Crucial to Iraq’s plan to increase its oil production capacity to around 7 million barrels per day (bpd) by 2027 are the supergiant fields of Rumaila and West Qurna 2, as analysed in depth in my new book on the new global oil market order. Within the last two weeks, Russian state oil proxy Lukoil agreed to dramatically increase output from West Qurna 2. At around the same time, Daqing Drilling Engineering Company – a subsidiary of Chinese state oil proxy China National Petroleum Corporation (CNPC) – was awarded a US$192 million engineering, procurement, and construction contract for Rumaila. Both critical developments in Iraq’s oil sector follow a comment from a very high-ranking official from the Kremlin – related exclusively to OilPrice.com at the time by a senior source in the European Union’s (E.U.) energy security apparatus - that: “By keeping the West out of energy deals in Iraq – and closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise”. The key question now for U.S. and its allies is what happens next in Iraq?
From China’s and Russia’s perspective, things are going very well indeed, based on the plan they put into action after the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA, colloquially ‘the nuclear deal’) with Iran in May 2018. At the broadest level, the objective was to control all of Iran’s massive oil and gas resources between them, and then to extend this influence into Iraq, and then into Saudi Arabia so that they controlled all their oil and gas resources too. This would provide China with all the energy it needed to power its economic growth into the future so that it could overtake the U.S. as the world’s leading economic superpower by 2030 (the ‘hard’ target date at that point in 2018). As also analysed in depth in my new book, it would allow China sufficient reserves not to worry about any supply disruptions caused by Western sanctions if it ‘repatriated’ Taiwan by 2024 (the ‘soft’ target date at that point). Having secured dominance across Asia Pacific, and with economic growth propelled further on the back of that, China saw little problem to its securing at least equal footing with the U.S. as the world’s top superpower. A key strategy to enable China to secure the oil and gas resources of Iran, Iraq, and Saudi Arabia was to do so in as surreptitious a way as possible, in order not to provoke a direct confrontation with the U.S. until it felt itself ready to win in such a scenario. Russia’s key role in this phase of the plan was to act more overtly and aggressively to test where the boundaries of the West were in the event of certain provocations by the China-Russian alliance. In many ways, Russia’s invasion of Ukraine was part of this tactic. Related: Rig Count Decline Accelerates Amid Rising U.S. Crude Oil Production
China’s path towards realising its objectives was made much easier by the U.S. withdrawal from the JCPOA. Within just three months of this, China and Iran had agreed in principle nearly all the key energy, financial, and military cooperation policies that would be enshrined a year later in the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ as 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. Aside from the obvious energy advantages to China of such an agreement, it was also aware that this pact would create an enormous perceived security threat to Iran’s arch-historical enemy, Saudi Arabia. From that point, then, China capitalised on Saudi Arabia’s fears to further leverage the relationship it had developed with Saudi Crown Prince Mohammed bin Salman (MbS) via a face-saving offer over the Aramco IPO that enabled him to become heir to King Salman, as also analysed in the book. A spate of deals was done between Saudi Arabia and China, to the point that by the time of Russia’s invasion of Ukraine in February 2022, Saudi Arabia was already so aligned to China that Saudi Aramco’s chief executive officer, Amin Nasser, said: “Ensuring the continuing security of China’s energy needs remains our highest priority - not just for the next five years but for the next 50 and beyond”. These developments, as China had anticipated back in May 2018, culminated in the 10 March 2023 agreement between Iran and Saudi Arabia to restore relations, brokered and monitored for the future by Beijing.
The longstanding division of tasks between China and Russia is evident in the current phase of their takeover of Iraq’s oil and gas sector. Well-known Russian oil and gas firms are present in major exploration and development contracts across the country, including in the semi-autonomous region of Kurdistan, which it uses to create trouble - and therefore leverage - with southern Iraq. West Qurna 2 is a key example of this approach. China, conversely, remains content to play the quieter, longer game, in order not to provoke direct confrontation with the U.S. and its allies. Hence, the multiple awards of anodyne-sounding ‘contract-only’ projects - such as drilling-only, field maintenance-only, parts replacement-only, storage-only, technology-only, and so on – to unknown Chinese firms. “The exploration and development contracts for China are done through this backdoor method, with firms that are less well-known than the big state players that attract little or no publicity but, as all companies in China are part of the state and are legally bound to work towards what they are told to do by the Communist Party, it doesn’t make any difference to the eventual outcome,” a senior source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com.
It is a testament to the effectiveness of China’s low-profile strategy in several Iraqi oilfields that although Daqing Drilling Engineering Company has been present in the Rumaila field in one capacity or another since 2010, it has attracted no attention whatsoever. This is even odder, as Rumaila is Iraq’s biggest oilfield, with an estimated 17 billion barrels in proven reserves, and current production of around 1.4 million bpd. Crucially, though, in China’s and Russia’s plans for Iraq, Rumaila - which, together with Kirkuk, has produced around 80 percent of Iraq’s entire cumulative oil production to date – urgently needs a reliable system through which the pressure in its wells can be maintained, otherwise production is liable to plummet. The system long envisaged for precisely this purpose is the Common Seawater Supply Project (CSSP), which involves taking seawater from the Persian Gulf and transporting it to key oil production facilities such as Rumaila to boost pressure and sustain production. A functioning CSSP running into Rumaila is absolutely vital to Iraq’s target of hitting 7 million bpd oil production in the first phase, and then boosting it upwards from there. China’s CNPC – the parent of the Daqing Drilling Engineering Company active in Rumaila – was long one of the two top contenders (along with the U.S.’s ExxonMobil) for putting the CSSP into place, before it was replaced by Western supermajor TotalEnergies as part of its US$27 billion four-pronged megadeal.
According to the E.U. energy security source, China regards this deal as a huge threat to its plans to close the net around Iraq’s oil and gas sector, and it also believes it might threaten some of its activities in the country’s chief regional sponsor, Iran. Specifically, Iran and Iraq share many of their major oil reservoirs and that many of the two countries’ oilfields are just two parts of these same oil reservoirs. For example, Iran’s Azadegan oil reservoir (split into North and South fields) is the same reservoir upon which sits Iraq’s Majnoon oilfield. The same feature applies to Azar (on the Iran side)/Badra (on the Iraq side), Yadavaran (Iran)/Sinbad (Iraq), Naft Shahr (Iran)/Naft Khana (Iraq), Dehloran (Iran)/Abu Ghurab (Iraq), West Paydar (Iran)/Fakka/Fauqa (Iraq), and Arvand (Iran)/South Abu Ghurab (Iraq), plus many others. “If the French [TotalEnergies] are successful in rolling out the CSSP – which they certainly have the capability to do – then the pressure will be on the Iraqi government to plug all of the major fields into it at some point to maintain pressure in the wells, and that would force out the Chinese,” said the E.U. source. “So, these two sudden announcements [West Qurna 2, and Rumaila] will be directly connected to China beginning to take a more overt stance in the country, and to really start to flex its muscles with the [Iraqi] government over its long-term interests there,” he concluded.
By Simon Watkins for Oilprice.com
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