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Biden Faces Major Challenge As China Zeroes In On Iraq

A series of deals between China and Iraq in the run-up to this week’s visit of Iraq President Mustafa al-Kadhimi to Washington, including the latest involving China’s build-out of Iraq’s critical Fao refinery complex, might finally push the U.S. into formulating a genuinely workable strategy for continued engagement in Iraq.

The Fao facility to the south of Basra and its surrounding and connected infrastructure is the key to much of Iraq’s current and future crude oil supplies. Together with the build-out of China’s presence elsewhere in Iraq and across its dominant partner state Iran, Beijing has secured an immovable presence in the two biggest hydrocarbons powers in the Middle East alongside Saudi Arabia (which China is working on in tandem with Russia) in the largest and most decisive land-grab since the Second World War.  According to the announcement last week from Iraq Oil Minister, Ihsan Abdul Jabbar, China’s State-owned Assets Supervision and Administration Commission (SASAC) has agreed to fund the Fao refinery project that will process at least 300,000 barrels per day (bpd) of crude oil in Iraq’s oil field-packed southern region that runs into the Fao Peninsula. Once Iraq had received the guarantee from China’s SASAC that it would guarantee all of the required findings for the strategically critical Fao refinery project, the specific contracts were awarded to the China National Chemical Engineering Co (CNCEC) and these include the construction of the refinery, training, technology transfer, operation, and maintenance. In addition to the heavy Chinese personnel contingent that will be involved in the ongoing construction, training, operation and maintenance areas of the refinery, there will also be even more “specialist security personnel” from China to “ensure the safety of the entire site”, a senior oil and gas industry figure who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com last week. 

In line with Iraq’s new target of increasing crude oil production to 7 million bpd by 2027 at the latest, Baghdad announced at the beginning of this year plans to boost crude oil export capacity from its southern area in and around Fao by 72 per cent within the next three years. In broad terms, the Iraq Oil Ministry’s intention is to increase the storage capacity at Fao to 24 storage tanks, each of 58 thousand cubic metres (around 365,000 barrels), for a total capacity of around 8.76 million barrels. This would add to the six storage tanks already in place. The plan is to all intents and purposes a reiteration – and expansion - of the original crude oil export infrastructure build-out plan that was about to be launched before Islamic State (IS) began to run riot across Iraq from 2006. At that time, the Oil Ministry had realistic plans in place to construct at least a further 12 full-time operational storage tanks and blending facilities in and around Fao by the end of 2016, with the longer-term target being the 24 storage tanks and 8 million bpd+ crude oil output target and then higher.  

Although Iraq’s crude oil export routes to the North, and into mainland Europe via the Turkish port of Ceyhan, appears theoretically the better export option, the practical political considerations involved render the theory obsolete. The original Kirkuk to Ceyhan Pipeline, also called the Iraq-Turkey Pipeline (ITP), consisted of two pipes, which theoretically had a nameplate capacity of 1.6 million bpd combined (1.1 million bpd for the 46 inch diameter pipe, and 0.5 million bpd for the 40 inch one). Even before IS entered the picture though this pipeline was subject to repeated and ongoing attacks by various militant groups in the region. This led to the government of Iraq’s semi-autonomous Kurdistan region – the KRG – to oversee the completion of a single side track, from the Taq Taq field through Khurmala. This also runs into the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur, with a nameplate capacity of 0.7 million bpd, which was then increased to 1 million bpd. Further complicated by perennial disagreements with the KRG over the budget-for-oil deal originally struck in 2014, Baghdad instead planned to renovate and re-open the Federal Government-owned oil pipeline section that runs from Kirkuk to Ceyhan, bypassing any Kurd control, before its finances dried up.  

Related: Oil Opens Lower As Delta Variant Fears Clash With Tight Supply

Such a build-out of export facilities in Fao aligns with the fact that virtually all export efforts in the Federal Government of Iraq (FGI) run from Baghdad are focussed on the Basra facility in the south. To get to Basra, oil is moved via internal pipelines but these have previously been found to be unsound and in need of upgrading. From there, oil makes its way into the Fao main export depot, where it is stored and blended. Here again, though, there has not been adequate investment in the past and anything over the current levels of oil coming in has not been sustainable, meaning that oil supplies have been backed before up in the oil fields themselves, which has led to production bottlenecks. Previously, this also held up the roll-out of the Iraq’s new oil grade – Basrah Medium – that was to have added to the revenue streams generated by the existing Basrah Heavy and Basrah Light. 

