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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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How China Took Control Of Exxon’s Supergiant Iraqi Oilfield

Various reports that Chinese oil giants, China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) are ‘considering acquiring’ U.S. oil titan ExxonMobil’s 32.7 per cent stake in Iraq’s supergiant West Qurna 1 oil (and gas) field are missing the point. The point is that China is already dominant at the site, not only through the 32.7 per cent stake held by PetroChina - the listed arm of CNPC - but also through the gradual acquisition of a range of huge supposedly ‘contract-only’ awards made to Chinese companies for work on the field. These most recently included 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 (CPECC) that was exclusively highlighted by OilPrice.com in this very regard. These reports also miss the point that the moment that ExxonMobil made it clear that it would not go ahead with the crucial Common Seawater Supply Project (CSSP) the door was left open for China – in the shape of CNPC – to take over that project too, and any other major project that Beijing wanted as well as part of the trade-off for taking on the, in itself, thankless and expensive CSSP task agreed back in 2010.

The CSSP 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 ExxonMobil’s lead-participation in it was first seriously mooted in 2010 when Baghdad was looking to raise its oil production capacity to 12 million barrels per day (bpd) by 2018, to overtake Saudi Arabia’s output. This project – and its newest iteration into the broader US$53 billion Southern Iraq Integrated Project (SIIP) - is the key to what has happened on West Qurna 1 from all perspectives, and in many ways to the broader geopolitical shift that is happening across Iraq away from the U.S. and towards China. As exclusively highlighted by OilPrice.com nearly two years ago, sources who work closely with Iraq’s Oil Ministry told us that – at the most basic level – ExxonMobil, and the U.S. in general, could simply not take the risk of becoming so integrally involved in such a corrupt project. “The central problem for ExxonMobil was always that the risk/reward elements of the contract were profoundly unbalanced, with three key elements in the general risk/reward matrix that form the basis of the CSSP negotiations – relating to cohesion, security, and streamlining – of particular concern,” said one of these sources. Cohesion ensures that building out facilities that are connected to the CSSP are completed in full and in order, security relates to the on the ground security of personnel but also to soundness of the basic business and legal practices involved in the agreement, and streamlining means that any deal should continue as agreed, regardless of any change in government in Iraq. Related: Oil Price Crash Crushes New Mexico’s Hope For Free College

On the first point, ‘bureaucratic’ hurdles have frequently arisen on a number of projects in Iraq relating to the approval of contracts for service work, such as building new pipelines and drilling wells, as well as for obtaining visas for workers and customs clearance for vital technical equipment. “A lot of what needs to happen in order make the CSSP progress properly will be in the hands of people who are less concerned about it working than about what they can personally pocket to allow it to occur,” one of the Iraq sources told OilPrice.com. The second – security - part of the risk/reward matrix not only grew steadily worse over the past 10 years from the on-the-ground security perspective for U.S. personnel but has also been complicated by the systemic corruption in many elements of Iraq’s business environment, as underlined by independent risk analysis firm, Transparency International. As summarised in its ‘Corruption Perceptions Index’, Iraq 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.” The lack of a meaningful legal structure relating to the origination, monitoring, and administration of business agreements would open up ExxonMobil up to a plethora of problems in the future, said one of the Iraq sources, especially when the third part of the risk/reward matrix is factored in. “Many leading politicians have clearly said that they will not stand by the decisions relating to the oil and gas industry made by their predecessors, which means that any agreement done with ExxonMobil would be meaningless with each new government,” he said. “Also, if ExxonMobil had taken part in the CSSP and any part of it was shown to have been corrupt then the fallout for Exxon – and for the U.S. government – would have been disastrous,” he added.

CNPC, then, was the only player left in the CSSP room and, despite the Iraqi Oil Ministry knowing perfectly well that it did not have the required technology, expertise, or engineering capabilities required at that time to complete the project to the top specifications, it was assured by Beijing that CNPC was in the process of ‘acquiring and updating’ all of the additional elements that it was lacking to complete the CSSP to the required standard ‘over time’, according to one of the Iraq sources. “What the Chinese wanted to do – and what they have now achieved with Exxon’s withdrawal from the CSSP – was to gain first refusal on all other major oil and gas fields in Iraq, which was the agreement at the time that the CSSP contract was announced, as it is such a big, expensive, and intensive project,” said one of the sources. “However, given the delicate position of China-U.S. relations over the past few months, it was thought wise by Beijing to tread lightly in Iraq and not come out with big headline announcements of Chinese companies taking over major oil and gas field developments but rather to just do this via a series of supposedly standalone individual contracts for specific work projects, such as engineering-only, maintenance-only, drilling-only and so on, which is exactly what we have seen, including at West Qurna 1,” he said. Related: Brazil's Oil Major Believes Net Zero Emissions Is A 'Fad'

