China’s Iraq Oil Strategy Comes Into Sharper Focus

March 19 marked the ten-year anniversary of the United States invasion of Iraq that toppled the government of Saddam Hussein. Although the international community continues to focus on the violence plaguing post-war Iraq and the country’s oil production capacity, changes in Iraqi foreign policy in the post-Saddam era have received far less attention. Endowed with the world’s fifth largest proven reserves of crude oil and sizeable natural gas deposits, Iraq is a critical source of energy for the world (U.S. Energy Information Administration, Iraq Country Data, April 2013). It is no surprise that China, a major energy importer whose reliance on Middle East oil continues to grow, is watching developments in Iraq closely. Although years of economic sanctions, war and mismanagement have devastated Iraq’s energy sector, an influx of foreign investment and efforts by the Iraqi government to improve the energy infrastructure have boosted Iraq’s oil production to the highest levels in decades. A search for customers has inevitably led it to China, which imports an estimated 500,000 barrels of oil per day (bpd) from Iraq (Xinhua, April 5). Indeed, Iraqi Oil Minister Abdul Kareem al-Luaibi recently announced that Iraq is pursuing a major long-term agreement with Beijing to deliver oil to China: “The Chinese companies are considered as strategic partners to Iraq in aspects of extracting and marketing crude oil through their active participation to develop the Iraqi oilfields” (Xinhua, April 5; Bloomberg, April 3, Reuters, March 5).

A confluence of elements centered on Iraq’s energy sector, especially its oil component, is aligning to shape a strategic partnership between Baghdad and Beijing. The rapid evolution of Sino-Iraqi ties will have far-reaching implications for both countries and the Middle East as a whole. Chinese investments in the Iraqi energy sector have been instrumental in helping to restore the country’s energy production. Iraq’s return to energy prominence—it surpassed Iran in December 2012 as the second largest producer of oil in the Organization of Petroleum of Exporting Countries (OPEC) and is now the world’s third largest oil exporter—has occurred as China continues its campaign to secure reliable oil and natural gas resources. Iraq achieved over 3 million barrels per day (bpd) of oil production in March and is now regarded as the world’s largest source of new oil. The predicted structural decrease in U.S. demand for imported oil over the long term is also affecting the thinking in Baghdad and Beijing (Financial Times, March 4; Reuters, March 5; December 12, 2012). In this evolving market, major energy producers such as Iraq are determined to enlist new and stable customers as demand for oil from traditional markets such as the United States wanes. China, meanwhile, is positioning itself to absorb available market supply. The International Energy Agency (IEA) has projected that up to 80 percent of Iraqi oil will eventually be exported to Asia in general and China in particular. In the long term, Iraq also hopes to satisfy China’s large demand for natural gas (International Energy Agency, Iraq Energy Outlook, October 9, 2012; McClatchy, March 27).

Measuring China’s Oil Footprint

China’s interest in Middle Eastern energy is well known. It depends increasingly on major oil producers such as Saudi Arabia and Iran to meet its oil needs, and is estimated to import around half of its oil from the Persian Gulf region alone (National [Abu Dhabi], April 4). Despite the inherent risks in dealing with complex and unstable markets such as Iraq, Chinese investors have been gaining a foothold in the country’s energy sector and in doing so have begun to face a unique set of challenges. In addition to having to navigate a tumultuous political and security environment, China is engaging a country that for a long period of time remained effectively under U.S. military occupation even as the central Iraqi government operated under a framework of limited sovereignty.

Under these circumstances, China was able to secure the first major oil accord between the Iraqi government and a foreign entity since 2003 (al-Jazeera [Doha], August 28, 2008). In 2008, China’s state-owned China National Petroleum Corporation (CNPC) concluded a $3.5 billion deal with Iraq’s North Oil Company (NOC) to develop the al-Ahdab oil field—a relatively small oil field by Iraqi standards—in the province of al-Wasit. The agreement negotiated between CNPC and NOC allowed the Chinese energy giant, in concert with its partner Zhenhua Oil to develop and manage the field for a 22-year period (Oil and Gas Journal, September 8, 2008). The 2008 agreement revived an earlier accord signed between Baghdad and Beijing in 1997 that governed Chinese exploration rights in the area. The importance of the agreement to develop al-Ahdab extends beyond timing and provides a glimpse into China’s approach toward investing in the Iraqi energy sector. A Chinese oil executive admitted that the economic fundamentals underlying CNPC’s investment in al-Ahdab was outweighed by the prospect of being able to “get a foot in the door” in Iraq (New York Times, June 28, 2011). With its eye on the future, China appeared to prioritize gaining an early foothold in the Iraqi oil sector that would lay the groundwork for future dealings on larger and more lucrative projects.

