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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 And The U.S. Are Battling For Influence Over Iraqi Oil

  • The U.S. has given Iraq a 120-day waiver to import electricity and gas from Iran, a move that demonstrates how important influence in the region has become.
  • Shortly after the waiver was awarded, Chinese commercial interests won another huge hydrocarbon deal as the Asian giant continues to gain influence in the country.
  • While the country's oil, gas, and refining sectors provide plenty of economic upside for external actors, the geopolitical and military importance of the area is just as important.

Like the first sparrow of spring, Iraq’s reversal of all promises made to the U.S. in order to secure another waiver to import electricity and gas from still-sanctioned Iran is a regular and much-anticipated feature of the oil year for seasoned market watchers. This year has been no different. Some have interpreted the 120-day waiver, which is the equal longest granted to Iraq in years, as a tangential good-faith gesture to Iran by the U.S. as they attempt to agree on a new iteration of the Joint Comprehensive Plan of Action (JCPOA, ‘nuclear deal’). This interpretation is unlikely to be correct, as Washington has not directly correlated the two issues for a considerable time. Rather, it seems that the 120-day waiver was made by the U.S. with the full knowledge that Iraq would break any pledges it made to secure it, and instead reflects a practical realization finally that it has to fight for any influence in the huge oil and gas reservoirs of Iraq against China’s continued encroachment. Indeed, last week – shortly after the award of the 120-day waiver - another huge hydrocarbons deal was awarded in Iraq to Chinese commercial interests. This latest deal – an engineering, procurement, and construction contract worth at least US$412 million for a 130 million standard cubic feet per day natural gas processing facility in Basra – was given out to a consortium of China CAMC Engineering Co (CAMCE) and CNOOC Petrochemical Engineering Co. (CNOOC Petrochemical Engineering) by the highly misleadingly named Kuwait Energy Basra Limited (KEBL). This company, in fact, is nothing much to do with Kuwait at all but rather is an indirect but wholly-owned subsidiary of China’s United Energy Group (UEG). According to UEG’s 2020 filings (but signed and filed on 27 July 2021 in Hong Kong on behalf of company chairman, Zhang Hong Wei), having acquired BP Pakistan’s assets (and renamed them ‘United Energy Pakistan Limited’), UEG then acquired Kuwait Energy Plc on 21 March 2019, since which time it has engaged in further upstream oil and gas business in Iraq and Egypt, as well as in Pakistan. Consequently, the award for the development of a critical piece of Iraq’s hydrocarbons infrastructure in Iraq has been neatly and quietly given by one Chinese company to another Chinese company.

Related: World’s Largest Oil Trader To Completely Phase Out Russian Crude
According to UEG’s 2020 Hong Kong filings, its own Kuwait Energy Basra Limited has been the operator of Iraq’s Block 9 since 3 February 2013 for a basic term of 30 years, with the early production rate achieved on 31 January 2016. In the meantime, Kuwait Energy Iraq Ltd (KEIL) – an operating unit of UEG’s Kuwait Energy – remains the operator of Iraq’s Siba gas field, the contract for which was entered into 5 June 2011. The Siba gas field is the first non-associated gas field in Iraq and, as UEG notes: “The indigenous gas production from Siba is considered by Iraq Government as one of the key strategic contributors to Iraq’s energy needs and economic development.” According to UEG, the Siba gas field development was completed, and the gas processing plant operation commenced in August 2018. This latest US412 million deal follows another even bigger deal between the same players in January of this year, in which a US$594 million engineering, procurement, and construction contract was given to the same consortium – CAMCE and CNOOC Petrochemical Engineering – by Kuwait Energy Basra Co for a 100,000 barrels per day (bpd) crude oil processing facility in Iraq’s Block 9. 

These deals, in turn, had followed swiftly on from the announcement in January that the Power Construction Corporation of China (PowerChina) signed a US$880 million engineering, procurement, and construction contract with Iraq’s Missan International Refinery Company to build the 150,000 bpd Missan Refinery Project. According to local news reports in 2019, the Missan International Refinery Company itself was formed by a little-known Swiss-Chinese consortium comprised of Swiss industrial firm Satarem (15 percent share) and China’s Wahan (85 percent share). The refinery project originally broke ground in 2016, with an estimated cost of US$6 billion, which, according to Iraq’s then-Deputy Minister for Refining, Deiaa Jaafar, would be funded by the Export-Import Bank of China and China Development Bank. At the time, Iraq was looking to move ahead with another three refineries, in addition to Missan, comprising the 300,000 bpd Nassiriya refinery, the 150,000 bpd Kirkuk refinery, and the 140,000 bpd Karbala refinery. According to the comments from Iraq’s Oil Ministry in January, this new iteration of the project will now be completed within the next 54 months. 

