Chinese Firms Beef up Oil Investments in Iraqi Oil Wells

China has been building up its oil investments in Iraq shortly after U.S. President Barack Obama announced that the Iraq war has come to an end.  China, through its state-run oil firm China National Petroleum Corporation, runs three oil fields in Iraq and is jointly capable of producing oil at the rate of 1.4 million bpd.  This is roughly 50% of Iraq’s daily oil production.

Recently, another Chinese oil firm is reportedly engaged in talks with ExxonMobil for a possible purchase of the latter’s stake in Iraq’s West Qurna 1 oil field. At the moment however, there is no confirmation yet from both parties whether or not negotiations on the sale did push through.  According to sources, oil reserves in West Qurna 1 are valued at around $50 billion.

There are unconfirmed reports that point to PetroChina as the top bidder for West Qurna 1 and that its adjoining oil field, Qurna 2, could also be part of the oil assets to be bid out to China.  Presently, Russian oil firm Lukoil runs said oil field.  Its former partner, Statoil, has pulled out its oil investments in the project. Vagit Alekperov of Lukoil approves of China as a possible new partner, citing the country’s positive demand growth.

From a current level of 3 million bpd, Iraq’s oil production is projected to grow to about 8 million bpd in 12 years’ time.  The International Energy Agency reported that, after this period, some 80% of Iraq’s oil output will be channelled to China. According to the Agency’s economist Faith Birol, oil trade between Iraq and China will create a new global Silk Route as Iraq trades its oil for additional investments from China.  This new partnership is bolstered by China’s commitment to build energy facilities in Iraq.

China’s competitive advantage is its ability to develop oil fields at very reasonable price tags due to its cheap labor. Wenran Jiang, a University of Alberta expert specializing in Chinese energy sector disclosed that Iraq pays Chinese and other non-local operators a few dollars for every barrel of oil produced. This has prompted other firms like Exxon to instead invest in oil fields owned by Kurdistan, who is reportedly offering more reasonable payment terms.

Despite the meager offer, China accepts Iraq’s terms for the reason that the former is heavily dependent on foreign oil. Currently, close to 60 percent of its oil requirements come from foreign sources.  This figure might even rise by 20 percentage points in the long term, says Lin Boquiang, a director at Xiamen University.

She added that there aren’t so many foreign sources left to choose from and, in China’s case, Iraq presents itself as a lesser evil.