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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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China Is The Only Winner In This Huge Iraqi Oil Field

The statement last week from Iraq’s Oil Minister, Ihsan Abdul Jabbar, that the newly resurrected Iraqi National Oil Company (INOC) has been given government approval to acquire ExxonMobil’s 32.7 percent stake in the supergiant West Qurna 1 oil field for up to US$350 million is likely to leave China delighted, the U.S. irritated, and Iraq’s oil industry still unable to achieve any of its key oil output goals. The last iteration of the INOC – created in 1966, before it was effectively closed down in 1987, with its remnants incorporated into the Ministry of Oil (MoO) – was founded on a mandate that included elements that seemed geared towards enabling malpractice of one kind and another. In particular, Article 12 of the law relating to the establishment of INOC contained, as highlighted by the former senior economist with Iraq’s MoO, and subsequently head of the Oslo-based Development Consultancy & Research, Ahmed Mousa Jiyad: “The most ridiculous, disintegrative, destructive and unconstitutional aspects of this law […providing] the legal cover for formalised corruption and kleptocracy by assigning the three funds [‘Citizens Fund’, ‘Generations Fund’, ‘Reconstruction Fund’] at least 10 per cent of the revenues of the oil exports at the discretion of the INOC’s board of directors.”  The power of the INOC board of directors, though, could extend further, he added at the time, as under the 2018 version of the law, revenues generated from the export and sale of oil and gas ‘will be considered as financial revenues for INOC’. “This is a flagrant violation of the Constitution, which states that oil and gas belong to the Iraqi people and not a financial return to one public company,” said Jiyad. The full scope of the powers of this new version of the INOC has not yet been fully laid out, which means that no constraints are in place.

Even without a centralised institution such as the INOC to concentrate and control all of the key elements pertaining to by far Iraq’s most lucrative business sector (oil still accounts for around 90 percent of the government’s total revenues), the independent risk analysis firm, Transparency International in its ‘Corruption Perceptions Index’, in which Iraq is always ranked at or near the bottom, perennially notes that the country demonstrates: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery have led the country to the bottom of international corruption rankings…and political interference in anti-corruption bodies and politicisation of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.”

According to a statement made in 2015 by Iraq’s own Oil Minister – and later Prime Minister of Iraq – Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” (that is over 14 ‘billion’, not ‘million’) from the beginning of 2011 up to the end of 2014 in cash “compensation” payments, supposedly to international oil companies and other related entities but in reality, as fully analysed by OilPrice.com here, basically related to the way in which gross remuneration fees, income tax and the share of the State partner was deducted and accounted for in the compensation paid out relating to reduced oil production levels. This ‘accounting factor used in calculations’ solely related to ‘expenses of various kinds’ that have never been disclosed or in any way clarified by the MoO but is key to the merging of public funds with private ones. It saw its true genesis in 2009 when IOCs in many cases were asked to make large upfront payments as part of their bid, which would supposedly be repaid at a later date. Related: Libya’s Oil Production Bounces Back Following Pipeline Repairs

This is the key reason why so many major Western oil companies have made for the exit in recent months, including ExxonMobil. As highlighted exclusively by OilPrice.com back in 2019, ExxonMobil had been desperate to get out of the key project vital to Iraq’s plans to dramatically increase its crude oil output – the Common Seawater Supply Project (CSSP) – for years in order avoid any reputational damage either to it or to the U.S. that its involvement may have led to. Once it was clear that Iraq was not going to address the risk/reward matrix by allowing U.S. or E.U. lawyers and accountants to be brought in to look over the legal agreements pertaining to the Project or to be involved in the accounts, then ExxonMobil made it clear to the Iraqis that it did not want to continue its involvement in the CSSP and it also lost its interest in continuing with its stake in West Qurna 1. The breadth and depth of Iraq’s endemic culture of corruption is evidenced even on the crucial issue of its own security, as highlighted by local news reports. This resulted in a situation that hundreds of millions of dollars over the years given to Iraq by the West specifically to maintain its F-16 fighter plane fleet instead ended up in the bank accounts of all layers of management involved in the program locally. So much money was stolen that by the middle of 2020 only seven jets out of the fleet – just 20 percent of the total – were still able to fly without serious risk of crashing.

