Iraq is retreating because of China’s greater control over its oil fields

  • Iraq persuaded Lukoil to stop selling to Sinopec – sources
  • Baghdad worried about China becoming too dominant – sources
  • Western companies are not satisfied with the terms of Iraqi deals

LONDON/BASRA (Reuters) – Last year, Iraq’s Oil Ministry thwarted three potential deals that would have given Chinese companies more control over its oil fields and triggered a mass exodus of major international oil companies that Baghdad wants to invest in its faltering economy.

Since the beginning of 2021, plans by Russia’s Lukoil and US oil giant ExxonMobil to sell stakes in key fields to state-backed Chinese companies have been hurt by the factors after interventions from the Iraqi Oil Ministry, according to the British newspaper, The Guardian. For Iraqi Oil Officials and Industry Executives.

Selling a stake to a Chinese state-run company was also one of several options being considered by BP, but officials have persuaded it to stay in Iraq for now, people familiar with the matter said.

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China is the largest investor in Iraq and Baghdad was the biggest beneficiary last year of the Belt and Road Initiative in Beijing, receiving $10.5 billion in funding for infrastructure projects including a power plant and an airport.

But when it comes to more Chinese investment in key oil fields, Baghdad has drawn a line in the sand.

A total of seven Iraqi oil officials and executives of companies operating in Iraq told Reuters in interviews that the Iraqi government and officials in state-run companies are concerned that further consolidation of fields in the hands of Chinese companies may accelerate the migration of Western oil companies.

Three people familiar with the matter said that Iraq’s Oil Minister Ihsan Abdul-Jabbar, backed by state oil company officials, dissuaded Lukoil last year from selling a stake in one of the country’s largest fields, West Qurna 2, to China’s state oil company Sinopec.

Iraqi officials also intervened last year to prevent Chinese state-backed companies from buying Exxon’s stake in West Qurna 1 and to persuade British Petroleum (BP.L) to stay in Iraq instead of offloading its interests in the giant Rumaila oil field to a Chinese company, people familiar with the matter said. With the command he said.

The Rumaila and West Qurna field together produce about half of the crude oil out of Iraq, which ranks fifth in the world’s oil reserves.

The Iraqi Oil Ministry did not respond to requests for comment on the deals or the minister’s role in any interventions.

Two government officials said the government is concerned that Chinese dominance could make Iraq less attractive for investment than elsewhere.

Some officials said China’s strengthening relationship with Iran has helped put it in Iraq due to Tehran’s political and military influence there, but the Oil Ministry is wary of ceding more control over the country’s key resources.

Another Iraqi official said, “We do not want the Iraqi energy sector to be described as an energy sector led by China, and this position is agreed upon by the government and the Ministry of Oil.”

risky strategy

The interventions on the sites of BP, Exxon and Lukoil companies in Iraq come after the British oil giant Shell (SHEL.L) decided in 2018 to withdraw from the vast Majnoon oil field in Iraq.

The interventions also represent a shift in the situation after Chinese companies won the most awarded energy deals and contracts over the past four years. Iraqi oil officials said Chinese companies have accepted lower profit margins than most competitors.

“All rules related to tenders were jointly drafted by the Chinese and Iraqi sides and conducted under transparent and fair principles,” state-owned China National Offshore Oil Corporation (CNOOC) (0883.HK) said in an emailed statement.

Countering more Chinese investment is a risky strategy, although there is no guarantee that others will step up and that the government needs billions of dollars to rebuild the economy after defeating the Islamic State insurgency in 2017.

Over the past decade, oil revenues have accounted for 99% of Iraq’s exports, 85% of the country’s budget, and 42% of gross domestic product, according to the World Bank.

As the oil majors compete for access to Iraq’s vast oil fields after the US-led invasion in 2003, they are increasingly focusing on the energy transition and more profitable games elsewhere. Oil officials said they wanted better terms for developing the fields.

China is among the largest buyers of Iraqi crude oil, and Chinese state companies have built a dominant position in the oil industry.

But when Lukoil notified the government last summer that it was considering selling some of its stake in West Qurna 2 to Sinopec, the oil minister stepped in, people familiar with the matter said.

