Iraq balks at greater Chinese control of its oilfields

LONDON/BASRA, Might 17 (Reuters) – Iraq’s oil ministry thwarted three potential offers final 12 months that may have handed Chinese language corporations extra management over its oilfields and led to an exodus of worldwide oil majors that Baghdad needs to spend money on its creaking financial system.

Because the begin of 2021, plans by Russia’s Lukoil (LKOH.MM) and U.S. oil main Exxon Mobil (XOM.N) to promote stakes in main fields to Chinese language state-backed corporations have hit the buffers after interventions from Iraq’s oil ministry, in accordance with Iraqi oil officers and business executives.

Promoting a stake to a state-run Chinese language firm was additionally one in all a number of choices being thought-about by Britain’s BP (BP.L), however officers persuaded it to remain in Iraq for now, folks conversant in the matter stated.

China is Iraq’s prime investor and Baghdad was the largest beneficiary final 12 months of Beijing’s Belt and Street initiative, receiving $10.5 billion in financing for infrastructure tasks together with an influence plant and an airport.

However in the case of additional Chinese language funding in main oilfields, Baghdad has drawn a line within the sand.

Iraq’s authorities and officers at state-run corporations are involved that additional consolidation of fields within the fingers of Chinese language corporations might speed up an exodus of Western oil corporations, a complete of seven Iraqi oil officers and executives with corporations working in Iraq advised Reuters in interviews.

Supported by state-run oil firm officers, Iraq’s Oil Minister Ihsan Abdul Jabbar dissuaded Lukoil final 12 months from promoting a stake in one of many nation’s largest fields, West Qurna 2, to Chinese language state agency Sinopec , three folks conversant in the matter stated.

Iraqi officers additionally intervened final 12 months to cease Chinese language state-backed corporations shopping for Exxon’s stake in West Qurna 1 and to steer BP (BP.L) to remain in Iraq relatively than offloading its curiosity within the big Rumaila oilfield to a Chinese language firm, folks conversant in the matter stated.

Mixed, Rumaila and West Qurna produce about half of the crude popping out of Iraq, which sits on the fifth-largest oil reserves on the planet.

Iraq’s oil ministry didn’t reply to requests for remark concerning the offers or the minister’s function in any interventions.

The federal government nervous that China’s dominance might make Iraq much less enticing for funding from elsewhere, two authorities officers stated.

China’s strengthening relationship with Iran has helped its place in Iraq as a result of Tehran’s political and army affect there, however the oil ministry is cautious of ceding extra management over the nation’s key sources, some officers stated.

“We do not need the Iraqi power sector to be labelled as a China-led power sector and this angle is agreed by authorities and the oil ministry,” one other Iraqi official stated.

RISKY STRATEGY

The interventions over BP, Exxon and Lukoil’s positions in Iraq come after British oil main Shell (SHEL.L) determined in 2018 to withdraw from Iraq’s huge Majnoon oilfield.

The interventions additionally mark a shift in stance after Chinese language corporations received most power offers and contracts awarded over the previous 4 years. Iraqi oil officers stated Chinese language corporations have accepted decrease revenue margins than most rivals.

“All the principles concerning tenders had been formulated collectively by the Chinese language and Iraqi sides and had been carried out underneath clear and truthful ideas,” stated state-owned China Nationwide Offshore Oil Company (CNOOC) (0883.HK) in an emailed assertion.

Pushing again towards additional Chinese language funding is a dangerous technique, although, as there is no assure others will step up and the federal government wants billions of {dollars} to rebuild the financial system after the Islamic State insurgency was defeated in 2017.

Over the previous decade, oil income accounted for 99% of Iraq’s exports, 85% of the nation’s funds and 42% of its gross home product, in accordance with the World Financial institution.

Whereas oil majors jostled to get entry to Iraq’s huge oilfields after the U.S.-led invasion in 2003, they’re more and more targeted on the power transition and extra worthwhile performs elsewhere. In addition they need higher phrases to develop fields, oil executives stated.

China is among the many largest patrons of Iraq’s crude and Chinese language state corporations have constructed up a dominant place in its oil business.

However when Lukoil notified the federal government final summer time that it was contemplating promoting a few of its stake in West Qurna 2 to Sinopec, the oil minister intervened, folks conversant in the matter stated.

It has not beforehand been reported that Sinopec was the potential purchaser of Lukoil’s stake. The Chinese language firm didn’t reply to a request for remark.

