ExxonMobil is in the process of selling stakes in Iraq’s super giant West Qurna-1 oilfield to China National Petroleum Corporation (CNPC) and Indonesia’s Pertamina. If this is finalized, it would leave CNPC with involvement in four Iraqi upstream projects, consolidating the Chinese state firm’s profile in Iraq and deepening China’s involvement in the Iraqi economy and energy sector. Strategically and operationally this has its pros and cons for both Iraq and CNPC. The ExxonMobil sale further weakens the role of American international oil companies (IOCs) and provides an opening for Indonesian state firm Pertamina in Iraq’s post-2003 petroleum sector.


CNPC is already the only foreign oil company that is involved in three Iraqi oilfields, and is now on the verge of involvement in a fourth.

The Ahdab oilfield was its first success story, where in 2008 CNPC agreed to convert the production sharing contract signed in 1997 into a long-term service contract. Work on Ahdab started in March 2009, and by June 2011 its output reached 60,000 b/d, half a year earlier than planned.

The second phase, raising capacity to 120,000 b/d, was also completed ahead of schedule by the end of 2011, with CNPC taking delivery of its first cargo of 650,000 barrels on 29 December. By mid-November 2012 production reached 140,000 b/d from 170 wells. Upon completion of the third phase capacity will be increased to 200,000 b/d.

CNPC’s second success is the Rumaila oilfield, where the BP/CNPC consortium signed the only deal concluded during Iraq’s first bid round in June 2009. Shortly thereafter CNPC increased its interest in the consortium from 33.33% to 49.33%. Production from the field is expected to average 1.45mn b/d in 2013, rising to 1.55mn b/d in 2014. The production plateau in the Rumaila contract is 2.85mn b/d sustainable for seven years. BP and CNPC have proposed three lower plateaus and longer periods, but negotiations have been inconclusive.

CNPC’s third success is Halfaya, where it is the operator with a 37.5% interest along with Total and Petronas (18.75% each). The field, with proven reserves of 4.94bn barrels, is expected to reach a plateau of 535,000 b/d in 2017 sustainable for 13 years. First phase development to a capacity of 100,000 b/d of crude and 90mn cfd of gas was completed by mid-June 2012, with a planned increase to 200,000 b/d by end of 2013. A further 100,000 b/d is due onstream in the second quarter of 2014. In the final phase, according to CNPC, capacity will rise to 600,000 b/d, higher than the contracted 535,000 b/d, by the end of 2016.

Finally, CNPC is on the verge of acquiring a 25% stake in West Qurna-1 (WQ-1) when the Iraqi authorities approve the deal. This acquisition would consolidate CNPC’s position as the leading foreign oil firm in the Iraqi upstream and China’s status as the foremost country in the Iraqi petroleum sector.

Table Chinese Oil Firms’ Iraqi Upstream Stakes

Number of Fields Proven Reserves (Bn Bl) Plateau Production Target (Mn b/d) of which CNPC/CNOOC (Mn b/d) Remuneration Fee Total Incremental Production (Mn b/d)
Weighted Average ($/B) Net ($Mn/day)
CNPC 4 32.39 6.41 2.11 2.05 2.43 5.1
CNOOC 3 2.5 0.45 0.27 2.3 0.31 0.35
Total 7 34.89 6.86 2.38 2.07 2.74 5.45


Two Chinese oil companies (both state-owned) are currently involved in the development of Iraq’s upstream (see table).

CNPC and China National Offshore Oil Corporation (CNOOC) have signed five long-term service contracts to develop seven oilfields. CNPC is involved in Rumaila, Halfaya and WQ-1 (subject to formal approval) and on its own in Ahdab, while CNOOC is the operator of three Misan oilfields, Buzorgan, Abu Ghirab and Fawqa, (with Total and Petronas).

Total proven reserves of these oilfields is some 35bn barrels, representing a quarter of Iraq’s official proven reserves, while total production at contracted plateau targets is 6.86mn b/d, most of which comes from CNPC oilfields. The Chinese state firms are thus critically involved in Iraq’s total production. Total incremental production over baseline levels would be 5.45mn b/d, constituting some 80% of their combined contracted plateau production targets.