Numerous Chinese energy concerns have since concluded a series of major deals governing a range of activities in Iraq. In 2009, CNPC and British Petroleum (BP) signed a joint agreement with Iraq to increase production at the Rumaila oil field, Iraq’s largest oil field. Also in 2009, a consortium led by China’s largest oil producer and CNPC subsidiary PetroChina concluded an agreement with Baghdad to operate Iraq’s Halfaya oil field (AFP, June 28, 2011). The China Petroleum and Chemical Corporation (Sinopec) entered the equation through its multibillion dollar purchase of Addax Petroleum, a Swedish energy concern with operations in Iraq. In 2010, the China National Offshore Oil Corporation (CNOOC) partnered with Turkish Petroleum Corporation (TPAO) to sign a 20-year agreement to develop upstream capacity at the Missan oil field (Caixin Online, May 18, 2010). China has concluded numerous upstream and downstream deals with Iraq valued in the billions. China’s presence in the Iraqi oil sector goes beyond exploration and extraction as well. The China Petroleum Pipeline Engineering Corporation (CPPE), a CNPC subsidiary, is reported to have been awarded a contract by Iraq’s Missan Oil Company (MOC) to build a 300-km pipeline to deliver oil extracted from the Missan oil field for export (Azzaman [Baghdad], January 30). According to some assessments, China’s position in the Iraqi oil industry is such that at least one third of all future production of Iraqi oil will be derived from oil fields owned outright or co-owned by Chinese concerns (McClatchy, March 27).

The perception surrounding China’s activities in the Iraqi energy sector in the context of the decade-long U.S. presence in Iraq is also worthy of note. In light of the widely-touted opinion that the United States invaded Iraq, in large part, to dominate its energy reserves, it is important to highlight the tremendous inroads made by China in the Iraqi energy sector following the fall of Saddam Hussein. While U.S. and other Western oil majors have reaped substantial profits in Iraq, it would appear that China, for numerous reasons, was able to realize disproportionate gains in the Iraqi energy sector (al-Jazeera, January 7, 2012). Yet in contrast to similar activities around the globe, China’s expanding profile in the Iraqi energy sector has appeared to receive far less attention. The ongoing violence and instability that typify the situation in Iraq has seemed to allow China to operate relatively below the radar.

Navigating the Geopolitics

China’s growing profile in Iraq also has thrust it into a geopolitical morass of intra-Arab rivalries. Iraq’s reemergence as an energy power has important geopolitical implications that transcend its impact on global supply and demand dynamics. Major oil producers within OPEC—particularly Saudi Arabia, currently the world’s largest producer and exporter of oil as well as the host to the world’s largest known oil reserves—are threatened by the prospect of a resurgent Iraq that is once again attempting to stake its claim as an energy superpower. Much like Iraq, Saudi Arabia also looks to China and Asia more broadly as prime destinations for its energy exports. China surpassed the United States as the top importer of Saudi oil toward the end of 2009 (“Shifting Sands in the Gulf: The Iran Calculus in China-Saudi Arabia Relations,” China Brief, May 13, 2010). In many respects, China’s growing reliance on Iraqi oil threatens to upend a delicate regional balance of power among key energy producers. Specifically, China’s prominent role in helping underwrite Iraq’s resurgence in the energy sphere will be viewed through a prism of suspicion in Riyadh. Saudi Arabia does not relish the prospect of having its preeminent position as an oil power challenged by Iraq, a country it has long seen as a rival. In addition to feeding Saudi concerns, the notable scale and scope of Chinese involvement in Iraq also may elicit unease from China’s other partners in the region. For example, Saudi Arabia’s allies in the energy-rich Gulf Cooperation Council (GCC), to varying degrees, are also wary of Iraq’s rising influence. Even in a period of sustained global demand for oil, major energy producers in the GCC are fearful of seeing their influence as energy suppliers diminish as a result of the availability of Iraqi oil on the international market. Reliable access to Iraqi oil, in essence, provides consuming nations with more choices.

