News / Middle East

Iraq Embraces China's Growing Oil Dominance

FILE - An aerial view of excess gas burning off at the al-Ahdab oil field in Wasit province, Iraq.
FILE - An aerial view of excess gas burning off at the al-Ahdab oil field in Wasit province, Iraq.
Reuters
— From the giant southern oilfields to the lively souks of Basra, China is drilling ever deeper into Iraq.

Driven by an insatiable thirst for oil, Beijing secured a formidable position in Iraq's prized energy sector through auctions held four years ago. It is now seeking to buy 850,000 barrels per day (bpd) of Iraqi oil, 30 percent of estimated 2014 exports.

Its dominant role in Iraqi oilfields sat uneasily with Baghdad at first. That changed when China's quick, cost-effective ramp-up in production helped push Iraq up the OPEC ranks to second spot behind Saudi Arabia from a virtual standing start after the disruptions of the U.S.-led invasion in 2003.

“The Chinese are our commercial partners in managing and developing oilfields that are totally Iraqi. So I don't see any issue of dominance or threats,” said Thamir Ghadhban, chairman of the advisory commission to Iraq's Council of Ministers.

“It's the other way around. I think the Chinese find Iraq to be their favorite partner.”

Further expansion is in the works.

PetroChina's anticipated purchase of a 25 percent share in Exxon Mobil's West Qurna-1 oilfield project will allow China's biggest energy firm to overtake Russia's Lukoil to become the biggest single foreign investor in Iraqi oil.

Cheap and silent

“China's strong position means the oil ministry has fewer qualms if Western companies back out because they are seen as being more readily replaceable,” said an Iraqi analyst.

PetroChina already partners with BP at Rumaila, Iraq's largest producer, and operates the Halfaya and al-Ahdab fields. It was the first foreign firm to sign an oil service deal in Iraq after U.S.-led forces toppled Saddam Hussein.

Deep pockets and corporate flexibility in the face of rising violence here in Iraq allows companies from China to offer the rapid production increases that many in the West cannot.

“The Chinese work cheaply and silently - worrying less about security compared to other foreign firms. They use a larger number of workers, so they always complete the job on time, if not before,” said an official with Iraq's South Oil Co (SOC).

“When we advise other contractors, or even our own workers, on how to get the job done, we tell them, 'Do it like the Chinese'.”

Baghdad has been particularly struck with PetroChina's performance at Halfaya in the southern Maysan province.

Along with partners Total and Petronas, PetroChina has lifted flows from the field, which was nearly untapped, above 100,000 bpd, and output is expected to hit 200,000 bpd by next September.

PetroChina's peers Sinopec and China National Offshore Oil Corp (CNOOC) are also on the ground, giving Beijing access to the whole of Iraq - from the autonomous Kurdish region in the north to the Maysan oilfield in the south.

They, along with all the foreign oil companies who signed service contracts with Baghdad, are repaid for development with a cut of the oil their work produces.

Beijing, which last month overtook the United States as the world's largest oil importer, is seeking 70 percent more Iraqi oil next year.

Saudi Rivalry

The higher oil sales are bound to step up the rivalry between Baghdad and top exporter Saudi Arabia for a bigger slice of the growing Asian market.

“Iraq's natural market is Asia, and with China's strong economy it's natural that it would lift more and more Iraqi crude and invest heavily to get the resources,” said a Western diplomat.

“And their partnerships with Western companies are important: they're being exposed to our business culture and moving in a manner that we want to see.”

Oil executives point to BP's venture with PetroChina, which has raised output by about 400,000 bpd to 1.4 million bpd, as a prime example of a smoothly running partnership.

“PetroChina brings its own capabilities and the opportunity, under competitive bidding, to access the Chinese supply chain,” said Toby Odone, Deputy Head of BP's press office.

Iraq's easy-to-access oilfields are the largest in the Middle East open to foreign investment, making them hard to resist as China's dependency on imports rises.

“The Chinese are reliable. They don't have the experience of running sophisticated projects, but drilling here is very easy,” said a senior Western oil executive.

Iraq has the world's fifth-largest oil reserves and wants to at least double its production of 3 million barrels bpd in the next few years and ultimately challenge Saudi Arabia as the world's biggest oil power.

For China, access to reserves is a strategic imperative. And Beijing is prepared to accept tougher terms and lower profits than Western oil majors and even Russian firms such as Lukoil, which have to answer to shareholders.

“China's expansion in Iraq is still largely driven by economics. There is little political thinking behind it,” said Chen Weidong, head of energy strategy research at CNOOC.

That drive has taken China beyond the oilfields and into the streets of Basra, where the Chinese are setting up shop.

“The Chinese are part of our society. They are not  strangers. Their presence here in Basra makes us feel that our city is secure,” said Ali Sa'adi, the 34-year-old owner of a mobile phone shop.

“I'm happy they are here, despite the competition.”

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