• 3 minutes Shale Oil Fiasco
  • 7 minutes "Leaked" request by some Democrats that they were asking Nancy to coordinate censure instead of impeachment.
  • 12 minutes Trump's China Strategy: Death By a Thousand Paper Cuts
  • 16 minutes Global Debt Worries. How Will This End?
  • 4 mins DUMB IT DOWN-IMPEACHMENT
  • 2 hours Everything you think you know about economics is WRONG!
  • 2 hours POTUS Trump signs the HK Bill
  • 31 mins Greta named Time Magazine "Person of the Year"
  • 2 hours americavchina.com
  • 3 hours Forget The Hype, Aramco Shares May be Valued At Zero Next Year
  • 23 hours WTO is effectively neutered. Trump *already* won the trade war against China and WTO is helpless to intervene
  • 22 hours Democrats through impeachment process helped Trump go out of China deal conundrum. Now Trump can safely postpone deal till after November 2020 elections
  • 4 hours Winter Storms Hitting Continental US
  • 3 hours Aramco Raises $25.6B in World's Biggest IPO
  • 13 hours Can Renewable Natural Gas Compete With Diesel?
Alt Text

Argentina's Shale Boom Hits New Milestone

Argentinian state energy company YPF…

Alt Text

What Can We Learn From Peak Whale Oil?

Whale oil was once the…

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…

More Info

Premium Content

The Superpowers Battling Over Iraq's Giant Oil Field

Ever since the U.S. signalled through its effective withdrawal from Syria that it now has little interest in becoming involved in military actions in the Middle East, the door has been fully opened to China and Russia to advance their ambitions in the region. For Russia, the Middle East offers a key military pivot from which it can project influence West and East and that it can use to capture and control massive oil and gas flows in both directions as well. For China, the Middle East – and, absolutely vitally, Iran and Iraq – are irreplaceable stepping stones towards Europe for its era-defining ‘One Belt, One Road’ project. Earlier this week an announcement was made by Iraq’s Oil Ministry that highlights each of these factors at play, through a relatively innocuous-sounding contract award to a relatively unknown Chinese firm.

Specifically, it was announced that China Petroleum Engineering & Construction Corp (CPECC) has been awarded a US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production at the supergiant West Qurna-1 oilfield in Iraq, 50 kilometres northwest of the principal oil hub of Basra. The project is due to be completed within 27 months and aims to increase the capture of gas currently being flared across the site. Two factors that were not highlighted in the general announcement were firstly that CPECC is a subsidiary of China’s principal political proxy in the oil and gas sector, China National Petroleum Corp (CNPC), and secondly that the gas capture project will also include the development of the oil reserves at West Qurna 1. The current level of oil reserves at West Qurna 1 is just under nine billion barrels but, crucially, the site is part of the overall massive West Qurna reservoir that comprises at least 43 billion barrels of crude oil reserves. “For China, it’s always all about positioning itself so that it is perfectly placed to expand its foothold,” a senior oil and gas industry source who works closely with Iraq’s Oil Ministry told OilPrice.com earlier this week. Related: Is Today’s Oil Price Plunge A Sign Of Things To Come?

Certainly it makes sense for Iraq to finally begin to monetise its associated gas that it has been burnt off for decades as a product of its burgeoning oil production. Aside from the negative environmental impact of this practice, there is the bizarre practical result that Iraq – which holds some of the biggest oil and gas reserves in the world – has to go to its neighbour Iran every year and beg for electricity imports to plug the huge power deficits that afflict it, particularly during the summer months. As it stands, Iraq has been steadily importing around one third of its total energy supplies from Iran, which equates to around 28 million cubic feet (mcf) of gas to feed its power stations. Even with these extra supplies, frequent daily power outages across Iraq occur and have been a prime catalyst for widespread protests in the past, including last year. The situation is also likely to become worse if change does not occur as, according to the International Energy Agency (IEA), Iraq’s population is growing at a rate of over one million per year, with electricity demand set to double by 2030, reaching about 17.5 gigawatts average.

Apart from this, burning gas associated with the production of crude oil is costing Iraq billions of dollars in lost revenues. It loses money in the first place because in order to try to minimise power shortages, Iraq is forced to burn crude oil directly at power plants that it could sell in the open market for currently well over US$55 per barrel (and the lifting cost per barrel in Iraq is just US$2 on average). In this context, the average volume of crude oil used for power generation has fallen in the past two years from a peak of 223,000 barrels per day (bpd) in 2015 but it still averages around 110,000 bpd, or around US$2.25 billion per year in value. It costs Iraq money in the second place because this associated gas that is flared could itself either be sold off directly or in LNG form or used as high-quality feedstock to finally truly kick-start the country’s long-stalled petrochemicals industry that itself could generate massive added-value product revenue streams. According to the IEA, Iraq has around 3.5 trillion cubic metres (tcm) of proven reserves of gas - mainly associated - which would be enough to supply nearly 200 years of Iraq’s current consumption of gas, as long as flaring is minimised. It added, though, that proven reserves do not provide an accurate picture of Iraq’s long-term production potential and that the underlying resource base – ultimately recoverable resources – is significantly larger, at 8 tcm or more. Related: Russia Ignores OPEC Commitment Two Weeks Before Landmark Meeting

