Tuesday, 9 September 2008


The Future of Iraq's Oil Industry:
China and Russia May have The Lion's Share!

Via The Angry Arab News Service

September 6, 2008

On Iraqi oil. Amer wrote this for Iraq Slogger:

"The Future of Iraq's Oil Industry: China and Russia May
have The Lion's Share!

Most of the mainstream Western media reported – but gave
little heed – to the recent agreements between the Iraqi
Government and International oil companies to exploit
Iraq's vast oil resources. It was casually reported that
"service contracts" were to be granted to a group of
Western oil companies to refurbish and increase production
in several Iraqi oilfields. Shortly thereafter, it was
confirmed that oil contracts going back to the Saddam era
(mostly with Chinese and Russian companies) to exploit
several other oilfields will be revived - and revised - and
will shortly enter into effect.

The importance of this news cannot be underestimated; these
contracts – if fulfilled – will largely determine the
future of Iraq's oil industry, and by extension, its
economic development. On the other hand, the shape and
structure of these contracts reveal the "strategic"
political deals that took place in the backrooms: the
current contracts represent a major departure from the
original US vision for Iraq's oil future, and may be a
reflection of the new balance of power in the "New Iraq."

Az-Zaman reported on the official granting of "exploitation
rights" to the Chinese National Petroleum Corporation
(CNPC) to produce oil from the Ahdab field (near the
Iranian borders,) al-Ahdab, as described by the newspaper
is "one of five strategic oilfields in Iraq" whose
exploitation was contracted to Russian and Chinese
companies by the previous regime during the late 1990s.
Az-Zaman, reaching for the political angle, framed the
story with the following title: "Chinese deal with Iranian
mediation excludes US companies from investment in Iraq's

The title is somehow misleading – since US companies have
already guaranteed large contracts in Iraq, but it does
contain a grain of truth. Why would the United States (or
its "ally", the Iraqi government) be interested in reviving
oil contracts with nations that neither supported the
US-led invasion in 2003, nor are considered allies of the
US? Didn't US officials clearly proclaim in the early
months of the invasion that countries opposing the
enterprise will have little access to Iraq contracts? What
happened to the grand plans to privatize Iraq's oil
industry and use Western companies and expertise to quickly
boost production in the framework of production-sharing
contracts (PSCs)? Furthermore, the contracts handed out by
Saddam to CNPC and Russian companies represent most of
Iraq's oil potential.

Iraq's proven oil reserves can be roughly divided into A-
reserves in already-producing oilfields and B- reserves in
oilfields that have been discovered in the 20th century,
but remained (for various reasons) unexploited. The largest
proportion of Iraq's oil reserves belongs to the second
category. Most of Iraq's oil production in the last
half-century came from a handful of oil deposits that were
discovered in the 1920s-1950s and that have been
continuously producing ever since. These fields, such as
Kirkuk and Rumaila, are considered to be "maturing," that
is, their reserves are running out and any attempt to boost
production (and compensate for the natural decline) will be
progressively more expensive in the coming years. Some of
these oilfields, such as Kirkuk, have had their oil
reservoirs irreversibly damaged because of bad production
practices in the past. Virtually all of the "service
contracts" granted to Western oil companies are in those
aging oilfields, while Russian and Chinese companies will
be tasked with exploiting fresh reserves. Both categories
of contracts are substantial, and possibly very lucrative,
but it would seem ironic that, after America's costly
enterprise in the Middle East, the Chinese and the Russians
will stand to control most of Iraq's future oil production
– hence Az-Zaman's acerbic title.

What is more significant for Iraq is that all of the
contracts are reasonably favorable to the country and its
National Oil Company (or at least far better than the
original visions floated after 2003, which spoke of
Production-Sharing Contracts with unreasonably high margins
for foreign companies.) In fact, the original Saddam
contract with China was seen as "too favorable" and had to
be revised down to a "service contract" (Saddam had
originally offered generous production-sharing.) According
to Az-Zaman, the Chinese operator will receive compensation
for its investment costs in addition to an agreed-upon
profit margin – the paper said that the Chinese company
will receive around $6 for every barrel it extracts. The
oilfield is expected to produce around 110,000 Barrels per
day for a contractual period of 10 years.

Where does Iran come into the equation? The reason that
prevented the signing of quick, massive, oil contracts with
Western and US companies after the Iraq invasion was the
tremendous opposition fielded against such contracts in
Iraq. The oil workers Unions and Iraqi oil experts
mobilized quickly and were very vocal in expressing their
opposition to such plans; the raging public mood convinced
the government that "political" oil deals will be very
costly, and – maybe most importantly – pro-Iranian militias
in the South made it clear to the oil industry that no oil
will be profitably exported from Iraq under conditions
unfavorable to a host of local and regional "actors." Once
this new structure for the exploitation of Iraq's oil was
negotiated, probably many months ago – with limited Western
involvement, large contracts for China and Russia and a
larger participation on behalf of the Iraqi national oil
companies - "sabotage" and attacks against Iraq's oil
installations suddenly died down!"

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