Based on their participation interests, the CNPC and CNOOC contribution to total plateau production is 2.381mn b/d, constituting 34.7% of combined plateau production from these fields. Remuneration for the development of these oilfields ranges from $1.4/B (Halfaya) to $6/B (Ahdab), with the weighted average remuneration fee (weighted by production level) put at $2.07/B. Once the production plateau is reached, the Chinese IOCs will earn an annual $1bn from the fields. These remuneration fees could increase further if the allowances for processing associated gas from the Ahdab, Halfaya and Misan fields are included or reduced due to ‘R-factor’ (cumulative revenue divided by cumulative costs) effect.

However, the prime objective of CNPC and CNOOC was not remuneration fees but access to vast, low cost reserves with geographical proximity. Without this strategic objective it would be difficult to explain how CNOOC could agree to reduce its remuneration fee from $21.4/B to $2.3/B. But remuneration fees are not the only source of revenue for the Chinese companies, since “cost inflating” through sub-contracting to other Chinese companies is also a major source of income.


There may be further opportunities for CNPC in the Iraqi upstream. ENI has indicated its willingness to have CNPC join other partners in the Zubair oil field, and Lukoil is still hoping CNPC will become a partner in West Qurna-2. A member of the Kirkuk provincial governing council has reportedly said that talks have been held with CNPC regarding the Kirkuk oilfield. In addition to CNPC and CNOOC, other Chinese companies play a significant role in the refining sub-sector. A large Chinese delegation attended the Nasiriya Integrated Project at the second ‘Amman workshop of mid-September 2013, and the memorandum of understanding recently concluded with Satarem for the Misan refinery involves possible Chinese participation (MEES, 18 October).


It is clear that the Chinese companies’ strategy has been to use low remuneration fees to access the Iraqi upstream and consolidate their position. In this respect they have been the most successful of all foreign oil companies.

The availability of vast and diversified sources of logistical services, professional manpower, supplies and subcontractors has also helped Chinese firms become the most successful contracting companies in Iraq, which, via transfer pricing practices, could have helped to compensate for the effect of low remuneration fees. Even if it did not, upstream petroleum projects have significant value and impacts for China from the macroeconomic and strategic points of view.

The Iraqi authorities set the end of December 2012 as the deadline for ExxonMobil to sell its share in the WQ-1 field, a deadline which the company failed to meet. When the CNPC and Pertamina deal for the field is accepted, it is vital for the Oil Ministry to finalize the necessary contractual arrangements as soon as possible in order to prepare the final development plan. Moreover, the ministry could impose capital gains tax on ExxonMobil’s profits from selling part of its shares.

By taking a 10% stake in WQ-1, Pertamina is making its first foray into Iraq’s upstream since 2003. More than 10 years ago, in 2002, this company concluded a production-sharing contract for the “old” exploration Block 3 in the south western desert. But a senior Iraqi oil official has reportedly said that this agreement is now “frozen” and cannot be reactivated until it is converted into a service contract. The Oil Ministry could use this opportunity to transform the old contract into one similar to that used for the fourth bid round.


China and its state oil companies possess strategic significance for Iraq generally and for oil marketing in particular. A recent study by Wood Mackenzie suggests that China will become the largest crude importer in the world over the next seven years, overtaking the US by 2017, and that OPEC suppliers, who have traditionally focused on the US, will be compelled to shift their attention towards China. According to Canada’s Financial Post newspaper, analysts believe 66% of China’s oil imports will be from OPEC by 2020, compared to 52% in 2005.

Recent information indicates that China has already requested 900,000 b/d-1mn b/d of Iraqi crude in 2014. In this regard it should be noted that China’s state-owned Sinochem plans to use Iraqi crude oil for 40% of the capacity of its new 240,000 b/d Quanzhou refinery. This is over and above the 200,000 b/d of Basra Light crude Sinochem usually buys, most of which now goes to Chinese refineries owned by Sinopec.

Senior Iraqi officials frequently assert that incremental oil production is aimed mostly at China, Japan, India and other Asian countries. The recently adopted Integrated National Energy Strategy (INES) also calls for a similar eastward orientation.

The payment of the entitlements of CNPC, CNOOC and other Chinese companies –investment, remuneration fees and other dues – in crude oil would secure oil deliveries to the companies for more than two decades to come. The production of crudes with different API and sulfur contents, and the construction of new refineries with technology capable of handling a wider range of crude qualities, could facilitate the marketing of Iraqi oil in China.


The consolidation of Iraqi oil’s position in Asian markets and China in particular has long-term strategic advantages for Iraq, but as Iraq’s national energy strategy notes, reliance on a single market or a single route carries risks.

*Mr Jiyad is the founder of Iraq/ Development Consultancy and Research (Norway). Email: [email protected]