Last Update: Saturday, 16 March 2013 KSA 12:40 - GMT 09:40
China in Iraq: winning without a war
Saturday, 16 March 2013
Dr. Naser Al-Tamimi Not long ago, Robert Kaplan, the well-known American writer, “complained” in The Wall Street Journal, saying: “... We have liberated Iraq so that Chinese firms can extract its oil.” The sentiment that was expressed by Kaplan was in fact reflecting the evolution of the situation in Iraq, where the Chinese presence was rising strongly. Tellingly, Beijing’s position in Iraq evolved quickly, from among the most outspoken of critics of the 2003 U.S.-led invasion to topple Saddam Hussein, to emerging as one of the biggest economic beneficiaries of the war in Iraq.
China’s Catching-up Game
Ten years after the American invasion, Iraq turned into an important energy / trade partner for China. Indeed, the trade between Iraq and China doubled almost 34 times. The volume of bilateral trade between the two states soared to $17.5 billion by end-2012 from small amount of $ 517 million in 2002. In the same period, the trade between Iraq and the U.S. increased only 5.6 times. The bilateral trade between both countries rose to $ 21.6 billion by end-2012 from $ 3.8 billion in 2002. Last year, China was both the second-largest purchaser of Iraqi exports, $ 12.6bn, (after the U.S. $ 19.6bn) and the second-largest supplier of imports, $ 4.9bn, (after Turkey $ 10.8 bn), according to latest data from the U.N. Comtrade data. The United States still Iraq’s largest trade partners, however the current trends suggest that China will soon overtake America to become Baghdad’s top trade partner.
Ironically, three important points emerged after a decade of the American occupation of Baghdad. (a) The U.S. imports from Iraq of crude oil in 2012 were less in volume in comparison before the invasion. For example in the 2002, the United States imported from Iraq 485 thousand barrels of crude oil per day (bpd), while the figure from China was almost zero. However, in 2012, America imported 473 bpd of crude oil; in comparison the volume of China’s total imports from Iraq hit about 315 bpd. (b) The first oil license awarded by Iraq’s government after the U.S.-led invasion was to state-run China National Petroleum Corp. (CNPC) who won a US $ 3.5 billion development contract for Iraqi oil field Al-Ahdab in November 2008. And (c) Beijing and Baghdad recently consolidated their trade ties with the two countries signing of a cooperation deal on economic and technology and an exchange of notes on personnel training; during the Iraqi Prime Minister Nuri Al-Maliki visit to China in July 2011, which was also the first visit by Iraqi prime minister to China in the over 50 years of history of diplomatic relations.
Within this context, IHS Global Insight argue that Iraq is extremely important for Chinese companies’ growth strategy, especially given that Iran is likely to face much of a standstill for years if not decades. Iraq’s production increases have matched the relative production decreases in Iran. As a result of Iranian oil production declines, Iraq became the second largest OPEC producer (after Saudi Arabia) in late 2012. Indeed, in a stunning turnaround, Iraq recently stabilized and increased its oil production, whereby at the end of 2012, it reached nearly 3 million barrel a day (mb / d) for the first time since 1990, and it can undoubtedly produce more according the International Energy Agency (IEA). Iraqi government is planning to increase production to 3.7 million barrels per day mb/d in 2013. The International Monetary Fund (IMF) believes the figures provided by the Iraqi government are very realistic. According to the latest data provided by the IMF, Iraq’s oil production will reach 3.6 mb/d by the end-2013, while the exports will rise to 2.8 mb/d in the same year, from 2.3 mb/d in 2012.
The Big Bet
Iraq is already the world’s third-largest oil exporter (after Saudi Arabia and Russia) and has the resources and plans to increase rapidly its oil and natural gas production as it recovers from three decades punctuated by conflict and instability. Iraq is estimated to have the fifth largest proven oil reserves (143.1 billion barrels) and the 12th-largest proven gas reserves in the world, as well as vast potential for further discoveries, according BP Statistical Review of World Energy 2012.
Beijing is betting big in Iraq. The view from Beijing is that a stable Iraq is good for the region and for China’s core economic interests. According to business Monitor International, (BMI), in November 2008, China and Iraq finalised a $ 3bn oil service contract for the development of the Ahdab oil field. The State-run Chinese National Petroleum Co. (CNPC) originally signed a Production Sharing Agreement (PSA) for the field in 1997. This is the first deal from the Saddam Hussein era to be honoured by the new Iraqi regime. While in November 2009, CNPC won a large stake in a $ 15 billion deal to develop the Rumaila oil field in southern Iraq, thought to be the second largest in the world. In December 2009, CNPC was awarded a 50% stake in the development of the Halfaya oilfield located southern Iraq. Halfaya is proven to hold 4.1 billion barrels of recoverable reserve and has production potential of 200 thousand to half million bpd. In February 2010, Beijing cancelled 80% of Iraq’s $8.5 billion debt to China, a move designed to further Chinese business interests in the country. In June 2012, CNPC finished the first phase of the Halfaya and increased production from 3,000 bpd to 100,000 bpd, 15 months ahead of schedule.
