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Simon Watkins

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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 Tightens Hold on Iraq's Oil with Al-Faw Refinery Nearing Completion

  • PowerChina and Norinco International are the guiding forces behind the development of the Al-Faw Refinery in South Iraq.
  • China is finishing the Al-Faw refinery perfectly in time to allow it to complete its strategically vital oil project in the critical Iraqi energy hub of Nasiriyah.
  • Other elements of China’s expansion strategy continue unabated, fusing both commercial advances and military ones across southern Iraq .
Basrah tankers

Back in early 2018 when rumours were rife that then-U.S. President Donald Trump was going to unilaterally withdraw his country from the ‘nuclear deal’ with Iran, China moved to position itself to occupy the vacuum that would be left in Iran and Iraq, at the very heart of the Middle East. Beijing knew that Iran continued to wield enormous influence over neighbouring Iraq, and that both together were the biggest oil and gas prize in the entire region, in addition to being at the vanguard of the Shia strand of Islam. In Iran’s case, China picked up the pace of negotiations for its all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’  concluded later, as first revealed anywhere in the world in my 3 September 2019 article on the subject and analysed in full in my new book on the new global oil market order

In Iraq’s case, it did the same for the foundation stone ‘Oil for Reconstruction and Investment’ agreement signed by Baghdad and Beijing in September 2019, which allowed Chinese firms to invest in infrastructure projects in Iraq in exchange for oil. This later became broadened and deepened in the equally all-encompassing ‘Iraq-China Framework Agreement’ of 2021. The announcement last week by the General Company for Ports in Iraq (GCPI) that a consortium of Chinese companies has nearly completed the 300,000-barrels-per-day (bpd) oil refinery at Iraq’s key Faw Port is in line with China’s eventual vision for Iraq as one part of a giant Mesopotamian client state including Iran as well.

Although no details were given by the GCPI as to which Chinese companies are involved in the Al-Faw refinery, in the port city of Basra, a source close to Iraq’s Oil Ministry exclusively told OilPrice.com last week that PowerChina and Norinco International are still the guiding forces behind the development. This makes sense, as these two firms signed the original contract in January 2018 to build the refinery at Al-Faw, which together with its 300,000-bpd capacity would also have a petrochemical plant attached to the development. It also perfectly aligns with Beijing’s broad modus operandi in its expansion strategy across the Middle East to combine commercial ventures with a military presence, as alongside its petroleum and mineral resources exploration and development activities, Norinco is one of China’s foremost defence contractors. One of Norinco’s key oil subsidiaries is Zhenhua Oil, which was the company that on 2 January 2021 made a multi-billion-dollar deal with Iraq’s Federal Government in Baghdad to prepay for four million barrels every month for five years to be delivered to China by Iraq’s State Organization for Marketing of Oil (SOMO). As analysed in depth in my new book on the new global oil market order, it was exactly the same strategy to take over Iraq’s oil industry in the south as Russia had successfully used to take over the industry in the semi-autonomous northern region of Iraqi Kurdistan in 2017. So obviously extraordinarily dangerous to U.S. interests in the Middle East and elsewhere was this deal that Washington eventually succeeded in forcing the Iraqis to suspend it. Related: World Oil Demand Jumped To 5-Year Seasonal High in February

This said, other elements of China’s expansion strategy continue unabated, fusing both commercial advances and military ones across southern Iraq. If this strategy sounds familiar, it is precisely the one used by Great Britain in its expansion in the Far East through the East India Company – of which, Chinese President Xi Jinping is a tremendous admirer. After a suitable period had elapsed after the suspension of the omni-toxic Zhenhua Oil prepayment deal, Baghdad approved three potentially far-reaching new infrastructure deals that heavily involved China in the heartland of Iraq. One was for nearly IQD1 trillion (US$700 million) of 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 2019 ‘Oil for Reconstruction and Investment’ agreement. Another deal was for Chinese companies 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 said that it intended to complete the airport by the end of 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. In the later discussions involved in the 2021 ‘Iraq-China Framework Agreement’, a senior source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com, it was decided that the airport could be expanded later to be a dual-use civilian and military airport. The military component would be usable by China without first having to consult with whatever Iraqi government was in power at the time, as also analysed in full in my new book on the new global oil market order. The final of the three deals involved 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.

In this mould, China is finishing the Al-Faw refinery perfectly in time to allow it to complete its strategically vital oil project in the critical Iraqi energy hub of Nasiriyah, at the heart of the some of the country’s biggest oil and gas fields and close to Faw Port’s main export terminal in Basra. According to the Iraq Ministry of Planning, the China Petroleum Pipeline Engineering Company (CPPEC)-led project will act as a storage hub and supply conduit for 3.0-3.5 million barrels of crude oil that will then either go for export out of Basra Port or will be transported to the Al-Faw refinery and through pipelines to other refineries and power plants in central and northern Iraq. It will also act as a logistical command centre for all of China’s extensive oil and gas projects in Iraq and for the build-out of multiple non-oil projects connected to the ‘Iraq-China Framework Agreement’. CPECC is also the very same firm that was awarded a US$308 million engineering, procurement, construction and commissioning contract for the huge Gharraf oilfield. A separate engineering and construction project for Gharraf was also awarded by Baghdad to China’s Zhongman Petroleum and Natural Gas Group. Back in 2015, Zhongman was also awarded a US$526.6 million drilling deal for Iraq’s supergiant West Qurna 2 oilfield. Further emboldened by the effective withdrawal of the U.S. from Iraq at the end of its combat mission in December 2021, the beginning of this year saw PetroChina take over the lead developer role at the neighbouring supergiant West Qurna 1 oilfield from the U.S.’s ExxonMobil. This was followed just a week later by the awarding of a major build-own-operate-transfer contract to a subsidiary of PetroChina to develop the Nahr bin Umar onshore gas field.

Once the Al-Faw refinery has been completed, China will be looking at options for the long-stalled US$11-billion Nebras Petrochemical Project (NPP), following the exit of British supermajor Shell from it in February, according to the Iraq source last week. Although Russia’s Lukoil put together a development proposal for the project before Shell agreed the original memorandum of understanding back in 2012, Beijing now thinks it might be a good fit for its other activities in southern Iraq, particularly as it expands its gas presence as well in the country. China is unlikely to have any issue with Iraq’s ‘commission’ payments – as Western companies have had - although in Nebras’s case these may end up totalling US$4 billion or more. In addition, it remains one of the world’s biggest buyers of ethylene, intended to be one of the major products from Nebras, and developing a world-class petrochemicals sector in Iraq would also give it first rights over other key petrochemicals it needs.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on April 18 2024 said:
    Surely this is a good thing for Iraq's oil industry benefitting greatly from China helping it expand its production and refining capacities and providing a ready market for Iraqi oil exports and also for China which needs every single drop of oil to satisfy its growing economy.

    Iraq is the last spectacular oil prize in the world sitting on an estimated 400 billion barrels of proven and semi-proven reserves with the cheapest production costs. When this is added to China's 25-year cooperation treaty with Iran, it enhances China's fast-growing geopolitical influence which has already eclipsed the United States' in the Gulf region and is also helping the petro-yuan increase its share in the global oil trade at the expense of the petrodollar.

    And with Russia's expanding influence and involvement in the oil industry in the Gulf region, the Chinese-Russian strategic alliance is on the way to making the Gulf region which is the world's most important oil region its own domain.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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