(FORTUNE Magazine) – Even by the colorful standards of British scandals, the arrest in late August of Mark Thatcher, son of former Prime Minister Margaret Thatcher, was explosive news. The 51-year-old former racecar driver and millionaire businessman was apprehended in his pajamas by South African police, who showed up at his Cape Town mansion and accused him of helping to finance a botched coup earlier this year in the oil-rich state of Equatorial Guinea.

Thatcher's arrest was the latest development in a bizarre tale involving oil, intrigue, and money. The coup plot had already landed dozens of British and South African mercenaries in jail in the tiny West African nation and in Zimbabwe. Then, in late August, a Zimbabwe judge convicted one of Thatcher's friends, Simon Mann, a scion of Britain's Watney beer fortune, of buying weapons for the coup. Mann inadvertently exposed Thatcher in a letter smuggled out of prison. "Our situation is not good, and it is very URGENT," he scrawled in a missive to Thatcher. "This is not going well."

Mann's coup plot held great allure for some. According to testimony, he planned to overthrow the country's autocratic ruler, Brig. Gen. Teodoro Obiang Nguema Mbasogo, and install exiled opposition figure Severo Moto. Up for grabs were millions in new oil contracts. His accusers say Mann planned to storm the presidential palace in Malabo with dozens of mercenaries and murder or capture Obiang in his bed. In the end it was Thatcher who was rudely roused.

The plot was scuttled in March, when South African intelligence officials tipped off Obiang and Zimbabwean officials as Mann was flying a Boeing 727 out of South Africa. He made it only as far as Zimbabwe, where he stopped to load up with guns. Soldiers impounded the plane and threw Mann in jail.

Although the coup failed, much remains at stake in the shaky oil state, where offshore drilling began in the early 1990s. Production of about 250,000 barrels per day is projected to nearly double in the next few years. Yet few of the 500,000 residents of the former Spanish colony are feeling flush with petrodollars; most have no plumbing or electricity. "None of the oil revenues have gone into developing the country," says Sarah Wykes, a researcher for the London corporate watchdog group Global Witness.

In July a U.S. Senate investigation into Riggs Bank found that Obiang and his family kept millions of dollars in bank accounts in Washington, D.C., some of which was spent on luxury homes. By last year, according to the Senate report, the accounts controlled by Obiang had ballooned to $700 million. SEC officials have since begun investigating five companies--Marathon Oil, Amerada Hess, ChevronTexaco, Devon Energy, and Exxon Mobil--to determine whether they paid bribes to the ruling clan, including leasing land from an Obiang-controlled company at inflated prices.

The oil companies deny bribing government officials, but such sweetheart deals would not be surprising in Equatorial Guinea. "The big problem for the oil companies is that everything is tightly controlled by the family of the President," says Philippe Vasset, editor of Africa Energy Intelligence, an industry newsletter in Paris. "Maybe ten people are running the country, and nine are close relatives of the President."

If all this sounds like the makings of a paperback thriller, that's hardly a coincidence. One of the alleged coup financiers was thriller author and former British politician Jeffrey Archer. Like Thatcher, Archer has denied involvement. But to Africa watchers the tale of treachery is closer to Danielle Steel, revolving around an ugly family feud raging within Obiang's palace. At stake is who will succeed the President after 25 years of iron rule. "These guys thought it was ripe for a coup, because there was nonstop squabbling in the family," says Vasset. Those eyeing the potential fortunes from the country's oilfields dread that Obiang might install his favored son, Teodorin, who owns a home in Los Angeles, where he started a music company, TNO Entertainment.

Thatcher, meanwhile, remains under house arrest. He faces up to 15 years in prison for breaking antimercenary laws. With U.S. officials scrutinizing oil companies and Obiang's palace still in turmoil, executives are hoping for more stability. "Almost anyone involved in business in Equatorial Guinea would prefer to see a different type of government," says Crispin Hawes, a risk consultant at the Eurasia Group in New York City. For now, however, that will have to wait. --Vivienne Walt