Baghdad, Iraq, 5 July 2009. Iraq is in the process of holding auctions for energy contracts to develop its massive oil fields, the third largest reserves in the world. The first auction was just completed, and only one deal closed. The Chinese were part of every consortium that bid and want to win even if they lose money - which is handy, because the Iraqi's don't want anyone to make too big a profit.
The contract that was awarded, for the large fields at Rumaila, went to BP, whose consortium included China National Petroleum Corp (CNPET.UL). The bid had initially come in at $3.99 per barrel, but BP and CNPC eventually accepted $2 a barrel. This is one of the cheapest operating prices anywhere in the world. The Niger Delta currently costs $2 - $4, North Sea production costs $12- $14 and US costs $20.
Other oil majors have walked away rather than risk losing money on deals, but BP stayed in there - probably with incentives from the Chinese government, through CNPC. And that is just fine as far as the Iraqi's are concerned.
The political situation in Iraq around these deals is complex. Clearly, the Iraqi government needs the funds from increased oil production to help rebuild the war-torn nation. It relies on oil for most of its revenues and yet can do little without the oil majors to reduce its deficits, currently running in the billions per year. It is negotiating an IMF loan to help tide over this period.
However, there is a great deal of concern amongst Iraqis that oil will be given away to foreign interests. Most people believe the war, and indeed much of the bloodshed in the country for the last century, have been about the black gold. They now want it to be used to enrich the nation.
The situation is futher complicated by the endemic corruption that Prime Minister Maliki has called 'white terrorism', and the constant friction caused by competition amongst a patchwork of political, religious and tribal interests.
Even if it delays funds flowing into naitonal coffers, it is therefore politically expedient to push hard for a low or even uneconomical pricetag, as that will be seen as a victory of sorts and a source of national pride. Indeed, Oil Minister Hussain al-Shahristani shrugged off the lackluster result, and expressed his satisfaction with the deal that was settled.
"We think that the first (bidding) round didn't achieve the full objectives of the Ministry of Oil," said government spokesman Ali al-Dabbagh. "At the same time, it was a good achievement especially in Rumaila oilfield ... With that level of production, we have compensated for the less(er) achievement of the first round. Generally we are happy with what we achieved," he added.
China's demand for oil will only continue to grow, with many Chinese oilfields running dry. Chinese energy-security strategy is central to national interests, and includes securing access to as many primary energy sources as possible worldwide. Since this is key to overall economic growth and prosperity in the mainland, uneconomical bids make sense from a strategic perspective.
There may never be an opportunity of the size of Iraq in the future as far as the Chinese are concerned, so this is just the start.
One day after the close of the Iraqi oil auction, China's Sinopec offered US $7.22 billion to purchase the Swiss-Canadian firm Addax Petroleum, which operates in Kurdistan, in Iraq.
Such a deal would be China's biggest international energy purchase. Addax's shareholders may approve the deal, and its board is recommending it.
The latest report from Rednet.cn says that all 3 Chinese oil majors, (CNPC, Sinopec and CNOOC) expect to compete in future bids.
China's experience in volatile countries, including many in Africa, means that it has the appetite for risk needed to enter Iraq.
"They may be no more competent at managing these risks than other companies, but they do seem to be prepared to accept a higher level of risk," said Philip Andrews-Speed, an expert in China's oil sector.
In the short-term, most firms are not prepared to invest in Iraq's oil, but with China's incredible growth and demand for diversification, the rock-bottom prices Iraq will pay appear to be worth the risk.
Umberto Osman, EconomyWatch.com