China Means Business in Iraq

After a few years of practical exclusion dictated by the United States, China is about to resume its economic and perhaps military presence in Iraq. It was reported in mid-October that Baghdad has awarded the Shanghai Heavy Industry Corporation a $940 million contract to build an enormous power plant in Wasit, southeast of Baghdad. If and when completed, the plant would supply 1,300 megawatts of electricity, a major increase of over one quarter to Iraq’s existing electricity supply (International Herald Tribune, October 19; New York Times, October 18). Earlier reports said that Chinese-made weapons had been discovered in Iraq, including 100mm, 82mm and 60mm rockets (World Tribune, May 1). Lethal armor-piercing ammunition, used by insurgents in Iraq against U.S. targets, had apparently been supplied by Iran with no evidence of Chinese involvement (Financial Times, July 6). Yet there are initial indications that Beijing is about to resume arms sales to Iraq, though on a smaller scale for the time being. On October 5, 2007, Baghdad’s Al-Iraqiyah al-Sharqiyyah Television reported that, according to President Jalal Talabani, Iraq would purchase from China some $100 million in light military equipment for the Iraqi Police, because “the capacity of the U.S. factories is not enough to provide Iraq quickly with all its needs.” He said that only one in five Iraqi police officers is armed (Washington Post, October 4). These modest steps, still a far cry from China’s earlier military and economic involvement in Iraq, should be attributed to painstaking and often secret negotiations that culminated last June in the Iranian President Mahmoud Ahmadinejad’s visit to China.

President Talabani’s Visit Opens a New Chapter in Sino-Iraqi Relations

The first ever Iraqi president to visit China, Jalal Talabani started a week-long official visit to China on June 20, 2007, heading a 36-member delegation, including Iraq’s Oil and Finance ministers and representatives of four other ministries. Talabani had been in China twice before, first in 1955 as a youth, before the establishment of diplomatic relations between the two countries, and again in 2003 before he was elected president of Iraq in April 2005, the first Kurd to hold such a position. His visit entailed a number of decisions and agreements that, if implemented, could become a turning point in relations between the two countries.

One agreement concerned the Iraqi debt to China. This debt has been accumulated since the early 1980s when China started large-scale weapons sales to Iraq (during its war with Iran) and considerably increased its involvement in Iraq’s labor and construction market. From 1982-1989 China sold Iraq arms valued at $4.939 billion, 31.4 percent of all its arms sales in that period and over twice the value of Chinese arms sold to Iran (SIPRI Arms Transfers Database). Originally estimated at $4 billion, the debt–that, evidently, has not been serviced at all and accrued huge interest–had reportedly blown up by early February 2004 to $5.8 billion (AFP, February 29, 2004). By the time Talabani visited China, the Iraqi debt must have almost doubled. Still, in May 2007, China’s Foreign Minister Yang Jiechi stated: “The Chinese government is ready to substantially reduce and forgive the debts owed by Iraq. In particular, it will forgive all the debts owed by the Iraqi government,” implying that debts by other Iraqi organizations and companies would not be fully written off (Xinhua, May 3). Iraq requested, however, that China would deal with its debt reduction and forgiveness on the basis of the policies of the Paris Club, an informal group of 19 creditor countries, of which the PRC is not a member. Earlier, in November 2004, the Paris Club agreed, conditional on certain provisions, to cancel 80 percent (over $31 billion) of Iraq’s debts to them so as to facilitate the rebuilding of the war-torn country. This was a gesture to the United States that had been pressing for waiving 95 percent of Iraq’s debts (Washington Post, November 22, 2004).

Before leaving, Talabani had been quoted as saying that he would like to have $8 billion of the debt to China cancelled (China Daily, June 22), implying that (given the Paris Club agreements) the debt stood at around $8-10 billion. During Talabani’s visit, Beijing agreed to write off some, though not all, of the Iraqi debt. As China’s Foreign Minister Yang Jiechi said in May, Iraq’s request to treat its China debt according to the Paris Club arrangements would be resolved through continued friendly consultation. Beijing’s unwillingness or inability to provide precise details about its commitment to write off Iraq’s debt may have to do with the fact that the precise size of this debt is unknown to China, as well and very difficult to quantify. Also, it may reflect China’s reluctance to accommodate Washington, whose invasion of Iraq it had opposed all along. When U.S. envoy James Baker III tried to convince China’s leaders to cut the Iraqi debt, PRC Prime Minister Wen Jiabao said that China “would consider reducing the debts owed to Iraq out of humanitarian concern” (Xinhua, December 29, 2003). In May 2007, Yang announced that the Chinese government would give Iraq a grant of 50 million Yuan (about $6.5 million) to be used for public health and education.