To encourage Lukoil to remain, Iraq provided a sweetener, an individual with direct data stated.

A couple of months after Lukoil signalled it was contemplating a sale, Baghdad lastly accepted its plan to develop a subject often called Block 10, the place the Russian firm had found an oil reservoir in 2017. Afterwards, Lukoil dropped the concept of promoting its stake in West Qurna 2, the supply stated.

Lukoil didn’t reply to a request for remark.

BP AND EXXON

Over the previous few years BP has additionally spoken to the federal government about its choices – together with leaving Iraq altogether – earlier than deciding on spinning off its stake in Rumaila right into a standalone firm final 12 months, two folks conversant in the matter stated.

Oil minister Abdul Jabbar led efforts to persuade BP to not go away as the federal government was involved its accomplice within the subject, China Nationwide Petroleum Company (CNPC), would purchase BP’s stake, the folks stated. Baghdad was additionally eager to maintain such a high-profile worldwide oil main within the nation, they stated.

BP declined to remark.

When Exxon flagged its intention to depart Iraq in January 2021, in the meantime, U.S. officers advised Exxon they had been sad with the prospect of the largest U.S. oil main pulling out – for causes that echoed Iraqi issues.

State division officers stated Exxon’s departure might create a vacuum for Chinese language corporations to fill, an individual conversant in the conversations stated.

U.S. officers then requested Exxon what it could take to remain in Iraq, the particular person stated, declining to offer additional particulars.

A State Division spokesperson stated: “We repeatedly interact with our Iraqi counterparts on fostering an atmosphere conducive to personal sector funding.”

Exxon had signed an settlement for the sale of its curiosity in West Qurna 1 to CNOOC and PetroChina (601857.SS), the listed arm of CNPC, folks conversant in the matter stated.

Neither CNOOC nor CNPC responded to requests for remark concerning the offers.

Exxon’s stake was valued at $350 million to $375 million, stated folks conversant in the matter.

Iraq has veto energy over oilfield offers, nevertheless, and didn’t approve the transaction.

Exxon filed for arbitration with the Worldwide Chamber of Commerce towards Basra Oil Co., arguing that it had adopted the phrases of its contract for West Qurna 1 and had a superb deal on the desk, folks conversant in the matter stated.

The oil ministry then took the bizarre step of making an attempt to dealer a deal on Exxon’s behalf. The ministry provided Exxon’s stake to different Western corporations together with Chevron Corp (CVX.N).

Nobody was . Slightly than let the stake go to the Chinese language corporations, Baghdad stated the state-run Iraq Nationwide Oil Firm (INOC) would take it as a substitute, although INOC continues to be within the strategy of being revived after being defunct for a few years.

“(Exxon) will proceed to work intently and constructively to succeed in an equitable decision,” stated a spokeswoman.

SERVICE CONTRACTS

Iraq’s oil business is usually primarily based on technical service contracts between the state-backed Basra Oil Co. and overseas corporations which are repaid prices plus a payment per barrel to develop fields, whereas Iraq retains possession of the reserves.

Oil majors sometimes favor offers that enable a share in earnings relatively than a set payment.

The precedence for Chinese language corporations, nevertheless, is attaining safe oil provides to feed China’s rising financial system, relatively than returns for traders, stated a Chinese language oil government with direct data of CNPC’s world investments.

There are some indicators, nevertheless, that Iraq is trying to make its phrases extra interesting.

France’s TotalEnergies (TTEF.PA) signed a $27 billion deal in September that included fee of 40% of income from one subject. The deal has stalled, nevertheless, as a result of disputes over phrases and it nonetheless wants approval from some Iraqi authorities companies, Reuters reported in February. learn extra

TotalEnergies stated it was totally dedicated to the undertaking.

One oil firm government stated they had been sceptical Iraq would introduce extra enticing phrases. However except they enhance considerably, analysts say it’s laborious to think about Iraq will be capable of stem the exodus because the power transition accelerates.

“Lots of the power majors are trying on the carbon emissions, their capacity to generate money flows if commodity costs are low, and so they’re taking a look at enhancing returns,” stated Ian Thom, analysis director at consultancy Wooden Mackenzie.

“Because the priorities of the power corporations are altering, the relative attractiveness of Iraq is altering.”

Reporting by Sarah McFarlane in London, Aref Mohammed in Basra and the Iraq bureau; Further reporting by Aizhu Chen in Singapore; Modifying by Simon Webb and David Clarke

Our Requirements: The Thomson Reuters Belief Ideas.