The history of the Middle East since the 1990s has been in many aspects been defined by China’s need to secure sufficient energy to power its economic growth to rival the superpower status of the U.S., and Washington’s efforts to keep these efforts in check. The ebb and flow of these competing forces has been felt nowhere more acutely perhaps than Iraq, with its very conservatively estimated 145 billion barrels of oil reserves and 3.5 trillion cubic metres of gas. While U.S. forces remained on the ground following the 2003 overthrow of Saddam Hussein, Beijing’s options to expand its influence in Iraq were extremely limited. But by 2018, the unpopularity of what many Iraqis regarded by then as an occupation and the concomitant unilateral withdrawal of the U.S. from the Joint Comprehensive Plan of Action (‘the nuclear deal’) with Iraq’s chief regional sponsor Iran opened the way for Beijing to expand its operations of influence.
The groundwork for all future developments by China in Iraq was laid out in the wide-ranging ‘Oil for Reconstruction and Investment’ agreement signed between China and Iraq in 2019. The basic template for this agreement – which includes priority on new field contracts for Chinese firms and substantial discounts for them on oil and gas recovered, among others – was the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ 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. The 2019 China-Iraq deal was then substantially broadened and deepened into the ‘Iraq-China Framework Agreement’ of 2021. Part of this featured even bigger discounts given to Chinese firms on oil and gas discovered in Iraq (up to 30%, depending on the field). However, crucially for China’s bigger territorial ambitions in Iraq and the Middle East, it also gave its firms developing such fields wide-ranging rights to station significant security forces in and around these areas and to engage in a massive build-out of accompanying infrastructure. This includes road and rail networks connected to bigger infrastructure hubs with links across the Middle East, the right for the Chinese military to use selected Iraqi military and civilian seaports and airports, and permission to construct further businesses, schools and other support facilities tangential to China’s ongoing interest in the region.Related: Russia Intent On Defying New U.S. Sanctions on Its Oil Industry
Such a development is West Qurna 1, located around 65 kilometres from southern Iraq’s principal oil and export hub of Basra and holding around 22 billion barrels of recoverable oil reserves. The Oil Ministry’s target for the present phase of development was increased in 2021 from the previous 500,000 barrels per day (bpd) to 700,000 bpd, with the field currently producing around 550,000 bpd. The Ministry also said at that time that although the original production plateau target of 2.825 million bpd (by the early 2030s) had been negotiated down to 1.6 million bpd during contract discussions with participating oil companies, the plateau target might well be raised again in the coming five years. The main companies involved in those discussions were PetroChina - the listed arm of the China National Petroleum Corporation (CNPC) – which then held 32.7% stake in West Qurna 1, and ExxonMobil, which also had a 32.7% stake at that point.
However, almost immediately China sought to establish itself as the dominant force on the site, using the surreptitious and gradual acquisition of a range of huge ‘contract-only’ awards made to its companies on the site in addition to PetroChina’s activities, as also analysed in full in my latest book. The most notable of these early on was the November 2019 US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production to the China Petroleum Engineering & Construction Corp. Similar ‘contract-only’ deals have been done by China across Iraq, including for its supergiant Majnoon oil field, to another hitherto unheard-of Chinese firm - the Hilong Oil Service & Engineering Company. This incremental loss of influence across the West Qurna 1 project was one of ExxonMobil’s problems. Another potentially far greater one emerged as the U.S. supermajor discussed its other major targeted deal in Iraq – the US$53 billion CSSP. This involves taking and treating seawater from the Persian Gulf and then transporting it via pipe¬lines to oil production facilities to maintain pressure in oil fields to optimise their output and longevity. At that time, West Qurna 1 and the CSSP were to form a new core presence for the U.S. in Iraq based around cooperation in the energy sector with the Iraq authorities, following years of rising military and sectarian tensions across the country. However, the U.S. firm eventually removed itself from both projects as it became increasingly clear that they were infused with massive legal and accounting risks that far outweighed the rewards. As was written into the original West Qurna 1 contract, ExxonMobil’s stake then went to PetroChina, and Beijing had complete control over the site, just as it had been working towards.
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It has taken some time, but as of now Beijing is in a position to roll out the next phase of its West Qurna 1 plans, which have nothing to do with increasing oil production as had been agreed with the Iraqis. Instead, several special projects were inaugurated in the Al-Sadiq District of Iraq’s oil-rich Basra Province, according to Oil Ministry announcements last week. Central to planning these and further operational rollouts undertaken by PetroChina (supported by the Basra Oil Company) will be the West Qurna 1 Field Operations Center (Phase 1), which also saw its groundbreaking ceremony last week. This will play a pivotal role in managing the water injection into the field, associated gas processing operations, and oversight of production activities across the field. It will also include new roads and electricity projects, increased employment opportunities in and around the development and the building of seven new schools. These facilities will be connected into China’s broader network across southern Iraq, as part of its ongoing ‘Iraq-China Framework Agreement’ of 2021 and following the U.S.’s end of combat mission in Iraq of the same year. Such additional elements of this plan and its 2019 ‘Oil for Reconstruction and Investment’ agreement predecessor in the heartland of Iraq have included IQD1 trillion (US$700 million) of infrastructure projects in the city of Al-Zubair in Basra. Another was for Chinese companies to build a dual use civilian and military airport to replace the previous installation 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. This airport project 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.
Ahead of the imminent start of Trump’s second term as president, Beijing has busily been adding to these key assets across Iraq. In August, Chinese firms won most of the 13 contracts for oil fields and exploration blocks awarded by Iraq’s Oil Ministry in the latest bidding round. When fully developed these will add 750,000 bpd of oil and 850 million cubic feet per day of gas to the country’s output. Already, according to industry figures, over a third of Iraq’s proven oil and gas reserves and over two-thirds of its current production are managed by Chinese companies. And in June, Chinese and Iraqi officials announced plans to link Iraq’s US$17 billion Strategic Development Road (SDR) programme directly into China’s ‘Belt and Road Initiative’ (BRI). Broadly, Iraq’s SDR will create a seamless transport corridor running from the flagship deepwater Al Faw Grand Port (due to be finished with Chinese help in 2025) in its key oil export hub of Basra in the Persian Gulf, all the way through several of its biggest oil and gas fields, and finally into Fishkabur on the Iraqi border with Turkey. From there it will extend via road and railway links into the rest of Europe. Even without any links to China’s BRI transport corridors, the SDR’s route from the Persian Gulf to the key business hubs of Europe (and its main oil hubs) would offer a higher speed and lower cost for goods to be moved than transport through the Suez Canal. For China, its integration into its own BRI infrastructure would represent an alternative final part of the transport jigsaw that would see a direct land route from Xi’an into Europe. It could also function as the alternative final route in the maritime transport corridor running from Quanzhou to Colombo in Sri Lanka and then up to Basra rather than continuing past Yemen and through the Red Sea and Suez Canal into the Mediterranean.
By Simon Watkins for Oilprice.com