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Petroleum rounds reveal level of Chinese involvement in oil and gas sector - International Law Office

International Law Office

Energy & Natural Resources - Iraq

Petroleum rounds reveal level of Chinese involvement in oil and gas sector

June 07 2010

Introduction
Investment in the oil and gas sector
Chinese trends in upstream development
Comment


Introduction

The recently competed first and second-bid petroleum rounds revealed Chinese corporations as the single largest investor in the Iraqi oil and gas sector. This success is a product of:

  • a Chinese foreign policy which aims to secure petroleum imports for a developing economy;
  • a long track record in Iraq which preceded the 2003 Second Gulf War; and
  • a skilled and proficient workforce which has a long track record of successfully completing projects and large-scale developmental infrastructure.

Among the host of other countries involved in the development of Iraq, China enjoys the optimal financial, political and logistical positions to bid competitively on large-scale infrastructure projects, while remaining profitable and domestically compliant in a harsh environment, irrespective of the massive political and security risk.

Investment in the oil and gas sector

Mainland China's clear interest in Iraq's oil is driven partly by the highly lucrative petroleum profits, but also by its domestic need for natural resources. The table below demonstrates the amount of Chinese activity in Iraq pursuant to the first and second-bid rounds.

Oil contracts in Iraq by Chinese companies

Company

Partner

Location

Investment

Output

Chinese National Petroleum Company (CNPC)

Ahdab oilfield

$4 billion

115,000 barrels per day (b/d)

China Petroleum and Chemical Corporation(SINOPEC)

Acquisition of Addax

Kurdish areas

$7.24 billion

180,000 b/d

CNPC

BP

Rumaila oilfield

$15 billion

2.85 million b/d

CNPC

Total and Petronas

Halfaya oilfield

535,000 b/d

CNPC (gas)

South Pars gas field

$4.7 billion

1.8 billion cubic feet per day

Daging Oil Field Company

Schlumberger and Iraq Drilling Company

Rumaila oilfield

$500 million

n/a

The four major Chinese oil companies competing in Iraq are all state owned. These companies arrived in Iraq with the clear domestic Chinese mandate to secure as much sustainable petroleum access as possible. Given China's unique combination of a communist political system and capitalist economic ideals, it can be inferred that such a mandate comes with the full support of the Chinese government and access to all China's resources.

The four state-owned Chinese oil companies involved in Iraq are: CNPC, SINOPEC, Chinese National Offshore Oil Corporation and Sinochem.

CNPC is currently involved in the Ahdab oilfield, the Rumaila oilfield, the Halfaya oilfield and the South Pars gas field. SINOPEC is involved in the Kurdish oilfields following an acquisition of Addax and was not involved in the bidding rounds in Iraq due to its presence in the Kurdish oilfields, most notably Tak Tak oilfield. Chinese National Offshore Oil Corporation is involved in the Misan oilfield, while Sinochem recently withdrew from the Missan oilfield project due to low profit margins.

While the recent global economic downturn has brought with it a drop in the demand for petroleum, China's oil consumption increased from 7.6 million b/d in 2008 to almost 8 million b/d in 2009. Despite being the fifth-largest oil producer in the world, China now imports more than half of its oil consumed in 2009 (approximately 4.1 million b/d). This number is projected to increase to 9.1 million b/d by 2020. Securing access to natural resources has become critical to China's economic expansion plans and also a salient nature of its worldwide foreign policy.

Chinese trends in upstream development

The Chinese government also contributes to the ability of the four state-run companies to be involved in upstream oil production and has used sovereign debt as a method to contribute towards its effectiveness. For example, China recently forgave 80% of the $8.5 billion debt owed by the Iraqi government to China. While the official statement identified furthering the long-term policy of assisting Iraq in its realization of stability and development as the reason for the cancellation, it was also meant to foster preferential business relationships and secure good relations within the three Iraqi oil and gas bid rounds.

China has already spent $557 million on signing fees alone in order to secure its oil position in Iraq. Given China's current focus on resources and its consistent national policy of growth, essentially a state-controlled oil firm has greater access to credit than any similarly situated private company.

Comment

Even before the Second Gulf War, China maintained significant ties and connections with Iraq. In fact, China was one of Iraq's top-five trading partners in 2000. At the end of 2000, 60 Chinese companies held more than 650 contracts with Iraq, valued at $1.6 billion. China advocated internationally and publicly for relaxing UN sanctions on Iraq. However, even before such statement was made, Chinese corporate interests were the recipient of $1.34 billion of projects which had already obtained UN approval.

For further information on this topic please contact Thomas W Donovan at Iraq Law Alliance PLLC by telephone (+964 7 901 919 425), fax (+20 2 760 4593) or email (thomas.donovan@iqilaw.com).


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