Iraq balks at greater Chinese control of its oilfields
By Sarah McFarlane and Aref Mohammed
LONDON/BASRA (Reuters) – Iraq’s oil ministry thwarted three potential offers final 12 months that may have handed Chinese language corporations extra management over its oilfields and led to an exodus of worldwide oil majors that Baghdad desires to spend money on its creaking financial system.
For the reason that begin of 2021, plans by Russia’s Lukoil and U.S. oil main Exxon Mobil to promote stakes in main fields to Chinese language state-backed corporations have hit the buffers after interventions from Iraq’s oil ministry, in accordance with Iraqi oil officers and trade executives.
Promoting a stake to a state-run Chinese language firm was additionally one among a number of choices being thought of by Britain’s BP, however officers persuaded it to remain in Iraq for now, individuals accustomed to the matter mentioned.
China is Iraq’s prime investor and Baghdad was the most important beneficiary final 12 months of Beijing’s Belt and Street initiative, receiving $10.5 billion in financing for infrastructure initiatives together with an influence plant and an airport.
However in terms of additional Chinese language funding in main oilfields, Baghdad has drawn a line within the sand.
Iraq’s authorities and officers at state-run corporations are involved that additional consolidation of fields within the arms of Chinese language corporations might speed up an exodus of Western oil corporations, a complete of seven Iraqi oil officers and executives with corporations working in Iraq advised Reuters in interviews.
Supported by state-run oil firm officers, Iraq’s Oil Minister Ihsan Abdul Jabbar dissuaded Lukoil final 12 months from promoting a stake in one of many nation’s largest fields, West Qurna 2, to Chinese language state agency Sinopec, three individuals accustomed to the matter mentioned.
Iraqi officers additionally intervened final 12 months to cease Chinese language state-backed corporations shopping for Exxon’s stake in West Qurna 1 and to influence BP to remain in Iraq reasonably than offloading its curiosity within the big Rumaila oilfield to a Chinese language firm, individuals accustomed to the matter mentioned.
Mixed, Rumaila and West Qurna produce about half of the crude popping out of Iraq, which sits on the fifth-largest oil reserves on this planet.
Iraq’s oil ministry didn’t reply to requests for remark concerning the offers or the minister’s position in any interventions.
The federal government anxious that China’s dominance might make Iraq much less enticing for funding from elsewhere, two authorities officers mentioned.
China’s strengthening relationship with Iran has helped its place in Iraq on account of Tehran’s political and army affect there, however the oil ministry is cautious of ceding extra management over the nation’s key sources, some officers mentioned.
“We do not need the Iraqi power sector to be labelled as a China-led power sector and this perspective is agreed by authorities and the oil ministry,” one other Iraqi official mentioned.
RISKY STRATEGY
The interventions over BP, Exxon and Lukoil’s positions in Iraq come after British oil main Shell determined in 2018 to withdraw from Iraq’s huge Majnoon oilfield.
The interventions additionally mark a shift in stance after Chinese language corporations gained most power offers and contracts awarded over the previous 4 years. Iraqi oil officers mentioned Chinese language corporations have accepted decrease revenue margins than most rivals.
“All the principles concerning tenders had been formulated collectively by the Chinese language and Iraqi sides and had been performed below clear and honest ideas,” mentioned state-owned China Nationwide Offshore Oil Company (CNOOC) in an emailed assertion.
Pushing again in opposition to additional Chinese language funding is a dangerous technique, although, as there isn’t any assure others will step up and the federal government wants billions of {dollars} to rebuild the financial system after the Islamic State insurgency was defeated in 2017.
Over the previous decade, oil income accounted for 99% of Iraq’s exports, 85% of the nation’s funds and 42% of its gross home product, in accordance with the World Financial institution.
Whereas oil majors jostled to get entry to Iraq’s huge oilfields after the U.S.-led invasion in 2003, they’re more and more centered on the power transition and extra worthwhile performs elsewhere. Additionally they need higher phrases to develop fields, oil executives mentioned.
China is among the many largest consumers of Iraq’s crude and Chinese language state corporations have constructed up a dominant place in its oil trade.
However when Lukoil notified the federal government final summer time that it was contemplating promoting a few of its stake in West Qurna 2 to Sinopec, the oil minister intervened, individuals accustomed to the matter mentioned.
It has not beforehand been reported that Sinopec was the potential purchaser of Lukoil’s stake. The Chinese language firm didn’t reply to a request for remark.