CNPC currently holds a 37.5% stake in the Halfaya field, a 75% stake in the al-Ahdab field and a 37% stake in the Rumaila field. Wang Dongjin, vice president of CNPC, estimates that Chinese state companies are currently helping in the production of some 1.6 million barrels a day in Iraq, more than half that country’s total output. Chinese companies are also producing 120,000 barrels a day from Halfayia and some 140,000 barrels a day from Ahdab. China’s initial success in Iraq also extends to the Kurdish Autonomous Region. In August 2009, the state-run, China Petroleum & Chemical Corporation (Sinopec) agreed to acquire Swiss energy company “Addax” in a $ 7.2bn deal. The deal has been approved by the Chinese government and it became effective on October 5, 2009. Subsequently, Sinopec gained access to two oil fields in northern Iraq; as Addax has a 30% stake in PSA for the Taq field ‘and’ a 26.67% working interest in the Sangaw North PSC oil field in Kurdistan. Additionally, there are also speculations (NASDAQ news) that China’s largest oil and gas producer - PetroChina - is interested in joining Texas-based ExxonMobil Corporation, for the development of West Qurna oilfield in southern Iraq. Both parties are yet to finalize on the size of stakes to be shared.
The Coming ‘Oil Superpower’
As for the future, in the IEA’s Central Scenario, that reflects its judgement about a reasonable trajectory for Iraq’s development, based on an assessment of current and announced policies and projects, Iraq’s oil production rises to 4.2 mb/d in 2015, more than doubles to 6.1 mb / d by 2020, jumps to 7 mb/d by 2025, and reaches 8.3 mb / d in 2035. The increase in Iraq’s oil production in the IEA’s Central Scenario of more than five mb/d over the period to 2035; makes Iraq by far the largest contributor to global supply growth. Over the current decade, Iraq accounts for around 45% of the anticipated growth in global output.
Iraq’s exports rise to 4.4 mb / d in 2020 and 5.2 mb / d in 2025, finishing the projection period at 6.3 mb / d. The IEA predicts that by 2020, Iraq will export 80% to Asia (3.5-4 m / bd) most of it will go to China. The IEA also predicts that China will become the main customer for Iraqi oil by the 2030s, with Baghdad overtaking Russia to become the world’s second-largest oil exporter by then. The IEA’s chief economist, Fatih Birol, recently said that: “Iraq will emerge as a major new oil producer by the 2030s. Its main customer will be China, and half of Iraqi oil production will go to China.”
Indeed, Iraq’s oil production potential is immense, but exploiting it depends on consolidating the progress made in peace and stability in the country and the need for infrastructure investments. In a high-case scenario, if all the various moving parts are aligned perfectly, the IEA forecasts that Iraq could crank up production to 9.1 mb/d by the end of this decade. It becomes the second-largest global exporter after Saudi Arabia and a key supplier to fast-growing markets in Asia. In a delayed case - which also is unlikely but could occur if the regional environment deteriorates and Iraq is engulfed in a larger regional conflict or oil prices crash - would see production rise marginally to 4 mb/d by 2020.
Difficult Road Ahead
To put Iraq’s potential in context, Baghdad in 2012 ranked sixth (after Saudi Arabia, Angola, Russia, Iran and Oman), in the list of key crude oil suppliers to China, where the ratio of imports to about 5.8% (about 315 thousand bpd) of China’s total imports. As by comparison, China imported over a million barrel per day (mb/d) from Saudi Arabia in 2012 (20% of China’s total crude oil imports), while Angola provided around 806 thousand bpd or 15% of total imports, nearly 9% or 489 thousand bpd came from Russia and around 442 thousand bpd or over 8% imported from Iran. But Iraq could jump to the third or the second largest supplier of oil to China over the next few years. However, the security situation and political developments in Iraq still a source of concern to Beijing.
Although the security situation has improved markedly over the past five years, Iraq is still far from stable. For China, the surge in imports of Iraqi crude oil carries risks because of the danger that deteriorating security, sectarian tensions, complex legal framework, endemic corruption, and lack of infrastructure could delay the increase in Iraq’s forecasted oil production forcing Beijing to look for alternative suppliers. The Economist Intelligence Unit (EIU) expects the political situation in Iraq to remain unstable, while the Global Insight argues that “Iraq’s delicate security condition poses the greatest downside risks to economic growth in the short term, as it could severely undermine development plans, cause a political gridlock, and erode consumer demand.” More worryingly, the increasingly civil war in Syria could spill over into Iraq creating dangerous sectarian conflict.
However, the EIU does not expect a repeat of the sectarian conflict that engulfed Iraq in 2006-07. Indeed, despite the gloomy political outlook, the IMF projects that Iraq to register the highest economic growth rates in the world, where the GDP is expected to expand rapidly in 2013 by more than 14% and Iraq’s economy to grow by a robust 10-11% on average during 2013-2017, driven primarily by rising oil production. This provides enormous opportunities for Chinese companies to expand in Iraq’s markets.