Iraq’s latest oil and gas bidding round shows China’s growing influence in the Arab country’s energy sector, which faces challenges such as stagnant production and underdeveloped gas reserves, analysts say.
In a three-day licensing round, 29 projects were made available for bidding across central, southern and western Iraq, and also included an offshore exploration block in the country's Arabian Gulf waters.
By the end of the third day, only 13 projects were awarded, with 10 of them going to Chinese companies such as Zhongman Petroleum and Natural Gas Group, UEG and Geo-Jade.
China will do its utmost to prevent American oil majors from returning to Iraq
Mamdouh Salameh,
oil economist
Most analysts were not surprised by the significant Chinese participation and the conspicuous absence of western oil majors, who have been pumping oil in Iraq for several decades.
“With its huge investments in Iraq’s oil industry, China establishes a huge new source of oil for its economy. Moreover, it will do its utmost to prevent American oil majors from returning to Iraq,” said Mamdouh Salameh, an oil economist.
“Western oil majors decided to remain on the sidelines partly to stop Iraq buying Iranian gas and mostly because of lack of transparency in Iraq,” Mr Salameh told The National.
Iran, which has been facing international sanctions over its nuclear programme, is a major supplier of natural gas to Iraq, which uses the fuel for its power stations.
Entities from Europe, the Gulf region, the UK, and Russia also remained “conspicuously absent” from the bidding process, Mahmood Baban, research fellow at Rudaw Research Centre, told The National.
“Factors contributing to this included concerns over asset protection … and strategic shifts towards renewable energy investments among European nations,” Mr Baban said.
Iraq began to attract international oil companies (IOCs) after the security situation in the country stabilised in 2008. Among major oil companies were ExxonMobil, Shell, the UK’s BP, China’s CNPC and Russia’s Lukoil.
Since then, Iraq has awarded dozens of oil deals to develop major fields that hold more than half of its 145.02 billion barrels of proven reserves. Deals to tap natural gas resources have also been awarded.
Iraq’s oil ministry plans to increase production to 6 million barrels per day in the next five years, from about 4 million bpd currently. It exports around 3.3 million bpd.
China, the world's second-largest economy, is the biggest buyer of Iraqi crude, importing about 1.18 million bpd, which is more than a third of Iraq's total crude exports, according to S&P Global.
“Chinese companies already dominate Iraq’s upstream sector, and the two countries enjoy strong diplomatic and trade ties. China is Iraq’s biggest crude market. So, there are plenty of synergies here,” said Vandana Hari, chief executive of Vanda Insights.
In 2021, China’s state-run Sinopec energy company won a deal to develop a major gas field in eastern Iraq. A contract was signed to develop the 4.5 trillion cubic feet Mansuriya gas field for 25 years.
On Wednesday, Iraq and China's Hualu Engineering also signed an agreement to construct the 300,000 barrel-per-day Al Faw refinery in country’s south, the Iraqi government said.
The project comprises two phases and will involve the construction of a petrochemical complex with an annual capacity of three million tonnes as well as a 2,000-megawatt electric station, it added.
Last year, the Central Bank of Iraq said it planned to allow trade with China to be settled directly in yuan for the first time to improve its access to foreign currency.
The settlement of trade in the Chinese currency instead of the US dollar will help the Iraqi central bank to “stabilise exchange rates”, it said in a statement at the time.
[Big international firms] have been variously replaced by smaller independents and in some cases, by Chinese state-owned giants
Vandana Hari,
Vanda Insights
China’s heavy dependence on Middle Eastern oil and gas has prompted substantial investments in infrastructure projects via the Belt and Road Initiative.
China is looking to position itself as an alternative to the US in the region. It has previously mediated talks between Iran and Saudi Arabia.
Meanwhile, with the notable exceptions of Guyana, Mozambique, Liberia and Namibia, big international energy players have continued to retreat from established hydrocarbon basins around the world, Ms Hari said.
“They have been variously replaced by smaller independents and national oil companies and in some cases, by Chinese state-owned giants, who still have the mandate to secure equity in oil and gas for the country’s future needs,” she added.
China’s oil demand is expected to slow this year. Crude demand growth is set to fall by 63 per cent from 2023 to 620,000 bpd this year, the IEA said in a report earlier this year.
Natural gas push
The latest contracts could help Iraq harness its vast natural gas resources, which are key to addressing the country’s chronic electricity shortages, especially during hot summers.
Despite billions of dollars spent on infrastructure over the past few decades, many Iraqi cities and towns still experience severe power cuts and rolling blackouts.
The country’s electricity demand is set to double between 2019 and 2030, with its supply shortfall expected to widen as its population grows by more than a million a year, according to the IEA.
Giovanni Staunovo, a strategist at UBS, said that increasing domestic gas usage may free up more crude for exports in the long term.
However, some analysts have expressed concerns about Iraq’s ability to implement the oil and gas contracts.
More than 20 years since the US invasion of Iraq, the country remains mired in challenges, compounded by political divisions and foreign interference.
Most recently, Iraq became a battleground between Iran-backed Shia militias and US troops stationed in the country, arising from tit-for-tat violence related to the war in Gaza and the broader conflict between Tehran and Israel.
“Iraq's recent contract signings represent a pivotal moment in its energy sector evolution,” Mr Baban said.
“However, challenges persist, including political complexities and regional tensions, which could impede the smooth implementation of these contracts,” he added.
“As Iraq navigates its path forward, addressing these issues will be critical to realising the full potential of its oil and gas reserves in the coming decades.”
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