Iraq's Oil Bounty Ripe for Chinese Investment

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By Jason Simpkins
Managing Editor
Money Morning

British oil giant BP PLC (NYSE ADR: BP) and China National Petroleum Corp. (CNPC) today (Tuesday) won the first contract in more than 30 years to develop a major Iraqi oil field – an indication that Chinese companies plan to play an integral role in the development of Iraq's energy resources.

A total of 32 energy companies from the United States, Europe, and Asia are bidding for the rights to tap Iraq's massive oil reserves, but so far only one deal has been struck. BP and CNPC have secured the contract for the Rumaila oil field.

Rumaila is the largest of Iraq's six oil fields on offer to foreign and state-owned companies with 17.7 billion barrels of proven reserves. Under terms of the 20-year contract, BP and CNPC have six years to boost the field's production to 2.85 billion barrels per day (bpd).

"The companies accepted to be paid two dollars per barrel," said Oil Minister Hussein al-Shahristani.

A handful of other companies had the opportunity to sign production deals but rejected the terms offered by the Iraqi government. While any foreign firm that is awarded a contract will have to fully finance the development of the oil field in question, it will also have to partner with a government-owned Iraqi energy company and share management.

"This raises the question of the profitability of the contract," said a source involved in the bidding, who spoke on condition of anonymity, told Melbourne-based newspaper The Age. "The companies are the ones investing, but have a big problem with the fact that management will be shared."

Also, foreign oil majors will be paid a fixed fee per barrel of oil produced, as opposed to sharing in the profits of the oil's sale. And that fee will only be paid when the operated field reaches a production quota set by the government.

ConocoPhillips (NYSE: COP) reportedly offered wanted $26.7 per barrel to work the Bai Hassan oil field, but the Iraqi government only offered the company $4 per barrel.

Of course, similar forays into such volatile regions as Nigeria and the Sudan have demonstrated that Chinese companies clearly don't mind working in less than optimal conditions, or at a discount, if it means locking in long-term resource deals for the Mainland's growing appetite.

A net exporter of oil as recently as the 1990s, China's oil consumption reached 8 million bpd in 2008 – up from 4.9 million in 2001.

Also, Chinese companies are ideally suited for projects in Iraq, because they have a shorter history, less experience, and fewer business opportunities than their larger Western counterparts.

"It's really hard for them to do anything in the developed world, including Australia," Mark P. Thirlwell, program director for international economics at the Lowy Institute for International Policy, told the New York Times.

China was actually the first country to sign an energy deal with Iraq in the post-Saddam era. CNPC last year agreed to a $3 billion deal to develop the Ahdab oil field, 100 miles southeast of Baghdad.

Sinopec Corp. and CNOOC Ltd (NYSE ADR: CEO) are among the other Chinese energy firms vying for a stake in Iraq.

Iraq has the world's third-largest proven petroleum reserves, according to the Energy Information Administration (EIA). But while the country boasts proven petroleum reserves of 112 billion barrels, the EIA estimates that up to 90% of the country remains unexplored. Only 2,000 wells have been drilled in Iraq, versus approximately 1 million in the state of Texas alone. Iraq would easily have another 100 billion barrels of oil buried beneath its uncharted territories.

"If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world," the Lowy Institute's Thirlwell, said during a speech in Hong Kong on Tuesday.

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