China knows all of this and has come to the correct conclusion that it cannot lose by expanding its imprint in Iraq in such a way. “However, China is now very wary of being seen in Iran or Iraq as looking to make them into client states, although that’s what it plans for both, so it’s recalibrated its approach to being more of the stealth variety – that is, small, incremental steps but lots of them - until at one point in the future the governments [of Iran and Iraq] look around and wonder how China is calling all the shots all of a sudden,” said the Iraq source. Such is the case in West Qurna 1 in which, although the contract announced principally involves CPECC just building the infrastructure to capture gas rather than flare it, in reality also involves being allowed to take and use or sell the gas at an advantageous rate. “China is looking at taking the gas with a discount of at least 30 per cent to the lowest mean one-year average market price at the hubs [principal gas hub pricing in Europe], and this then allows China to get more involved in the oil as well,” he added. China certainly has the expertise for this – and the appetite – as it has put on hold for a while at least its plans to take over the development of Phase 11 of Iran’s supergiant South Pars gas field.

This large foothold in West Qurna 1 will very neatly fit in with China’s near-identical move just a couple of months ago 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 will be 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 source. Also located very close to Basra – around 60 kilometres to the north-east - the supergiant Majnoon oilfield is one of the world’s largest, holding an estimated 38 billion barrels of oil in place. It is currently producing around 240,000 bpd. Longer term, though, the original production tar­get figures for the 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.

The deal 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 earlier this week. 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 to recoup more profits on average per year and less upfront investment. The per barrel payments to China will 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 will also involve at least a 10 per cent discount to China for at least five years on the value of the oil it recovers, in addition to the aforementioned 30 per cent discount for the gas it captures.

By Simon Watkins for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • Mamdouh Salameh on December 02 2019 said:
    Almost eighteen years ago, a group of neoconservative hawks among them John Bolton, President Trump’s former national security adviser, persuaded President George W. Bush to mount a quick invasion of Iraq because, they alleged, it had “weapons of mass destruction.” That decision, based on dubious intelligence and taken against the advice of many of America’s closest allies, triggered a huge refugee crisis, destabilized the entire Middle East and cost the global economy an estimated $12.584 trillion of which the US economy’s share was $6.52 trillion according to a research paper titled: ”The Oil ’Price Rise’ Factor in the Iraq War: A Macroeconomic Assessment” I wrote and was published by the United States Association for Energy Economics (USAEE) on the 4th of June 2008. Moreover, hundreds of thousand of Iraqis and nearly 5,000 Americans lost their lives in Iraq.

    The United States went to war in Iraq because it wanted to get an assured supply of inexpensive oil for itself and its oil companies. I have argued in my book (Over a Barrel, 2004, p.191) that the invasion of Iraq in 2003 was undoubtedly about oil. Even the veteran ex-chairman of the US Federal Bank Alan Greenspan has admitted in his memoirs (The Age of Turbulence, 2007, page 463) that the Iraq war was largely about oil.

    And despite winning the military battles because of its overwhelming force, the United States lost the war. The real winners were China in terms of emerging as the world’s largest investor in Iraq’s oil industry without even firing a shot and Iran in terms of its intrusive political influence on Iraq.

    Since 2009 China has been involved in the development of two of Iraq’s super-giant oilfields, namely Rumaila with proven oil reserves of 17 billion barrels (bb) and West Qurna with 43 bb of reserves and now it is extending its involvement to the super-giant Majnoon oilfield with estimated 38 bb of reserves.

    China has been awarded a contract to upgrade the facilities that are used to extract gas during crude oil production at West Qurna-1 oilfield. The project is due to be completed within 27 months and aims to increase the capture of gas currently being flared across the site and also enhance oil production as well.

    The capture of the flared gas in West Qurna will enable Iraq to stop burning some of its crude oil production to generate electricity and reduce its dependence on Iran for electricity imports.

    Russia and China are taking advantage of a growing global disenchantment with the United States and are therefore trying to fill a vacuum created by an erosion of the United States’ economic, geopolitical and moral influence. From the shifting sands of the Middle East to Venezuela’s defiance to the rising power of China in the Asia-Pacific region and Russia’s in the Middle East, the United Sates is starting to look like a spent force while the strategic alliance between China and Russia is not only on the rise.

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

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play