iraq prevented work being carried out, and has threatened to take the matter to the international courts. Forgiveness of a portion of the billions of dollars of debt owed by Baghdad to Moscow has also become part of the equation.

IOCs cite the security situation high up their list of reasons for caution about investment in Iraq - a problem made more acute by the move towards targeting civilian collaborators with the occupying forces rather than the US-led coalition authorities themselves. Oil facilities have been a favourite target of saboteurs. Only in early March was it possible to reopen the Kirkuk-Ceyhan export pipeline, closed since the war because of attacks and the difficulty of protecting against them. The pipeline continues to operate well below capacity.

However, IOCs are no strangers to uncomfortable operating conditions and Iraq offers vast potential to majors hungry for significant new reserves. Shell's Libyan and Saudi coups were overshadowed by the company's shattering admission that reserves had been overbooked by 20 per cent. The confession forced the resignation of chairman Phil Watts and shone a wider spotlight on the question of IOCs' reserve estimates. Given the intense pressure exerted on management by shareholders to maintain strong reserve replacement ratios, the temptation to exaggerate is obvious.

Such pressure is alien to regional giant Saudi Aramco, but its own reserve and production estimates have also come under scrutiny recently. A fierce debate was sparked in February when independent US energy analyst Matt Simmons cast doubt on the sustainability of the largest Saudi oil fields and on the ability of Riyadh to maintain the mantle of global swing producer. Aramco swiftly mounted a vocal, data-driven defence, and the debate has been welcomed for prompting unprecedented transparency from the company.

The Middle East is back on IOC radar screens as some of the region's most promising oil producers open their doors to foreign investment. Iraq and Libya, in very different circumstances, have shed their pariah status. Saudi Arabia and Iran have successfully concluded the tortuous process of agreeing foreign investment terms. And given the increasing scrutiny accorded to IOCs' reserve levels and the dearth of major opportunities elsewhere, the conversions could not come at a better time.

Clare Dunkley