Exactly the same ‘contract-only’ model was recently used in Iraq’s massive Majnoon oil field. It is this field that was the focus of the extremely similar announcement that two major new drilling contracts had been signed: one with China’s Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million and the other with the Iraq Drilling Company to drill 43 wells at a cost of US$255 million. In reality, it is China that is in charge of both, having given the funds required to the Iraq Drilling Company as a ‘fee’ for its own participation, according to the Iraq sources. Also located close to the Basra export hub, the supergiant Majnoon oilfield is one of the world’s largest, holding an estimated 38 billion barrels of oil in place and is currently producing around 240,000 bpd. Longer term, though, the original production tar­get figures for then-Shell-led consortium still stand: the first production target of 175,000 bpd (already reached), and the plateau production for the site of 1.8 million bpd at some point in the 2030s. West Qurna 1, in the meantime, is producing around 465,000 bpd, with an original plateau target of 2.825 million bpd having been re-negotiated down, to 1.6 million bpd again by some point in the 2030s.

Should ExxonMobil go ahead with selling its stake to China then the deal with Iraq’s Oil Ministry for the oil that China ends up extracting from West Qurna 1 will be: “Absolutely in line with the deal it has for Majnoon,” the Iraq source told OilPrice.com. Specifically, this will involve a 25-year contract but – critically – one that would only officially start two years after the signing date (yet to be determined), so allowing CNPC (or CNOOC) 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 per cent discount to China for at least five years on the value of the oil it recovers. And finally, it would also involve whichever China firm that took over West Qurna 1 receiving a 30 per cent discount to the lowest mean one-year average market price at the key gas pricing hubs for the gas it captures, as this is the deal that was already agreed for CPECC on West Qurna 1, according to the Iraq source.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on December 03 2020 said:
    Winner takes all. China and Iran were the ultimate winners in the United States’ invasion of Iraq in 2003. China ended up being the largest investor in Iraq’s oil industry and the second largest buyer of Iraqi crude oil. Iran, on the other hand, gained dominant political influence in Iraq and is using this influence to force an ejection of US forces from Iraq.

    Should China’s National Petroleum Corporation (CNPC) and National Offshore Oil Corporation (CNOOC) jointly buy ExxonMobil’s 32.7% stake in Iraq’s supergiant West Qurna 1 oilfield, China will end up controlling three of Iraq’s supergiant oil fields, namely Majnoon, Rumaila and Qurna 1 oilfields. And by taking over the contract for the crucial Common Seawater Supply Project (CSSP) which ExxonMobil isn’t keen to go ahead with, China will virtually be in control of Iraq’s oil industry.

    The CSSP is pivotal for Iraq’s plans to raise its production to a minimum of 7 million barrels a day (mbd) and a maximum of 12 mbd by transporting sea water from the Persian Gulf to oil production facilities to boost the pressure and recovery rates at key oil reservoirs in Iraq.

    And while Iraq has the reserves to sustain a production of 12 mbd, the maximum it has so far achieved was 5 mbd before the 2014 oil price collapse. The answer lies in rampant corruption, lack of oil infrastructure, lack of investment and geopolitics.

    Although the BP Statistical Review of World Energy reports Iraq’s proven crude oil reserves at 147.2 bn, many experts think the country’s true potential is still underestimated. Iraq’s proven and probable reserves are estimated at 315 bb with some experts believing that Iraq actually holds more than 400 bb of reserves. Moreover, only 70% of Iraq’s territory has so far been explored for oil. Furthermore, there are also more than 60 discovered but undeveloped oilfields in Iraq containing at least 75 bb of reserves.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • jone al sharon biriyani indian on December 04 2020 said:
    Surprising . after Iraq war which will cost America over $5 trillion by year 2030 why hand over control to china?
    why is Trump's ban on chinese contractors not extending to Oil majors?
    It appears Bush and his Military generals still call the shots in Iraq.

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