Related: How Egypt Could Become A Critical Energy Hub

All of this Chinese activity occurred in parallel to the finalization – again at the beginning of this year - of the 25-year deal for the China Petroleum & Chemical Corporation (Sinopec) to take a 49 percent share in the huge Mansuriya non-associated field, with the remainder held by Iraq’s state-own Midland Oil Company. Extremely close to the Iranian border, and just north of Baghdad, the Mansuriya gas field has an estimated 4.5-4.6 trillion cubic feet (Tcf) of gas in place, with plans to increase production to at least 320 million standard cubic feet (Mmscf) per day, making it a very valuable gas deposit in and of itself. Its broader significance is that Iraq had previously always sought to offer the three fields of Mansuriya, Akkas, and Siba together as one development package. 

These three sites form a skewed triangle across southern Iraq, stretching from Mansuriya near the eastern border with Iran, down to Siba in the south (extremely close to the key Iraqi Basra export hub), and then all the way west across to Akkas (extremely close to the border with Syria). When Russia had been eyeing the development of the very same three fields, just before China took the figurative driving seat on the deals with a view presumably on what Russia was about to do in Ukraine, this triangle was to have been linked in with a transit route running all the way from Basra to Syria. Much of this route disappears into Iraq’s lawless wasteland Anbar province, a place so violent and unpredictable that it was even avoided where possible by Islamic State. This route, what the U.S. military used to call ‘the spine’ of the Islamic State, is where the Euphrates flows westwards into Syria and eastwards into the Persian Gulf, and is extremely close to the border with Iran. 

It remains of vital strategic importance to Russian operations in Syria, including the Russian military Khmeimim Air Base near Latakia that functions alongside the civilian Bassel Al-Assad International Airport in Syria, while Latakia itself is also home to a key intelligence-gathering listening station operated by Russia. There are also plans by China, as analyzed in-depth in my new book on the global oil markets, to build its own intelligence-gathering listening station in Iran’s Chabahar, which will function as a core part of Beijing’s ongoing upgrading and rollout of its own C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) systems in the region. The overall plan, as exclusively highlighted by OilPrice.com at the time, before a more circumspect approach was taken (for the time being at least) in the aftermath of the Russian invasion of Ukraine, was for the Chabahar facility to be connected to Russia’s intelligence-gathering stations around its core military bases in Syria. This, in turn, would allow it to be easily tied into Russia’s Southern Joint Strategic Command 19th EW Brigade (Rassvet) near Rostov-on-Don, which itself links into the corollary Chinese systems.

Consequently, Iraq’s playing both sides in the gas, oil, and refining sectors can be regarded as part of a much broader move by several major Middle Eastern oil and gas players – including the once stalwart U.S. ally, Saudi Arabia – to position themselves in the center of what is becoming an economically, politically, and militarily bipolar order rather than the U.S.-dominated world of the previous hundred years or so and before that the Great Britain-dominated one. The series of meetings in Beijing earlier this year between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC) underlined this. At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat,” according to local news reports

By Simon Watkins for Oilprice.com

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Leave a comment
  • Hussein Ahmad on April 13 2022 said:
    love your articles Simon. They are actually amazing!!! You deserve more recognition
  • Wayne 56 on April 14 2022 said:
    The United States should never have involved itself in Iraq.

    It never had to.

    Even at its nadir in 2006, prior to the advent of fracking, the US was producing 5 million barrels per day of crude.

    Add another 1 million barrels per day from Canada and 4 million from Venezuela (a Christian nation whose Government could have been overthrown if necessary and replaced with a pro-US regime much more easily than a country like Iraq dominated by a population rooted in fundamentalist Islam and hostile to Christian infidels).

    Add 6 million barrels of oil from Saudi Arabia to that and you have 16 million barrels per day of supply.

    The US was burning 20 million at the time. That could've been easily dropped to 16 with fuel conservation measures.

    Just like that, you have a secure oil supply for your nation (bolstered in later years by the fracking revolution) with no invasion of Iraq needed.

    Saddam (or whatever madman ended up replacing him) could be left in power. If he tried to acquire nukes or WMD's, he gets hell rained down on him.

    Instead the US spent trillions of dollars, thousands of US soldiers (and potentially a million Iraqi civilians) in the resulting war of occupation.

    Despite all this, it failed to retain control of the nation's oil (or even strong influence over the new Government for that matter), which has instead passed into the control of its main rival China.

    Whatever you think of Trump, he summed it up pretty succinctly: "We spent trillions of dollars doing it and we didn't even keep the oil."

    The US invasion of Iraq potentially ties with the Russian Federation's invasion of Ukraine as the worst military/geopolitical blunder to date of the 21st century.

    Both left/will leave the invading nation weaker not stronger, depleted economically and militarily.

    Both have left a legacy of death and destruction in their wake and a civilian population mistrusting and despising the invader, to the point they are willing to get in bed with their arch-enemies.

    Neither America or Saddam won the war in Iraq. China won without firing a shot or taking a single casualty.

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