Once past Fao, the situation is slightly more efficient as Fao pumps the oil to the single-point moorings (SPMs) – there are now five, with four in constant use whilst the other undergoes regular maintenance – and there has been some expansion in the capacity of the existing offshore terminals at Khor al-Amaya (KAAOT) and Al-Basrah (ABOT). In the same context of dramatically increasing its oil export capabilities, Iraq late in 2020 signed an agreement with Dutch marine construction firm, Royal Boskalis Westminster, to build an artificial island south of the ABOT terminal in the Persian Gulf, with the new artificial island project to be located 4 nautical miles south of the ABOT. An export terminal would be attached to the island, and include four jetties, which would have loading facilities for up to four very large crude carriers at a time, each capable of holding up to 320,000 deadweight tonnage. 

China’s involvement in a cornerstone project of the Fao build-out plan will perfectly augment its rolling out of financing for any and all projects in Iraq that either entrench it more firmly into the bedrock of Iraq’s (and Iran’s) oil and gas sector or increases its on-the-ground presence in other areas of Iraq’s vital infrastructure. Earlier this year, most appositely to the recent Fao development, it was announced that Baghdad has approved nearly IQD1 trillion (US$700 million) for infrastructure projects in the city of Al-Zubair in the southern Iraq oil hub of Basra. According to the city’s Governor, Abbas Al-Saadi, Phase 2 of the projects would be awarded to a Chinese company. The Iraqi source to whom OilPrice.com spoke last week stated that this participation by China was part of the broad-based ‘oil-for-reconstruction and investment’ agreement signed by Baghdad and Beijing in September 2019. This agreement allows Chinese firms to invest in infrastructure projects in Iraq in exchange for oil. 

The previous week to the Al-Zubair announcement was a similar statement that Iraq had just awarded another Chinese company a contract 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 is due to complete the airport by 2024. This project will 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 announced the week before in which Iraq officials stated that Chinese companies were being approached to build 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. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on July 27 2021 said:
    The historical fact is that the United States invaded Iraq in 2003 under false pretences in order to get its hands on its spectacular oil wealth. It won the military battles against weaker Iraqi armed forces but lost the war. The real winners were China and Iran.

    China emerged as the largest investor in Iraq’s oil industry and the second largest importer of Iraqi crude oil whilst Iran emerged with greatest political influence in Iraq.

    There is a major and very radical difference between China and the United States. China doesn’t interfere in the political affairs of the country in which it cultivates influence. Its approach is to have honest trade relations in a country like Iraq from which both sides enjoy reciprocal benefits and in so doing China extends its geopolitical influence. This has been the case from Iran to Saudi Arabia and scores of countries around the world.

    The United States, on the other hand, gives many promises but none is delivered. Meanwhile it tries to own the country. If a country doesn’t agree with its policies it comes under US sanctions. That is why China’s influence in the world and particularly in the Middle East is surging whilst the United States’ is declining fast. The United States has been globally reduced to become the agent of Israel and to serve Israeli political objectives like the normalizations of relations with Arab countries and the annexation of occupied Arab land like the Golan Heights and many parts of Palestinian lands.

    Therefore, it is presumptuous by the author to portray China’s growing influence in Iraq, Iran and Saudi Arabia as the largest and most decisive land-grab since the Second World War. These three countries aren’t the property of the United States to lose. Moreover, America will soon depart or be forced to depart the Middle East under pressure from Iran leaving a vacuum to be filled by both China and Russia.

    Oil could and should help build Iraq’s infrastructure particularly its oil assets. After all, Iraq floats on tremendous oil reserves estimated by experts to exceed 400 billion barrels (bb) between proven and semi-proven with the lowest production costs in the world and the largest potential for capacity expansion anywhere else.

    China is already the largest investor in Iraq’s oil industry and, therefore, it is only natural for Iraq to award oil and non-oil projects to China.

    Top of these projects should be the building of the strategic Basra-Aqaba oil pipeline connecting Basra oilfields with the Jordanian port of Aqaba on the Gulf of Aqaba. This would give Iraq another export route for its oil in case that the Strait of Hormuz was blocked.

    By the way, Mustafa Al-Kadhimi is the prime minister of Iraq and not its president as the author mistakenly described him. The President of Iraq is Barham Salih.

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

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