China's Iraq Oil Deal

Press reports Aug. 29 declared China and Iraq have finally agreed on a long-pending deal to let Chinese interests develop the fallow al-Ahdab oil field in southeastern Iraq. It would be the first such major oil field redevelopment deal granted to foreign interests by the new Iraqi government and on the surface appears to be a coup for the People's Republic of China.

Readers of "The Oil Card" will note a key assertion of the book is that the main reason behind the US-led invasion and occupation of Iraq in early 2003 was to prevent China's CNPC, partnered with PRC armsmaker Norinco, from moving in to effectively garrison Ahdab and possibly other Iraq fields upon the expected lifting of UN sanctions at the end of 2003. That could have created an Iraq-China client state relationship around oil dwarfing in strategic significance the Chinese presence in The Sudan. 

Does this deal undo the hard efforts of the past five years by the US and its allies to block foreign control of strategic Middle-East oil reserves, under the aegis of the 1980 Carter Doctrine? Probably not. Here's why:

1.) The deal is only a service contract, spanning 22 years but possibly having to be renewed yearly. There is no equity ownership of the Ahdab reserves granted to CNPC. The Chinese will get merely a fee for their services with no share of the oil profits and no claim on the oil in the ground.

2.) Norinco is not in the deal. Instead, CNPC will be partnered 75:25 with Iraq's Northern Oil Co., and will apparently have to fund all the investment. Norinco (China North Industries Group) had been sanctioned by the Bush Administration in May 2003 for providing possible dual-use high-strength steel to Iran for that country's missile program. Norinco is also a major arms supplier to the PRC's Peoples Liberation Army.

3.) CNPC is reportedly committing to invest a whopping $3 billion to develop Ahdab, which is more than double the $1.3 billion CNPC and Norinco had agreed to invest over 23 years at al-Ahdab in their 1997 deal with the Saddam Hussein regime.

4.) In the 1997 deal, CNPC and Norinco (forming what was called the al-Waha venture), were to have a 50% equity stake in what was expected to be an eventual 100,000 barrels/day from what was then considered to be 1.4 billion barrels of recoverable reserves underlying a 250 sq km field area. Now the reserves there are estimated at 1.2 billion barrels, according to press reports, and initial production from al-Ahdab would be only about 25,000 b/d starting in 2011. It is expected to eventually rise to 110,000 b/d.

5.) Of that production, much will initially go to fuel Iraqi power generation, which is a rather low-value use of liquid hydrocarbons. Little of the oil would make its way to the world market where it might have some impact on lowering still sky-high crude prices paid by the PRC.

6.) CNPC can bring some of its own security staff, but security at the field will be provided mainly by the Iraqi army.

7.) The deal still has to be approved by the Iraqi parliament: no small hurdle. Given the tortured history of the al-Ahdab transaction, there is no telling what other deal-killer provisions could yet be inserted. 

8.) All the Western oil majors so far have rejected similar service contract deals with Iraq, finding them to be unattractive in relation to the costs and risks involved. 

In short, Iraq and China appear to have reached a face-saving but only marginally attractive resolution to a vexing contractual problem over al-Ahdab. China can claim it retained its pre-war contract rights to al-Ahdab, albethey only in the form of a low-margin service contract. Iraq can avoid the major headaches it would get from China if it failed to honor the former al-Ahdab deal at least in some form. (Beijing had threatened to thwart any other development of al-Ahdab if its claim was not honored.)