China’s deepening involvement in Iraq is also raising trepidation among Iraq’s neighbors because of its potential to impact the course of Iraqi foreign policy. Iraq’s rehabilitation as a major energy producer is viewed as a precursor to the emergence of a more assertive foreign policy. In this context, Iraq’s relationship with Iran is the cause of particular consternation. The conservative Sunni monarchies led by Saudi Arabia are alarmed about what they see as an emboldened Shi’a-led Iraq that has tilted toward Iran. The fact that China continues to view Iran as a strategic partner and vital source of oil and natural gas adds another layer of complexity to the regional climate. China also frequently sides with Iran on international actions concerning Iran’s nuclear program. Yet even as it benefits greatly from its friendship with Baghdad, Iran also understands that the availability of additional oil supplies furnished by Iraq to world markets may leave it more susceptible to harsher economic sanctions over its nuclear program. One of the many criticisms of the U.S.-led economic sanctions on Iran highlights the impact of energy supply gaps due to the removal of Iranian energy supplies from the global market. In theory, Iraqi oil can fill supply gaps resulting from a decrease in exports of Iranian oil. Given this logic, the expansion of Sino-Iraqi relations over energy may cause unease in Tehran, as it must recalibrate its own position to account for the fact that it can be replaced in its role as a major world supplier of oil and, eventually, natural gas.

China’s activities in Iraq also raise important issues relevant to U.S. influence in Iraq and the U.S. position in the wider region. The United States may have withdrawn its military forces from Iraq, but a formidable U.S. military presence remains in place throughout the Persian Gulf. Even as the United States has declared its pivot toward Asia and its desire to work toward energy independence, Washington is not prepared to abandon its presence in the broader Middle East. The U.S. influence in the region provides Washington with a valuable lever of strategic influence over its competitors and rivals alike. These circumstances present important challenges for China down the line, especially as its reliance on the region’s energy resources continues to grow.

As its reach extends further into Iraq, China’s rising profile also threatens to entangle it in a multitude of domestic political disagreements that have widespread ramifications for the future of Iraq and regional stability. The sensitive internal disputes festering between the central authorities in Baghdad and the autonomous Kurdish Regional Government (KRG) promise to pose a number of challenges to Chinese interests in Iraq down the line. These disputes raise existential questions over the parameters of Iraqi territorial sovereignty and national identity. The Iraqi constitution guarantees the KRG’s autonomy under a federal structure. A series of rows over the status of the disputed oil-rich city of Kirkuk, foreign policy, security, revenue sharing and natural resource extraction, however, threaten to unravel Iraq’s fragile unity (al-Monitor, April 4). The KRG has leveraged the relative peace and stability of the northern Iraqi territories under its control to lure foreign investment and engage with its neighbors independent of the central government. Baghdad interprets the KRG’s behavior as an attempt to circumvent its authority in an ultimate bid for independence. Consequently, Baghdad has punished foreign energy majors for their direct dealings with the KRG by excluding them from lucrative contracts in central and southern Iraq. For example, in 2012 Baghdad banned Chevron and other energy majors in retaliation for their direct dealings with the KRG (Financial Times, July 24, 2012). Exxon Mobil, which is operating in Iraq’s massive West Qurna 1 oil field, angered Baghdad when it signed an oil exploration accord with the KRG. Exxon Mobil reportedly has considered selling its stake in West Qurna 1 in favor of focusing on its prospects in Iraqi Kurdistan. Meanwhile, PetroChina has been mentioned as a candidate to buy Exxon Mobil’s assets at West Qurna 1 if it decides to abandon southern Iraq for the KRG or to develop the field jointly with Exxon Mobil if it were to renegotiate its position in Iraq (Reuters, March 25; Reuters, March 5). Moreover, a number of Chinese companies operate in Iraqi Kurdistan. China also has committed itself to establishing a consulate in Erbil in a bid to foster closer ties with the KRG (eKurd.net, January 8). That said, Beijing has been careful not to overstep its bounds in Iraqi Kurdistan by flouting Baghdad’s authority when engaging the KRG. At the same time, it is unclear whether China can remain relatively unscathed by Iraq’s domestic political turbulence for too much longer.

Conclusion

The convergence of mutual interests between China and Iraq over the buying and selling of oil will serve to underpin a long-term strategic partnership. At the same time, the geopolitical realities of a resurgent Iraqi energy sector will present China with an array of difficulties. China has steered these circumstances successfully until now with relative ease. The future may not be as forgiving. The overlapping and divergent interests that are at play in Iraq are likely to compel China to make difficult choices down the line. China has strived to build multifaceted relationships with Iraq and its neighbors through pragmatic diplomacy and lucrative trade while deftly avoiding alienating any of them in the process. But it is also reasonable to expect that China’s partners will someday seek to leverage their respective relationships with Beijing to further their own interests at the expense of their competitors and rivals. As China’s influence and presence in Iraq and the wider Middle East grow commensurate with the scale of its energy interests, regional players may seek to play China off against the United States or other key actors in an effort to strengthen their own positions. To what extent that China is capable of maintaining its delicate balancing act in Iraq and beyond in such an environment remains to be seen.