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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 Makes Big Moves To Secure Iraqi Oil

  • China is set to take over as the sole lead operator of Iraq’s giant West Qurna 1 oilfield.
  • West Qurna 1 crude oil has an average lifting cost of around US$1-2 per barrel.
  • West Qurna 1 and 2 hold an estimated 43 billion barrels of recoverable reserves.
West Qurna 1

Whilst the U.S. and its allies appear to be taking a subtle approach to advancing their remaining interests in Iraq, as hinted at by the Qatar’s talks to buy a 30 percent stake in TotalEnergies’ US$27 billion project package, China seems to be taking a more direct route to what it wants. Last week saw six oil concessions awarded by Baghdad to three companies from China and the UAE, as part of the fifth licensing round, according to Iraq’s latest Oil Minister, Hayan Abdul Ghani. In addition, according to a senior source who works closely with Iran’s Petroleum Ministry spoken to exclusively by OilPrice.com in the past few days, PetroChina is set to take over as the sole lead operator of Iraq’s supergiant West Qurna 1 oil field as the U.S.’s ExxonMobil is finally close to being able to sell its 32.7 percent stake in the site.

Looking at the second part of this turn of events in China’s favour first, 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 oil reservoir that comprises the West Qurna 1 and West Qurna 2 oil fields. Originally West Qurna 1 was thought to have around 9 billion barrels of these reserves, but early in 2019 Iraq’s Oil Ministry said the field had recoverable reserves of more than 20 billion barrels. The Ministry added that the plans were to boost the field’s crude oil production capacity to more than 700,000 barrels per day (bpd) by the end of 2025, from the then-(and now) 450,000-500,000 bpd level. As with all of Iraq’s major oil fields, West Qurna 1 crude oil has an average lifting cost of around US$1-2 per barrel (operating cost excluding capital expenditure), the lowest development cost in the world, along with Iran and Saudi Arabia. 

Although PetroChina - the listed arm of the China National Petroleum Corporation – bought a 32.7 percent stake in the field at around the same time as ExxonMobil took its identically-sized stake in the field, China has long been the dominant partner in West Qurna 1. This was achieved by dint of several under-the-radar deals that on paper were for ‘contract-only’ work related to various anodyne-sounding projects but together established total control for China over the field, at ExxonMobil’s expense. This gradual marginalisation of its role in the oil field and in the U.S. company’s plans for the build-out of the crucial Common Seawater Supply Project (CSSP), together with the considerable potential for damage to its reputation arising from elements in the West Qurna 1 and CSSP development contracts, were key to ExxonMobil’s desire to leave both projects – and Iraq - as quickly as possible. 

Related: Big Oil’s Back In Fashion

Notable among these under-the-radar contracts, and typical of China’s careful operational methods to accrete power across Iraq and Iran, as analysed in depth in my last book on the global oil markets, was the supposedly contract-only award made to the China Petroleum Engineering & Construction Corp (CPECC) for West Qurna 1 in the middle of 2021. The US$121 million engineering contract was initially to upgrade the facilities used to extract gas during crude oil production, but the project broadened and deepened in scope and scale to dovetail with the activities of PetroChina in West Qurna 1. Exactly the same contract-only model was used in Iraq’s neighbouring supergiant Majnoon oil field after Britain’s Shell decided to exit that site in 2017, with CPECC being awarded a US$203.5 million contract-only project for engineering to treat sour gas at the Majnoon site. Before this award to CPECC on Majnoon, though, two other game-changing contracts had been signed for the supergiant field. One was with China’s Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million, and the other was with the Iraq Drilling Company  - with Chinese assistance - to drill 43 wells at a cost of US$255 million. Soon after these awards, China’s Anton Oil entered the picture, on a ‘project management and development services’ contract. The plan for Majnoon,  with an estimated 38 billion barrels of oil in place, is to increase oil production from the current circa-240,000 bpd Majnoon oilfield to 600,000 bpd by 2026. 

It is apposite to note at this point that Majnoon is a field shared with Iran, in which it is known as Azadegan, which, in turn, is split into two supergiant fields – North Azadegan and South Azadegan. CNPC is still the lead foreign operator in North Azadegan, which went operational in November 2016 with production capacity of 75,000 bpd, and the Chinese company also held the lead developer position in South Azadegan from 2009 to 2014 when it was expelled from the field for delays in progress. Since then, though, Chinese companies have again been working on contract-only projects alongside the nominal Iranian lead developer, Petroleum Engineering and Development Co.

