China’s Oil Quest Comes to Iraq - While China's oil dealings with countries like Iran and Sudan receive global attention, its budding relationship with Iraq may turn out to be the most important

A lot of attention has been paid in recent years to energy-hungry China’s billion-dollar bids on oil fields in Canada and the Asian giant’s reliance on oil from countries like Iran and Sudan to fuel its growing economy. But its growing interest in another major oil producer has gone largely unnoticed, and if current trends continue, that Middle Eastern country could become the world’s next “oil superpower,” with China, not the West, acting as both Iraq’s main partner and top beneficiary of its rich resources in what some now call the B&B trade axis (Beijing and Baghdad).

In the past decade or so, China waited patiently on the sidelines while the U.S. and its allies coped with Iraq’s new, and often times messy internal dynamics that followed the 2003 overthrow of Saddam Hussein by a U.S.-led coalition. China reemerged in 2008, however, to sign post-Saddam Iraq’s first major oil deal with a foreign country. While the majority of Iraqi oil deals in the post-Saddam era were awarded to Western firms, the Western shift to a more amenable and independent oil-rich Kurdish region in the north amid disenchantment with southern Iraq is creating a vacuum that China has found hard to resist.
Even more so than Russia, a traditional player in Iraq during the Soviet era, China has the capital that Baghdad is desperately seeking to build its oil and gas infrastructure, while Iraq has crude potentials that are alluring to a China that seeks to diversify its energy sources. Already, Chinese oil firms have taken an active interest in acquiring deals that had been awarded to Western firms in 2009-2010, which the latter are now relinquishing so they can focus on alternative oil fields in Kurdistan. Although talks between China and Iraq go back to at least 1997, major investments have only occurred in recent years, with Chinese National Petroleum Company (CNPC) focusing on the 17 billion barrel Rumaila field — Iraq’s largest — and Halfaya, both in the south. As of 2010, China had made five major oil investments in Iraq since the overthrow of Saddam Hussein, one of which was in Kurdistan.
Relations are already on the right foot. To create goodwill with Baghdad, Beijing in 2010 forgave about 80 percent of Iraq’s $8.5 billion debt to China and has signed multibillion-dollar trade deals in various sectors, including industry, government, tourism, and transportation. As China seeks to expand its fledging defense industry, it is not unreasonable to think that at some point Iraq will turn to it for military hardware, which in turn would create incentives for greater military cooperation between the countries and further entrench China’s presence in Iraq.
China’s prospects in Iraq are certainly enviable. The vast amounts of capital at the disposal of state-owned oil firms like CNPC, combined with Beijing’s more permissive and risk-tolerant rules of engagement on foreign investment, will give it a net advantage as it attempts to outbid potential competitors for Iraq’s oil resources. Additionally, Beijing will have one up on other potential bidders for not having to face the colonial baggage that comes with their investment, such as the U.K.’s BP, or Russian and French companies.
The implications of this shift away from the West in favor of China will be far-reaching for both Iraq and the Middle East. About two thirds of Iraq’s estimated oil reserves of 143.1 billion barrels and natural gas holdings of 126 trillion cubic feet are located in southern Iraq, the same parts of the country that Western companies are pulling out of. Industry sources maintain that by 2020 Chinese companies could be involved in projects within Iraq that account for at least 2 million barrels per day (bpd) of the estimated 6 million bpd Iraq will produce by then (from 3.1 million bpd at present), and may be aiming for 3.5 million bpd by 2035. According to the International Energy Agency (IEA), Iraq’s output could reach 8.3 million bpd by 2035.
To put Iraq’s potential in context, by comparison, China imported about  970,000 bpd from Saudi Arabia in 2011 and currently purchases about 520,000 bpd from Iran, or about half of Iran’s total exports of 1 million bpd, which is down from 2.3 million bpd in 2011 before Western sanctions over its suspected nuclear weapons program kicked in (prior to the sanctions, China accounted for roughly 20 percent of Iran’s exports). However, the U.S. Energy Information Administration (EIA) estimates that falling production resulting from lack of investment, a high rate of natural decline in maturing oil fields, and the impact of the sanctions regime, will reduce the quantity of oil that is available for export and thus reduce Iran’s importance as an oil