This is precisely the chaotic environment into which China and Russia see opportunity to project their influence, and so it has been with Iraq’s oil sector, which - with an average lifting cost per barrel of crude oil of around US$1-2 (operating cost excluding capital expenditure) - offers the lowest development costs in the world, along with Iran and Saudi Arabia. West Qurna 1, located around 65 kilometres from southern Iraq’s principal oil and export hub of Basra, holds a considerable portion of the estimated 43 billion barrels of recoverable reserves held in the entire supergiant West Qurna field. Originally West Qurna 1 was thought to have around 9 billion barrels of these reserves, but earlier last year Iraq’s Oil Ministry said it has plans to boost the field’s crude oil production capacity to more than 700,000 barrels per day (bpd) over the next five years, from the current 450,000-500,000 bpd, on the basis that it has recoverable reserves of more than 20 billion barrels. This opportunity led China, in the shape of PetroChina - the listed arm of the China National Petroleum Corporation – to buy a 32.7 percent stake itself in the field at around the same time as ExxonMobil took its stake and to establish itself as the dominant force on the site even before ExxonMobil decided to pull out of the oil field and of the CSSP. As analysed in depth in my new book on the global oil markets, the strategy employed to effectively sideline ExxonMobil is one that China has repeatedly used in similar situations across the Middle East, with a key element being the often surreptitious and gradual acquisition of a range of huge ‘contract-only’ awards made to Chinese companies. The most notable of these - exclusively reported by OilPrice.com in November 2019 – was the US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production to the China Petroleum Engineering & Construction Corp. Similar ‘contract-only’ deals have been done by China across Iraq, including for its supergiant Majnoon oil field, to another hitherto unheard-of Chinese firm - the Hilong Oil Service & Engineering Company. These deals done with lesser-known Chinese companies, in addition to the official production exploration and development deals done by the big Chinese oil firms, mean that whichever Western company was also involved on a site, it was China that was in charge.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on January 11 2022 said:
    The rampant corruption, widespread bureaucratic bribery and massive embezzlement prevailing nowadays in Iraq are the legacy of the US invasion of Iraq in 2003.

    The United States invaded Iraq to get its hand on its spectacular oil wealth estimated to exceed 400 billion barrels (bb) of oil between proven and semi-proven reserves according to international experts who assessed Iraq’s oil potential. It even financed the whole invasion from stolen Iraqi oil money and left behind successive Iraqi governments who are hell-bent on corruption and embezzlement to a level leaving the Iraqi treasury unable to even pay the salaries of government employees and needing Chinese money to do that.

    And while the United States won the military battles, the winners of the war were China who has become the largest investor in Iraq’s oil and gas industry and the second largest importer of Iraqi crude and Iran that has become the dominant political force in Iraq.

    That is why the Iraqi people are very deeply missing the regime of the late Saddam Hussein where the administration was clean and charges of corruption and bribery ended in death sentences for those involved.

    Against the US legacy of corruption in Iraq, China entered the country with a clean slate. In addition to its huge investment in Iraqi oil industry, it is most probable that it will end up acquiring ExxonMobil’s share in the super giant West Qurna 1 oilfield from Iraq since the Iraqi government may not have the funds to finance the purchase.

    China’s involvement in Iraq is part and parcel of its growing influence and involvement in the whole Arab Gulf region. China will be hosting this week the foreign ministers of Saudi Arabia, Kuwait, Oman and Bahrain as well as the secretary general of the of the Gulf Cooperation Council (GCC) in Beijing to accelerate progress towards reaching a free trade agreement (FTA) and cooperation in areas including energy.

    An FTA with the GCC would enhance further China’s involvement in the Arab Gulf region and fit well with its Belt and Road Initiative (BRI) which is extending its influence over the global economy slowly but surely.

    Under an upright governance, Iraq could be expected to supply the global oil market with 12-13 million barrels a day (mbd) in the next two decade and will most probably be producing the very last oil barrel in the world. The two barrels before the last will most probably come Venezuela’s Orinoco Belt and Russia’s arctic.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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