It is also apposite to note that at the time when ExxonMobil first stated several years ago that it wanted to leave its Iraq projects, including the vital CSSP, China – through CNPC – assured Iraq’s Oil Ministry that it had the required technology, expertise, and engineering capabilities required at that time to complete the project to the required specifications. Given the scale of the CSSP – which involves taking seawater from the Persian Gulf and transporting it to oil production facilities to boost the pressure and recovery rates at key oil reservoirs – and the lack of discernible progress by CNPC on the project, it has become apparent, even perhaps to Iraq’s Oil Ministry, that CNPC has none of these capabilities. “What the Chinese wanted was to push ExxonMobil out of Iraq, so it could have first refusal on all other major oil and gas fields in the country, and these could then be linked in to what it was doing in Iran, and with ExxonMobil’s withdrawal that is what it’s achieved,” the Iran source told OilPrice.com. 

The reason why China wanted to have the West Qurna 1 field to itself, according to the Iran source and to a senior source who worked closely with Iraq’s Oil Ministry at that time, both exclusively spoken to by OilPrice.com, is that the understanding that China originally reached with the then-Iraq government was absolutely in line with the deal it had agreed for Majnoon at the outset. The original Majnoon deal, and by extension the deal for West Qurna 1, involved a 25-year contract but – critically – one that would only officially start two years after the signing date, so allowing China to recoup more profits on average per year and less upfront investment. The per barrel payments to China would be the higher of either the mean average of the 18 month spot price for crude oil produced, or the past six months’ mean average price. It would also involve at least a 10 percent discount to China for at least five years on the value of the oil it recovered and, in addition, whichever Chinse developer that took the lead would receive a 30 percent discount to the lowest mean one-year average market price at the key gas pricing hubs for the gas it captured.

Interestingly, at around the same time as last week’s awarding of oil exploration and development concessions, Iraq’s President, Abdul Latif Jamal Rashid, played host to Russia’s Foreign Minister, Sergey Lavrov. According to the official statement on the visit, Rashid highlighted the importance of enhancing economic cooperation between the two countries, pointing to the need for coordination and consultation on issues of common interest including security and peace in the region and across the world. Lavrov, in the meantime, added that Russian oil companies have made investments of over US$13 billion in Iraq, and that they have “far-reaching plans with their Iraqi partners”. The six exploration and development concessions were awarded to the UAE’s Crescent Petroleum (which won three – Gilabat-Qumar, and Khashim Ahmer-Injana, in Diyala, and Khudher Al-Mai in Basra) and to China’s erstwhile little-known Geo-Jade Petroleum Company (which won two - Huwaiza, in Missan, and Naft Khana, in Diyala), and its UEG (which won Sindbad in Basra). China’s Geo-Jade Petroleum Company - which shifted its business in recent years from real estate, lease service and trading, into oil and gas exploration and development - completed the acquisition of 95 percent of the shares of Maten Petroleum for US$526 million in December 2014, and in January 2015 announced the US$$400 million acquisition of Kozhan JSC, giving it exposure to oil fields in Kazakhstan and oil exploration activity in Kazakhstan and Russia.

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on February 15 2023 said:
    While the United States won the military battles during its illegal invasion of Iraq in 2003, the winners of the war were undoubtedly China and Iran. China became the largest investor in Iraq’s oil industry and also the second largest importer of Iraqi crude oil after India while Iran emerged as the dominant political force in Iraq.

    While BP Statistical Review of world Energy estimates Iraq’s proven crude oil reserves at 145 billion barrels (bb), international oil experts who assessed Iraqi oil potential believe that Iraq holds more than 400 bb of reserves between proven, semi-proven and probable. The largest field in production is West Qurna 1 with proven reserves of 20 bb. However, West Qurna 1 and 2 hold an estimated 43 bb of recoverable reserves. Moreover, Iraqi oilfields are the world’s most prolific with the cheapest production costs of $1-2 a barrel. Daily average production per well is 13,700 barrels compared with 10,200 for Saudi wells and 17 barrels for the United States'.

    Since the end of the Iraq war, China has been working steadily to bolster its position further in Iraq at a time the United States is withdrawing from the country. PetroChina is set to take over as the sole lead operator of West Qurna 1 oilfield as the U.S.’s ExxonMobil is finally close to being able to sell its 32.7% stake in the site.

    China has the same plans for the giant Majnoon oilfield with an estimated 38 bb of oil in place hoping to increase oil production from the current 240,000 barrels a day (b/d) to 600,000 b/d by 2026.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • Shuja Zaidi on February 19 2023 said:
    Iran may be the winner as a political leader and China may enter the market but the bottom line is that USA companies are still holding some control. The USA companies are looking at all those fields that are mentioned by Dr. Salameh.

    My question is what Iraqi government and people are doing to save these reserves. Why the Chinese nd US companies have to come and take control. I am so disappointed that Iraqi government and people have failed to form a better government and run their own country independently. All this is the result of corruption. Why they have to rely on China and USA

Leave a comment




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