China’s reluctance and passivity to write off Iraq’s debt may have been determined by what Beijing perceives as its exclusion from Iraq’s reconstruction contracts by the United States. At the same time, however, its eventual agreement “to substantially forgive Iraqi debt” might have something to do with the $260 billion bonds, issued by the pre-1949 Nationalist Government, that are still held by Americans and that the PRC has so far refused to honor (China Daily, June 22). At an interesting time, House Concurrent Resolution 160, introduced in May 2007 by a number of U.S. legislators, would deny the Chinese access to the U.S. capital markets until Beijing “fully honors repayment of its outstanding defaulted public debts owed to United States citizens” (Washington Times, June 26). By forgiving Iraqi debts, Beijing may expect Washington to likewise treat the debts owed by the PRC as a successor government that is not responsible for its predecessor’s liabilities.

New Energy to Bilateral Ties: Reviving Suspended Oil Projects

Meeting with Talabani, China’s President Hu Jintao said that the visit would “add new energy to the bilateral [Sino-Iraqi] ties.” Apparently, this pun is not coincidental as it underlines perhaps the main outcome of the visit: China’s “return” to the Iraqi oil market. To be sure, China has never played any significant role in Iraq’s oil market. Indeed, in 1997 CNPC (in collaboration with China’s giant armaments producer NORINCO, or Northern Industries Corporation) did sign a 23-year $0.7-1.2 billion PSA (production sharing agreement) with Saddam Hussein to develop the Al-Ahdab oilfield. Yet, U.N. sanctions that had been imposed on Iraq prevented the implementation of the contract and, following the American occupation of Iraq in 2003, all foreign oil contracts were suspended.

Initial indications of Iraq’s policy change began to emerge in October 2006, following the visit of Iraq’s Oil Minister Husayn al-Shahristani to China. For the first time since the war Iraq publicly and officially welcomed Chinese oil companies to participate in the reconstruction of its oil industry (BBC, October 31, 2006). Until then China had been basically excluded from Iraq’s reconstruction that is almost totally monopolized by companies associated with the United States and its allies. Turning to China mainly reflects the deteriorating security situation in Iraq that makes it much less attractive, and much more dangerous, for Western companies. In fact, China’s thriving international energy policy has been built–willingly or not–upon the reluctance of Western companies to invest in violent, unstable and isolated countries such as Sudan, Nigeria, Angola and Iran (Associated Press, October 28, 2006; Xinhua, October 31, 2006). Yet even China, whose workers and engineers abroad have in recent years experienced kidnapping and other acts of terrorism, may not be so enthusiastic to resume its economic presence in dangerous Iraq, especially in view of the additional legal and technical obstacles [1].

Negotiations between Chinese and Iraqi representatives began in November 2006 but could not proceed quickly because Iraq’s new hydrocarbon law, which the Parliament was supposed to enact before the end of the year, has been consistently put off. Thereby the negotiations postponed the reconfirmation of the suspended contracts as well as the revival of the Iraqi National Oil Company that was to take charge of developing oilfields, including Al-Ahdab. A China National Petroleum Corporation (CNPC) delegation went to Iraq in March 2007 probably to discuss the fate of the 1997 agreements and to amend them in advance of the forthcoming law. It appears that there is no question if the contracts would be implemented; the question is when and how. Yet, at the time of writing Iraq is hardly mentioned at all on the CNPC website and homepage [2].

