Since the American engagement in Iraq was downsized, other countries have continued to gain higher profiles there, and Iraq’s economic allegiances — and its resources — are being wooed by powers whose interests are in competition with those of the United States. Nothing demonstrates this change more dramatically than the state-owned China National Petroleum Corp (CNPC) acquisition of US oil giant ExxonMobil’s position in the West Qurna Phase 1 oilfield for $50 billion, one of the largest such energy deals ever made.
Beijing had become a big player in Iraq’s oil sector even before this transaction was announced in early February. CNPC, at the beginning of 2013, was jointly operating three fields producing 1.4 million barrels per day (b/d), more than half the country’s output. However, acquiring the new stake means that CNPC alone will soon account for 50 percent of Iraq’s crude production.
Beijing’s takeover of the Exxon concession came after a dispute between the Iraqi central government in Baghdad and the US oil company over its attempt to operate in both Kurdistan and the rest of Iraq. Already involved in the south of the country, Exxon was the first big oil company to sign an agreement with the autonomous Kurdistan Regional Government in Erbil, even after Baghdad had told the US giant that it couldn’t work with the Kurds and with the rest of Iraq at the same time.
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Gasoline prices across the Middle East
Beijing’s success in Iraq is partly based on its lower costs, with Chinese managers and engineers typically earning only 25 percent of the salaries paid by Western companies. Since Baghdad is giving foreign operators as little as a couple of dollars per barrel of crude produced, some Western firms like Chevron and Exxon are turning to the Kurds, who offer more lucrative production-sharing agreements.
Iraq’s output of crude is set to rise to more than 8 million b/d by 2030, 80 percent of which may go to China. To facilitate exporting Iraqi oil, the Chinese are engaged in various forms of infrastructure development, including pipelines. Regarding the latter, the China Petroleum Pipeline Company is reported to be favored to win a $650 million contract to build a pipeline linking Iraq’s southern oil fields to coastal storage depots. This new line with a wider diameter pipe will replace the existing outdated one, easing transport constriction and expanding oil export capacity. The new pipeline should be operational in early 2014, facilitating a planned increase in output in the targeted area from the current 230,000 b/d to around 400,000 b/d.
Nor are the Chinese the only Far Eastern players coming up in Iraq: the South Koreans are also busy with infrastructure and other work in the country. Among many other projects, South Korea is constructing a housing mega-complex of 100,000 units. And LS Industrial Systems, a leading South Korean manufacturer of electric components, won a $67 million contract to build a power distribution control center for the Iraqi government. Under the deal with Iraq’s Ministry of Electricity, the company will also later construct seven distribution control centers across the country. With this contract, LS Industrial has logged more than $106 million of new business in Iraq during the first few weeks of 2013.
Look for more such Far Eastern dynamism in Iraq this year and beyond, as the Chinese and others continue stepping into the Iraqi market with even greater force. On one level, this will be a purely economic phenomenon, simply meaning that more business is being done between Iraq and East Asia. The implications in geostrategic terms, however, could be even bigger, going beyond Iraq’s borders to impact other parts of the region.
With Washington continuing to lose its appetite for involvement in the Middle East, a stronger Chinese position in the region could, for example, affect Syria and Iran, helping both to face Western pressure. Whatever the outcome of such a complex mix of business and politics in Iraq and regionally might be, the coming year is likely to be one of even greater flux than the one just past.
Riad el-Khouri is an economist and a principal at Development Equtiy Associates Inc, Washington DC