To encourage Lukoil to remain, Iraq supplied a sweetener, an individual with direct data mentioned.
Just a few months after Lukoil signalled it was contemplating a sale, Baghdad lastly accredited its plan to develop a discipline often called Block 10, the place the Russian firm had found an oil reservoir in 2017. Afterwards, Lukoil dropped the thought of promoting its stake in West Qurna 2, the supply mentioned.
Lukoil didn’t reply to a request for remark.
BP AND EXXON
Over the previous few years BP has additionally spoken to the federal government about its choices – together with leaving Iraq altogether – earlier than deciding on spinning off its stake in Rumaila right into a standalone firm final 12 months, two individuals accustomed to the matter mentioned.
Oil minister Abdul Jabbar led efforts to persuade BP to not go away as the federal government was involved its associate within the discipline, China Nationwide Petroleum Company (CNPC), would purchase BP’s stake, the individuals mentioned. Baghdad was additionally eager to maintain such a high-profile worldwide oil main within the nation, they mentioned.
BP declined to remark.
When Exxon flagged its intention to depart Iraq in January 2021, in the meantime, U.S. officers advised Exxon they had been sad with the prospect of the most important U.S. oil main pulling out – for causes that echoed Iraqi considerations.
State division officers mentioned Exxon’s departure might create a vacuum for Chinese language corporations to fill, an individual accustomed to the conversations mentioned. U.S. officers then requested Exxon what it might take to remain in Iraq, the individual mentioned, declining to offer additional particulars.
A State Division spokesperson mentioned: “We recurrently interact with our Iraqi counterparts on fostering an setting conducive to non-public sector funding.”
Exxon had signed an settlement for the sale of its curiosity in West Qurna 1 to CNOOC and PetroChina, the listed arm of CNPC, individuals accustomed to the matter mentioned.
Neither CNOOC nor CNPC responded to requests for remark concerning the offers.
Exxon’s stake was valued at $350 million to $375 million, mentioned individuals accustomed to the matter. Iraq has veto energy over oilfield offers, nonetheless, and didn’t approve the transaction.
Exxon filed for arbitration with the Worldwide Chamber of Commerce in opposition to Basra Oil Co., arguing that it had adopted the phrases of its contract for West Qurna 1 and had a superb deal on the desk, individuals accustomed to the matter mentioned.
The oil ministry then took the weird step of attempting to dealer a deal on Exxon’s behalf. The ministry supplied Exxon’s stake to different Western corporations together with Chevron Corp.
Nobody was . Slightly than let the stake go to the Chinese language corporations, Baghdad mentioned the state-run Iraq Nationwide Oil Firm (INOC) would take it as an alternative, although INOC remains to be within the technique of being revived after being defunct for a few years.
“(Exxon) will proceed to work intently and constructively to achieve an equitable decision,” mentioned a spokeswoman.
SERVICE CONTRACTS
Iraq’s oil trade is usually primarily based on technical service contracts between the state-backed Basra Oil Co. and international corporations which can be repaid prices plus a payment per barrel to develop fields, whereas Iraq retains possession of the reserves.
Oil majors usually favor offers that permit a share in earnings reasonably than a set payment.
The precedence for Chinese language corporations, nonetheless, is attaining safe oil provides to feed China’s rising financial system, reasonably than returns for buyers, mentioned a Chinese language oil govt with direct data of CNPC’s international investments.
There are some indicators, nonetheless, that Iraq is making an attempt to make its phrases extra interesting.
France’s TotalEnergies signed a $27 billion deal in September that included cost of 40% of income from one discipline. The deal has stalled, nonetheless, on account of disputes over phrases and it nonetheless wants approval from some Iraqi authorities companies, Reuters reported in February.
TotalEnergies mentioned it was absolutely dedicated to the undertaking.
One oil firm govt mentioned they had been sceptical Iraq would introduce extra enticing phrases. However except they enhance considerably, analysts say it’s exhausting to think about Iraq will be capable of stem the exodus because the power transition accelerates.
“Most of the power majors are trying on the carbon emissions, their skill to generate money flows if commodity costs are low, and so they’re taking a look at bettering returns,” mentioned Ian Thom, analysis director at consultancy Wooden Mackenzie. “Because the priorities of the power corporations are altering, the relative attractiveness of Iraq is altering.”
(Reporting by Sarah McFarlane in London, Aref Mohammed in Basra and the Iraq bureau; Extra reporting by Aizhu Chen in Singapore; Modifying by Simon Webb and David Clarke)
