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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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China Replaces Western Energy Firms in Iraq’s Supergiant Oil Field

  • West Qurna 1, holding over 20 billion barrels of reserves, is a key asset in Iraq's oil industry, with PetroChina now leading its development.
  • ExxonMobil's withdrawal from the Common Seawater Supply Project and other Iraqi energy projects opened the door for Chinese and Russian firms to fill the gap.
  • The change in leadership at West Qurna 1 reflects a broader trend of increasing Chinese influence in Middle Eastern oil markets and the decline of Western hegemony.
China Oil

The official handover of the lead operator role on one of the world’s biggest oil fields – West Qurna 1 – from the U.S.’s ExxonMobil to China’s PetroChina was completed last week. However, unofficially China took control of the supergiant oil field from the moment at the end of June 2018 that ExxonMobil broke off talks with the Iraqi government about it being the lead partner in the country’s Common Seawater Supply Project (CSSP) and began a strategic withdrawal from all Iraq energy projects, as did other Western energy firms. Chinese and Russian firms were happy to step into the project voids created. As a very high-ranking official from the Kremlin said recently at a meeting with senior government figures from Iran: “By keeping the West out of energy deals in Iraq […] the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise,” a senior source who works closely with the European Union’s energy security apparatus exclusively told OilPrice.com

West Qurna 1 is located around 65 kilometres from southern Iraq’s principal oil and export hub of Basra and holds a considerable portion of the estimated 43 billion barrels of recoverable reserves held in the entire supergiant West Qurna field. Originally, West Qurna 1 was thought to have around 9 billion barrels of these reserves, but early in 2021 Iraq’s Oil Ministry revised its recoverable reserves estimate for the field up to a total of over 20 billion barrels. Given this, the Ministry increased the target for the present phase of development 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 at the time, the plateau target may 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 completed the purchase of a 32.7 percent stake in West Qurna 1, and ExxonMobil, which also took a 32.7 percent stake. Almost immediately, PetroChina sought to establish itself as the dominant force on the site. As analysed in full in my new book on the new global oil market order, the strategy employed to effectively sideline ExxonMobil is one that China has repeatedly used in similar situations across the Middle East, with a key element being the often surreptitious and gradual acquisition of a range of huge ‘contract-only’ awards made to Chinese companies. 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. At that time, both projects 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. The CSSP is the key to Iraq’s being able to jump from its long-running oil production of around 4-4.5 million bpd to 7 million bpd, then 9 million bpd, and perhaps even 12 million bpd, as also analysed in depth in my new book on the new global oil market order. This would allow it to become the world’s second-biggest crude oil producer, after the U.S. and ahead of Russia and Saudi Arabia. The CSSP involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities in order to maintain pressure in oil fields to optimise their output and longevity. The basic plan for the Project is that it will be used initially to supply around six million bpd of water to at least five southern Basra fields and one in Maysan Province, and then built out for use in further fields. However, both the longstanding stalwart fields of Kirkuk and Rumaila – the former beginning production in the 1920s and the latter in the 1950s, with both having produced around 80 percent of Iraq’s cumulative oil production – require major ongoing water injection. Although the water requirements for most of Iraq’s oilfields fall between these two cases, the needs for oilfield injection are highest in southern Iraq, in which water resources are also the least available.

ExxonMobil was brought into the CSSP initiative when it was first announced in 2010, to take the lead in co-ordinating initial studies for the plan at a time when Baghdad was looking to raise its oil production capacity to 12 million bpd by 2018, to overtake Saudi Arabia’s output. The U.S. firm was then removed in 2012 when negotiations fell through, and replaced by the state-run South Oil Company. By that time, it had become increasingly clear to the Americans that the Project was infused with massive risks to it that far outweighed the admittedly considerable rewards. Fully detailed in my new book, suffice it to say here that there were three key elements to the risk/reward matrix that formed the basis of those negotiations between ExxonMobil and the Oil Ministry. These were cohesion, security, and streamlining, a senior source who works closely with the Ministry exclusively told OilPrice.com at the time. “Cohesion related to ensuring the facilities that are connected to the CSSP are completed in order and in full, security related to the on-the-ground security of personnel and to the basic soundness of the business and legal practices involved in the agreement, and streamlining meant that any deal should continue as agreed, regardless of any change in government in Iraq,” he said. “The basic problem was that the [Oil] Ministry and other officials connected with the CSSP expected to receive commissions for anything they did, which might look a lot like bribery if they ever came to light, but if the payments weren’t made then the project simply would not have progressed,” he added. “The standard commission here is 15 percent, but it can rise to 30 percent or more, so with the development cost having risen to US$53 billion, Exxon[Mobil] was looking at under-the-counter payments of nearly US$8 billion, and that’s difficult to hide in any accounts, even if it wanted to do so,” he told OilPrice.com.

According to the source (and corroborated to OilPrice.com by two other senior sources connected to Iraq’s Oil Ministry at the time), ExxonMobil tried again in 2015 to reset negotiations with the Ministry back onto a normal business level by insisting that all the contracts relating to the CSSP were designed by independent Western risk experts and lawyers, and administered by independent Western accountants, but such demands came to nothing. “Ultimately, Exxon[Mobil] was not willing to take the risk to its reputation or to that of the U.S. government, and could not move forward with the CSSP, and it was from that point that it also started to look seriously at getting out of West Qurna 1 as well,” the source said. 

CNPC then tried to take up the CSSP where ExxonMobil had left off – as part of a broad-based set of deals with Iraq that gave China huge discounts on oil and gas produced, as also analysed in depth in my new book - but made very little progress. Thereafter, no real progress was made until the Oil Ministry eventually agreed to allow France’s TotalEnergies to move ahead with it as part of a four-pronged US$27 billion deal. According to source close to the Ministry, the government again sought to inveigle the French supermajor into similar arrangements that it had tried on ExxonMobil, but TotalEnergies stood firm as well – which was why the deal was postponed repeatedly until it was recently ratified. How this will pan out for the French is uncertain, as the overall drift of Iraq into the China-Russia sphere of influence continues.

By Simon Watkins for Oilprice.com 

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  • Mamdouh Salameh on January 09 2024 said:
    This has been on the books since the end of the US invasion of Iraq when China and Iran emerged as the real winners of the war: China as the biggest investor in Iraq’s oil and also the second biggest importer of Iraqi crude and Iran with the largest political influence in the country.

    Since then working with Russia under the umbrella of their strategic alliance, China has been replacing US and other Western oil companies in Iraq’s biggest producing oilfields such as West Qurna and other major projects essential for Iraq to lift its production to 6-7 million barrels a day (mbd) in the next ten years.

    Both China and Russia are aiming to replace declining US influence not only in Iraq but also in the entire Gulf region sitting on 60 percent of global oil reserves.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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