It was not previously reported that Sinopec was the potential buyer of Lukoil’s stake. The Chinese company did not respond to a request for comment.

To encourage Lukoil to stay, Iraq provided candy, said one person with first-hand knowledge.

A few months after Lukoil indicated it was considering a sale, Baghdad finally approved its plan to develop a field known as Block 10, where the Russian company discovered an oil reservoir in 2017. After that, Lukoil abandoned the idea of ​​selling its stake in West Qurna 2, the source said. .

Lukoil did not respond to a request for comment.

BP and Exxon

Over the past few years, BP has also spoken to the government about its options – including leaving Iraq entirely – before settling to convert its Rumaila stake into a stand-alone company last year, two people familiar with the matter said.

People said Oil Minister Abdul-Jabbar led efforts to persuade BP not to leave because the government was worried that its partner in the field, China National Petroleum Corporation (CNPC), would buy BP’s stake, people said. They said Baghdad is also keen to keep such a prominent international oil company in the country.

BP declined to comment.

Meanwhile, when Exxon announced its intention to leave Iraq in January 2021, US officials told Exxon that they were unhappy with the prospect of the largest US oil major pulling out — for reasons that reflect Iraqis’ concerns.

State Department officials said Exxon’s departure could create a vacuum that Chinese companies would fill, a person familiar with the talks said.

US officials then asked Exxon what it would take to stay in Iraq, he said, declining to elaborate.

A State Department spokesman said: “We are in regular contact with our Iraqi counterparts to promote an enabling environment for private sector investment.”

People familiar with the matter said that Exxon signed an agreement to sell its stake in West Qurna 1 to CNOOC and PetroChina (601857.SS), the listed arm of CNPC.

Neither CNOOC nor CNPC responded to requests for comment on the deals.

People familiar with the matter said Exxon’s stake was estimated at $350 million to $375 million.

But Iraq has a veto over the oilfield deals, and has not agreed to the deal.

Exxon has filed an arbitration suit with the International Chamber of Commerce against the Basra Oil Company, arguing that it followed the terms of its contract for West Qurna 1 and had a good deal on the table, people familiar with the matter said.

Then the Oil Ministry took the unusual step of trying to broker a deal on behalf of Exxon. The ministry offered Exxon’s stake to other Western companies, including Chevron Corp. (CVX.N).

Nobody was interested. Rather than letting the stake go to Chinese companies, Baghdad said the state-run Iraq National Oil Company (INOC) would take it instead, although the Iraq National Oil Company is still in the process of reviving after being idled for many years.

“(Exxon) will continue to work closely and constructively to find a just solution,” a spokeswoman said.

Service Contracts

Iraq’s oil industry relies mostly on technical service contracts between the state-backed Basra Oil Company and foreign companies that reimburse costs plus fees per barrel to develop the fields, while Iraq retains ownership of the reserves.

The big oil companies usually prefer deals that allow a share in the profits rather than a set fee.

A Chinese oil official with direct knowledge of CNPC’s global investments said the priority for Chinese companies is to achieve safe oil supplies to fuel the growing Chinese economy, rather than investor returns.

However, there are some signs that Iraq is trying to make its terms more attractive.

France’s TotalEnergies (TTEF.PA) signed a $27 billion deal in September that involved paying 40% of revenue from a single field. Reuters reported in February that the deal had stalled due to disagreements over terms and still needed approval from some Iraqi government agencies. Read more

TotalEnergies said it was fully committed to the project.

An oil company executive said they were skeptical that Iraq would offer more attractive terms. But analysts say that unless it improves dramatically, it is hard to imagine that Iraq will be able to stem mass migration as the energy transition accelerates.

“Many major energy companies are looking at carbon emissions, their ability to generate cash flow if commodity prices are low, and they are looking to improve returns,” said Ian Thom, director of research at consultancy Wood Mackenzie.

“As the priorities of energy companies change, so does the relative attractiveness of Iraq.”

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(Sarah McFarlane reports from London, Arif Muhammad from Basra and the Iraq office). Additional reporting by ISO Chen in Singapore. Editing by Simon Webb and David Clarke

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