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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 Deepens Influence In Iraq With Oil-For-Infrastructure Deals

  • China is looking to close more oil-for-projects deals with several countries in the Middle East.
  • Saudi Arabia, Iran, and Iraq are the most prominent countries in which China is looking to secure long-term oil supply deals.
  • At the same time as Iraq is inking deals with China, Baghdad is looking to offset any negative reaction from the U.S.
Baghdad

A series of meetings occurred last week between senior members of the Iraqi and Chinese governments aimed at broadening and deepening the already extensive ‘oil-for-projects’ framework characterised by Chinese firms investing in infrastructure projects in Iraq in exchange for oil. Officially, Iraqi Deputy Prime Minister and Minister of Planning Muhammad Ali Tamim, and the Chinese ambassador to Iraq Cui Wei, discussed China’s support for Iraqi schools, hospitals, electricity, and service sector projects. Unofficially, according to a senior source who works closely with Iraq’s Oil Ministry spoken to exclusively by OilPrice.com, the discussions extended to further oil and gas projects, banking and financing, and the strategic build-out of airports and seaports for dual-purpose (civilian and military) Chinese use. All of these projects are in line with China’s multi-generational power-grab project, ‘One Belt, One Road’ (OBOR), the ultimate aim of which is to overtake the U.S. as the world’s number one economic power by 2030, as analysed in depth in my new book on the new global oil market order.

The key to this plan by China is to secure as much of the world’s oil and gas resources as it can in as short a time as possible, particularly as it foresees a continued ramping up of tension between it and the U.S. in the Asia Pacific region in the coming year or two, most notably over Taiwan. Beijing’s three big target countries in the Middle East in terms of its efforts to secure lots of energy resources very quickly are Saudi Arabia, Iran, and Iraq, given their pre-eminent oil and gas resources in the region. These countries also have the lowest lifting cost for oil in the world, at around US$1-2 per barrel (operating cost excluding capital expenditure). Ever since China made a face-saving offer to Saudi Arabia’s Crown Prince Mohammed bin Salman when his idea to float part of Saudi Aramco was running into trouble, as also analysed in depth in my new book, Beijing has steadily accrued influence there. Around the same time, it was able to do the same with Iran through its ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ first revealed anywhere in the world in my 3 September 2019 article on the subject, and also analysed in full in my new book on the new global oil market order. These two elements together laid the foundation for the recent landmark deal brokered by China that saw the resumption of relations between the historical enemies Saudi Arabia and Iran. The latter multi-faceted deal with Iran, meanwhile, lay the foundation for a similar series of deals to be done between China and Iraq. Not only is Iraq heavily influenced by Iran through Tehran’s political, economic, and military proxies, but the two neighbouring countries share many of their largest oil and gas fields. These include Azadegan (on the Iran side)/Majnoon (on the Iraq side), Azar/Badra, Yadavaran/Sinbad, Naft Shahr/Naft Khana, Dehloran/Abu Ghurab, West Paydar/Fakka and Arvand/South Abu Ghurab. As China was already involved so heavily on Iran’s side of these reservoirs, an extension of that influence into the Iraqi side of them was a natural development. 

Related: Deadly Cyclone In India Halts Fuel Exports And Operations At Offshore Rigs

For a considerable time, concerned about the possible backlash from the U.S. over openly expanding its presence in a country in which Washington still saw political and economic opportunities itself, China took a low-key approach where possible. 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 these established total control for China over several fields in Iraq, as also analysed in my new book. Notable among these deals 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. 

The same sort of 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 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. China National Petroleum Corporation is still the lead foreign operator in North Azadegan, which went operational in November 2016 with production capacity of 75,000 bpd. The Chinese company was also the lead developer 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 nominal Iranian lead developers. 

