China Doubles Down On Iraqi Oil

A Chinese oil company may buy Exxon’s Iraq stake | “Baghdad to Beijing is the new Silk Road of the global oil trade”

Dexter Roberts, with Nayla Razzouk, Kadhim Ajrash, and Matthew Philips

A little more than a year after President Barack Obama declared the end of the war in Iraq, Chinese companies are top players in the country’s oil sector. China National Petroleum Corp. (CNPC) is jointly operating three fields in the south producing 1.4 million barrels a day — more than half Iraq’s output. China and Malaysia have the largest share of international contracts, says Abdul Mahdy al-Ameedi, an official in the Iraqi Oil Ministry. “We are very much satisfied with the work of Chinese companies,” says al-Ameedi, who is in charge of petroleum contracts and licensing.

Now a Chinese oil major may purchase ExxonMobil’s position in the West Qurna 1 field, which has reserves worth $50 billion. Derek Scissors, a senior research fellow at the Heritage Foundation who specializes in China’s state-owned enterprises, spoke in December with a Chinese oil executive whose company was negotiating with the Iraqis over Exxon’s stake. The Chinese executive warned it was not a done deal, says Scissors. The Iraqi Oil Ministry and Exxon wouldn’t comment on a possible agreement.

The Iraqi oil industry is abuzz with rumors that CNPC’s Hong Kong-listed subsidiary, PetroChina, is the leading bidder. PetroChina’s spokesman did not return phone calls and e-mails. A stake in West Qurna 2, a nearby field, could go to the Chinese as well. Russia’s Lukoil operates that field, but its partner in that project, Statoil of Norway, has pulled out. “An attractive partner for us would be China, where there is stable demand growth,” Lukoil head Vagit Alekperov told reporters in Russia on Jan. 15.

Iraq, which pumps 3 million barrels of crude a day, is expected to reach 8 million barrels by 2035, according to the Paris-based International Energy Agency. By then, 80 percent of Iraqi production will go to China. “Baghdad to Beijing is the new Silk Road of the global oil trade — oil from Baghdad and capital investment from Beijing,” says Fatih Birol, chief economist at the IEA. Chinese construction of power plants has cemented the relationship.

It helps that the Chinese develop fields at lower costs than their rivals, says Wenran Jiang, a political scientist at the University of Alberta who studies China’s energy industry. Chinese managers and engineers usually earn a quarter the wages paid by Western companies, estimates Jiang. With Iraq offering foreign operators as little as a couple of dollars per barrel produced, it’s hard to earn money, says Trevor Houser, an energy and natural resources expert at China-focused consultancy Rhodium Group. Some companies, Exxon included, are turning to the Kurds, whose terms are more generous.

China may have little choice but to accept the terms offered by the Iraqi Oil Ministry. Foreign oil meets almost 60 percent of China’s needs today. That will likely rise to 80 percent by 2035, says Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University. “It’s not that China likes going to Iraq,” says Lin. But “not that many places are left.”

The bottom line Chinese oil companies are bulking up fast in Iraq, which may eventually sell 80 percent of its crude output to China.


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