exporting country. Venezuela, another important source of crude for China, exports about 1.7 million bpd, of which China accounts for 10 percent. There as well, natural decline, lack of investment, and rising domestic consumption have led to an about one-quarter decline in exports since 2001. For its part, Russia produced 9.8 million bpd of crude in 2011, of which 7 million bpd were exported with China buying about 375,000 bpd. Unresolved territorial tensions, Moscow’s tendency to use oil exports as an economic weapon when relations sour, and Russia’s growing mistrust of China’s “rise” may have convinced the Beijing leadership that Russia cannot be counted on to serve as a reliable source of energy, its vast resources notwithstanding. And while Canada, a beacon of stability, shows great potential for China, Beijing is aware that major investments by China will remain a controversial issue in Canada, which could cause severe delays to the process of transforming the North American giant into a major source of energy for China.
From the above figures, it is therefore easy to see why Beijing would increasingly turn to Iraq, possibly the next “energy superpower,” as a source of crude to ensure it can continue to feed China’s economic expansion well into the future.
However, ever wary of Western designs, China remains extremely susceptible to any possibility that its access to energy will be disrupted. Such fears are exacerbated by China’s increasing reliance on oil imports, which currently stand at 55 percent, or 5.3 million bpd, of a total consumption of 9.9 million bpd. As its economy continues to expand, China’s oil dependence will grow commensurately, making disruptions to its imports all the more threatening. Efforts by the U.S. to attain energy self-sufficiency and therefore reduce its reliance on the Middle East are also fueling fears among the more conspiratorial minds in Beijing, who believe that a U.S. that is less dependent on Middle Eastern oil would be more inclined to sow discord within the region to “punish” China economically.
While such scenarios are unlikely, there is little doubt that self-sufficiency, added to Washington’s “pivot” to Asia, will result in the reduction of U.S. forces in the Middle East, where they currently serve as the guarantors of security. As the U.S. develops new sources of energy and increases domestic production (it could possibly overtake Saudi output by 2020, with 11.1 million bpd), the Middle East as an object of national security — a longstanding legacy of the “Carter Doctrine” — could gradually become a thing of the past, or at least become less strategically significant to the U.S. Conversely, unless China embarks on its own policy to achieve energy self-reliance, or finds energy sources on its vast territory that have hitherto been undiscovered, the importance of the Persian Gulf for its economic security will only increase. As a result, unless another power steps in, the People’s Liberation Army could eventually replace the U.S. military as the guardian of the Gulf. And this extends beyond Iraq.
Iraq nevertheless remains divided by sectarian conflict and terrorism, a situation that is unlikely to change for years to come. As such, major Chinese investment projects there will face the same high risks that have compelled Western investors to look elsewhere. Although it tends to be more risk-tolerant, China probably will not countenance any major disruption in operations or threats against its nationals.
Lastly, as Beijing’s investments in Iraq and the Middle East expand, so will the need to ensure the unrestricted flow of crude and natural gas to China, which will add immediacy to the need to provide protection navigation in the Persian Gulf and throughout the long journey oil tankers must make to reach East Asia. Unsurprisingly, one major driver in China’s decision to invest heavily in its Navy over the past two decades has been the requirement to ensure access to energy sources abroad. Not only has its fleet of frigates and destroyers undergone a dramatic transformation in the past 10 years, incrementally the PLAN has learned to operate away from its waters and has embarked on several “goodwill” visits overseas, such as the port call by a Navy Escort Task Group in Abu Dhabi, United Arab Emirates, in March 2010. Additionally, China’s carrier ambitions, with the commissioning of the Liaoning earlier this year and alleged plans to build more, also point to a desire by Beijing to acquire the ability to sustain a permanent naval presence overseas with the means to launch military operations well outside its traditional theater of operations. Future Middle Eastern contingencies certainly fit such requirements.
Given the high stakes for the region, Beijing’s engagement of Iraq over the next decade will deserve close scrutiny.

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