To avoid any misunderstanding, Iraq’s Oil Minister, who accompanied Talabani in his trip to China, underlined: “The contract with the previous administration [i.e. Saddam Hussein’s] is still valid–it was signed and we will honor it.” He then mentioned that some technical problems have to be solved before the reconfirmation: “We have been talking since I visited China eight months ago and the Chinese have just submitted a revised proposal to meet the new technical requirements for oil field development laid out by the Iraqi government” (Financial Times, June 22). Iraq’s top oil and gas adviser Thamer al-Gadhban, reiterated that “these contracts will not be cancelled, they will not be required to bid again, they just have to be amended.” He added, “China is very important for us–their Ahdab field is in a fairly safe area, but [the contracts] will be amended.” The main problem, however, is that the 1997 contract “was signed based on vertical drilling, but as it is in a fertile area, we need to change the contract to horizontal drilling so [as] not to disrupt the fertility of the nearby area” (Dow Jones Emerging Markets Report, June 27). Earlier in March, Baghdad asked the Saudi oil firm Al-Waha, partly owned by CNPC, to investigate drilling a single vertical well in Al-Ahdab and spreading out horizontally, rather than sinking several wells into the valuable agricultural land (Reuters, March 12).

Even if the problem of horizontal drilling could be overcome, which would be unprecedented in Iraq’s oil production and evidently very costly to solve, the resumption of Sino-Iraqi oil relations still depends on the promulgation of the Iraqi Oil Law. Finally approved by the Iraqi government in mid-February 2007, the “Draft Iraq Oil and Gas Law” was submitted to the parliament in May. Since then there has been no progress. This law is crucial for China’s resumed oil ventures in Iraq since, as Iraq’s oil minister put it, all oil contracts signed before the passing of this law would be considered “illegal” (The Hindu, November 7). Indeed, Article 40 of the Draft Law that covers existing contracts insists that the Iraqi Ministry of Oil (and other companies and organizations specifically authorized by it) “shall review all the existing exploration and production contracts with any entity before this law enters into force to ensure harmony with the objectives and general provisions of this law. These contracts must then be submitted to the Federal Oil and Gas Council, to ensure and to validate the maximum economic return for the people of Iraq.” Contracts signed with the Kurdistan Region shall be similarly reviewed by “the Designated Authority” of this region.

Picking Up Slowly

Since the early 1990s and especially since the 2003 war Sino-Iraqi bilateral economic relations have been substantially disrupted. In 2000 Sino-Iraqi trade turnover reached $975 million, reflecting primarily a considerable growth in imports compared to 1999, which consisted mainly of a one-time acquisition of nearly 3.2 million tons of Iraqi oil. Diminishing to $56 million in 2003, bilateral trade has begun to grow, reaching $470 million in 2004, $820 million in 2005 and over $1.144 billion in 2006, including over $653 million in Chinese imports. China’s construction services have also substantially declined due to the 2003 war. The value of contracts that had reached $145 million in 2002, declined to $128 million in 2003 and then nosedived to less than $9 million in 2004, picking up slightly to over $11 million in 2005 and climbing to $50.5 million in 2006 (all data from China Statistical Yearbook 2007 and earlier years). These figures provide the best evidence of China’s exclusion from Iraq’s reconstruction projects [3].

Given the deteriorating situation in Iraq and the pressure on the U.S. administration to pull back, it is quite possible that the U.S. withdrawal, if and when undertaken, would create a vacuum that could put China in a very advantageous position. Sudan is the obvious precedent; Washington had not only evacuated Sudan but also forced other Western countries to do the same, thus paving the ground for China’s presence–and possibly predominance. Although China has always been careful to avoid involvement in other countries and reluctant to take such a responsibility, especially under unstable and violent circumstances, the prospects of gaining access to Iraqi oil–whose reserves are estimated to be second or third in the world and dramatically dwarf those of Sudan, Angola or Nigeria–may overcome these concerns. Beijing has become more self-confident and daring in its overseas ventures. Nevertheless, it may take some time as Iraq’s oil law is still blocked, its security situation does not seem to improve and the United States is still there.

Notes

1. Xia Ji, “Zhanzheng yinying xia jiannan fushu de Yilake shiyou gongye” [The Difficulties in Reviving Iraq’s Oil Industry under the Shadow of the War], Shiyou Huagong Jishu Jingji [Oil and Chemical Industry Technology Economy], Vol. 21, No. 5 (2005), pp. 18-22.

2. See China National Petroleum Corporation’s website: www.cnpc.com.cn/cnpc/.

3. On China’s interest in Iraq’s reconstruction, see: “Yilake zhongjian yushang ji” [Business Opportunities in Iraq’s Reconstruction], interview with Iraq’s ambassador to China, Zhongguo Jingji [China’s Economy] (March 1, 2005), pp. 16-18.