These, and China’s other multiple field developments in Iraq, run alongside Beijing’s other strategic priorities in the country as they relate to the all-encompassing OBOR project. One of these was Baghdad’s approval of nearly IQD1 trillion (US$700 million) for infrastructure projects in the city of Al-Zubair in the southern Iraq oil hub of Basra. Judging from comments made by the city’s Governor at the time, Abbas Al-Saadi, China’s heavy involvement in Phase 2 of the projects was part of the broad-based ‘oil-for-reconstruction and investment’ agreement – part of the general ‘oil-for-projects’ idea signed by Baghdad and Beijing in September 2019. The Al-Zubair announcement followed shortly after the awarding by Baghdad of another major contract to another Chinese company to build a civilian airport to replace the military base in the capital of the southern oil rich Dhi Qar governorate. The Dhi Qar region includes two of Iraq’s potentially biggest oil fields – Gharraf and Nassiriya – and China has said it intends to complete the airport by 2024. This airport project, it announced, would include the construction of multiple cargo buildings and roads linking the airport to the city’s town centre and separately to other key oil areas in southern Iraq. This, in turn, followed yet another deal being mooted, which would involve Chinese companies building out Al-Sadr City, located near Baghdad, at a cost of between US$7-8 billion, also within the framework of the 2019 ‘oil-for-reconstruction and investment’ agreement.

At the same time as Iraq was making these deals with China, Baghdad looked to offset any negative reaction from the U.S. with promises that Iraq would put more distance between itself and Iran. For many years, Iraq – despite its oil and gas riches – had been dependent on neighbouring Iran for around 40 percent of its power supplies, coming in the form of both gas and electricity imports into Iraq. However, as also analysed in depth in my new book on the new global oil market order, the middle of 2021 saw a statement from the then-Iraq Oil Minister, Ihsan Abdul Jabbar, that China’s State-owned Assets Supervision and Administration Commission (SASAC) had agreed to fund the strategically-critical Fao refinery project. This would process at least 300,000 bpd of crude oil in Iraq’s oil field-packed southern region that runs into the Fao Peninsula around Basra. Once Iraq had received the guarantee from China’s SASAC that it would guarantee all the required funding for the Fao refinery project, the contracts were awarded to the China National Chemical Engineering Co (CNCEC). These included the construction of the refinery, training, technology transfer, operation, and maintenance. In addition to the heavy Chinese personnel contingent that would be involved in these areas, there would also be even more ‘specialist security personnel’ from China to ‘ensure the safety of the entire site’ according to senior sources close to Iraq’s Oil Ministry and to Iran’s Petroleum Ministry exclusively spoken to by OilPrice.com at the time. 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on June 14 2023 said:
    The author can’t abide by the fact that China’s economy is the world’s largest and has been so since 2013. China’s economy at $33.0 trillion in 2023 is 23% bigger than the United States’ at $26.85 in 2023 both based on purchasing power parity (PPP). So the claim by the author that the ultimate aim of China is to overtake the US as the world’s number one economic power by 2030 is absolutely erroneous.

    Another fact that the author can’t abide by is China’s Belt & Road Initiative (BRI) which he insists on calling a multi-generational power-grab project. The reason I presume is that the BRI is part and parcel of the new emerging World Order being ushered in by the strategic Chinese-Russian alliance. It has seismic geopolitical, strategic and economic impact on the global trade system and the race for the top of the pyramid in global influence, something the United States is already losing decisively.

    Being the largest economy in the world, China’s economy needs a lot of oil, gas, LNG and coal not to mention nuclear power and renewable energy. Moreover, China’s economy would falter without oil. Its global oil strategy is, therefore, geared towards ensuring that this never happens.

    The key to this is to secure as much of the world’s oil and gas resources as it can in as short a time as possible particularly as it foresees a continued ramping up of tension between it and the US over Taiwan.

    Beijing’s three big target countries in the Middle East in terms of oil and gas resources are Saudi Arabia, Iran, and Iraq, the three oil giants of the Gulf region.

    China’s access to the vast proven crude oil reserves of Iraq, Iran and Saudi Arabia is already established and its energy security is being consolidated globally by further access to the energy reserves of Russia the world’s energy superpower and also through arrangements to protect the routes of oil supplies from the Gulf region.

    China is the biggest investor in Iraq’s oil and gas industry and the second largest importer of Iraqi crude. It has full access to Iran’s crude exports and is deeply involved in the development of Iranian oil and gas through a 25-year cooperation agreement. It is also Saudi Arabia’s largest destination for its oil export and investments. Moreover, China will soon sign a free trade agreement with the Gulf Cooperation Council (GCC) countries.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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