Controlling Iraqi oil... a Chinese dream thwarted by Baghdad (report) - Energy

During the past year (2021), Iraq thwarted 3 deals to control the Iraqi oil sector, on the part of Chinese companies, which sought to acquire more oil fields.

The Iraqi Oil Ministry moved against the potential deals, which were planned by the Russian Lukoil and the American ExxonMobil, by selling stakes in the main fields to the Chinese state company, according to Reuters.

The Chinese companies’ control of more Iraqi oil shares would harm the economy, after the mass exodus of international oil companies, which Baghdad seeks to make them invest more in the economy, which has been suffering from major crises for a long time.

The British oil giant BP also planned to sell a stake it owned to a Chinese state-run company, but officials persuaded it to stay in Iraq for the time being.

Chinese investment in Iraq

Iraqi oil
Rumaila oil field in Basra – Photo by Reuters

China is the largest investor in Iraq, and last year Baghdad was the biggest beneficiary of the Belt and Road Initiative in Beijing, receiving $10.5 billion in financing for infrastructure projects, including a power plant and an airport.

Despite this, Baghdad moved quickly to halt deals through which China tried to increase its investment in Iraq’s major oil fields.

Reuters quoted Iraqi oil and executive officials as saying that the Iraqi government and officials of national companies are concerned about the further merging of fields in the hands of Chinese companies, which may accelerate the migration of Western oil companies from Iraq.

Iraqi interventions

Officials indicated that Iraqi Oil Minister Ihsan Abdul-Jabbar – with the support of officials in the state oil company – made Russia’s Lukoil company withdraw last year from selling a stake in one of the largest fields in the country, West Qurna 2 field, to the Chinese company Sinopec.

Iraqi officials also intervened last year to prevent Chinese companies from buying ExxonMobil’s stake in West Qurna 1, while they demanded the British company BP to stay in Iraq instead of giving up its interests in the Iraqi Rumaila oil field to a Chinese company.

The Rumaila and West Qurna fields together produce about half of Iraq’s crude oil production, which is exported abroad, which ranks fifth in global oil reserves.

Reuters quoted officials as saying that the Iraqi government is concerned about China’s dominance of Iraqi oil, which may make Baghdad less attractive for investment from elsewhere.

Chinese influence and foreign companies

Iraqi oil
A worker in the Majnoon field in Basra – Photo by Reuters

Strong ties between China and Iran have helped position Beijing in Iraq more firmly due to Tehran’s political and military influence there, but the Iraqi Oil Ministry is concerned about giving China control over more of the country’s key resources.

An Iraqi official said: “We do not want the Iraqi energy sector to be described as a sector led by China, and this position is agreed upon by the government and the Oil Ministry,” according to Reuters.

The Chinese companies hope that the British companies BP, the American ExxonMobil and the Russian Lukoil will repeat what the British Shell did in 2018, when it withdrew from the huge Iraqi oil field, Majnoon.

And Chinese companies have won most of the energy deals and contracts awarded over the past 4 years, which Iraqi officials revealed happened after Chinese companies accepted lower profit margins than most competing companies.

Dangerous strategy

Countering more Chinese investment is a risky strategy, especially since there are no guarantees that other companies will continue, with the government needing billions of dollars to rebuild the economy after the defeat of the terrorist organization ISIS in 2017.

Over the past decade, Iraqi oil revenues made up 99 percent of the country’s exports, 85 percent of its budget, and 42 percent of gross domestic product, according to the World Bank.

Oil majors competed for access to Iraq’s vast oil fields after the 2003 US-led invasion of Iraq, and are now increasingly focused on energy transition and more lucrative operations elsewhere, so Iraq is seeking better terms for oil field development.

Iraqi oil
A policeman near the West Qurna field in Basra – Photo by Reuters

China is among the largest buyers of Iraqi crude oil, as Chinese state-owned companies have built a dominant position in the oil industry, but when Russia’s Lukoil Company notified the Iraqi government, last year, of its intention to sell some of its stake in West Qurna 2 to Sinopec, the oil minister intervened.

Service Contracts

Iraq’s oil sector relies heavily on technical service contracts between the state-run Basra Oil Company and foreign companies that pay costs in addition to a per-barrel fee to develop fields, while Iraq retains ownership of reserves, and major oil companies prefer deals that allow for a share of profits rather than fees.

Although Iraq is trying to make its terms more attractive, a deal with France’s Total Energy worth $27 billion last September, which included paying 40% of the revenue from one field, faltered due to differences over terms.

Ian Thom, director of research at Wood Mackenzie, said that many major energy companies are looking to reduce carbon emissions and their ability to obtain cash flows, while commodity prices are low, and are looking to improve returns, so with the priorities of these companies, the attractiveness changes relative to Iraq.

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