China Goes after Big Stake in Iraq's Oil

Chinese oil companies are showing a growing interest in Iraq's oil industry, which the International Energy Agency expects to more than double production by the end of the decade to 6.1 million barrels per day.

Beijing is widening its global hunt for mineral resources to fuel China's burgeoning economy that has largely concentrated on Africa, from where oil and raw materials can be exported directly east across the Indian Ocean.

The IEA, which made the forecast in a report issued Tuesday, estimated that by 2030 Iraq will be the second largest oil exporter after Saudi Arabia.

"If the IAE is right, Iraq's supply surge could have far-reaching consequences for the geopolitics of oil and dramatically change the balance of power within the Organization of Petroleum Exporting Countries," the Financial Times observed.

Iraq's oil production reached 2.6 million bpd in September, the highest in more than three decades.

One of the key beneficiaries of the Iraqi surge in oil flows from Iraq will be China, the IEA said.

"There's a new trade axis being formed between Baghdad and Beijing ... the B&B link," observed the agency's chief economist, Fatih Birol, and the main author of the study.

By 2020, the IEA report noted, 80 percent of Iraq's oil will be going to Asia, including 1.5 million bpd to China, rising to nearly 2 million bpd by 2035.

"In effect," the Financial Times said, "China will be replicating in Iraq what it's done in several African nations," most prominently in Angola, the Democratic Republic of Congo and South Sudan.

"The 'B&B' oil link would not only be the key for the oil market but could also force a bigger political and military involvement of China in Iraq and the broader Middle East."

Already, state-owned Chinese outfits such as PetroChina, China National Petroleum Corp. and China National Offshore Oil Corp. are either partners or operators in several major Iraqi oil fields.

With U.S. influence in the Middle East ebbing after the messy war in Iraq, and the U.S. military withdrawal in December, China and Russia have been seeking to boost their influence in the region of late, and Iraq, with its energy riches, is a magnet.

Both powers have stakes in Iraq's resurgent oil industry and are looking for more to extend their clout across the region.

These days, even the Saudis, long an important source of oil for the Americans, are shipping more oil to Asia than they are to the United States.

A significant Chinese entry into Iraq, which the IEA says could produce up to 8.3 million bpd by 2035, nudging Saudi Arabia's output of around 10 million bpd, could give Beijing immense power in the Middle East.

Further, an analysis by Citigroup released in September raised the alarming possibility that Saudi Arabia, for 60 years the world's paramount oil producer, could become a net importer by 2030 as the kingdom consumes more and more of its oil itself to meet the demands of a swelling population and economic growth, thus reducing petroleum exports.

Iraqi Prime Minister Nouri al-Maliki, increasingly irked by U.S. policy, this week signed a $4.2 billion arms deal with Moscow during a visit to Russia. That was a slap in the face for the United States, Baghdad's main arms supplier but which seems reluctant to provide Iraq with advanced weapons systems.

The Russians are also hunting for a bigger stake in Iraq's oil and gas industry and new deals could emerge before Maliki leaves Moscow.

China's encroachment into Africa has depended to a large extent of the hard cash that its state-owned corporations are able to throw around, mostly providing badly needed infrastructural projects like airports, housing, roads, rail networks and factories in return for oil and gas concessions.

And that could prove to be telling with regard to Iraq. It needs some $150 billion in investment to upgrade its long rundown energy industry infrastructure, a major stumbling block to boosting production and exports, on which postwar reconstruction depends.

And there's another catch. Iraq has still failed to approve a hydrocarbons law to regulate the industry and establish revenue-sharing rules. Until that's resolved, Birol argues, production growth will be slower.