LONDON/BASRA, May 17 (Reuters) – Iraq’s oil ministry last year foiled three potential deals that would have given Chinese companies more control over its oil fields and led to an exodus of international oil majors that Baghdad wants to invest in its struggling economy.
Since the start of 2021, plans by Russian Lukoil (LKOH.MM) and US oil giant Exxon Mobil (XOM.N) to sell stakes in major fields to Chinese state-backed companies have reached limits after Iraqi oil ministry interventions, according to Iraqi oil officials and industry leaders.
Selling a stake in a Chinese state-owned company was also one of many options Britain’s BP (BP.L) considered, but officials persuaded it to stay in Iraq for the time being, officials said. people close to the file.
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China is the top investor in Iraq and Baghdad was the biggest beneficiary last year of Beijing’s Belt and Road Initiative, receiving $10.5 billion in funding for infrastructure projects, including a power plant and an airport.
But when it comes to new Chinese investment in major oil fields, Baghdad has drawn a line in the sand.
Iraqi government and state-owned company officials fear that further consolidation of fields in the hands of Chinese companies could accelerate the exodus of Western oil companies, a total of seven Iraqi oil officials and oil executives told Reuters. companies operating in Iraq during interviews.
Backed by state oil company officials, Iraqi Oil Minister Ihsan Abdul Jabbar last year dissuaded Lukoil from selling a stake in one of the country’s largest fields, West Qurna 2, to the oil company. Chinese state Sinopec, three people familiar with the matter said.
Iraqi officials also intervened last year to prevent Chinese state-backed companies from buying Exxon’s stake in West Qurna 1 and to persuade BP (BP.L) to stay in Iraq rather than divest its interests in the giant Rumaila oilfield to a Chinese company, sources have learned. with matter said.
Together, Rumaila and West Qurna produce about half of the crude out of Iraq, which sits on the fifth largest oil reserves in the world.
Iraq’s oil ministry did not respond to requests for comment on the agreements or the minister’s role in the interventions.
The government feared China’s dominance would make Iraq less attractive to foreign investment, two government officials said.
China’s strengthening ties with Iran have strengthened its position in Iraq due to Tehran’s political and military influence there, but the Oil Ministry is reluctant to cede more control over the country’s key resources, some officials said.
“We don’t want Iraq’s energy sector to be labeled as a Chinese-led energy sector and this attitude is endorsed by the government and the oil ministry,” another Iraqi official said.
RISKY STRATEGY
The interventions in the positions of BP, Exxon and Lukoil in Iraq come after British oil major Shell (SHEL.L) decided in 2018 to pull out of Iraq’s vast Majnoon oilfield.
The interventions also mark a shift in stance after Chinese companies won most contracts and energy contracts awarded over the past four years. Iraqi oil officials said Chinese companies have accepted lower profit margins than most of their competitors.
“All rules regarding bidding were formulated jointly by the Chinese and Iraqi sides and were conducted according to transparent and fair principles,” state-owned China National Offshore Oil Corporation (CNOOC) (0883. HK) in an emailed statement.
However, pushing back new Chinese investment is a risky strategy, as there is no guarantee that others will step up and the government needs billions of dollars to rebuild the economy after the defeat of the Islamic State insurgency in 2017.
Over the past decade, oil revenues have accounted for 99% of Iraq’s exports, 85% of the country’s budget and 42% of its gross domestic product, according to the World Bank.
As the oil majors scrambled to gain access to Iraq’s vast oil fields after the US-led invasion in 2003, they are increasingly focusing on energy transition and more profitable games elsewhere. They also want better conditions to develop the fields, oil executives said.
China is one of the biggest buyers of Iraqi crude, and Chinese state-owned enterprises have gained a dominant position in its oil industry.
But when Lukoil informed the government last summer that it was considering selling part of its stake in West Qurna 2 to Sinopec, the oil minister stepped in, people familiar with the matter said.
It was not previously reported that Sinopec was the potential buyer of Lukoil’s stake. The Chinese company did not respond to a request for comment.
To encourage Lukoil to stay, Iraq offered a sweetener, a person with direct knowledge said.
Months after Lukoil signaled it was considering a sale, Baghdad finally approved its plan to develop a field known as Block 10, where the Russian company discovered an oil reservoir in 2017. , Lukoil has abandoned the idea of selling its stake in West Gournah 2, the source said.
Lukoil did not respond to a request for comment.
BP AND EXXON
In recent years, BP also spoke to the government about its options – including leaving Iraq altogether – before deciding to spin off its stake in Rumaila into a standalone company last year, two people familiar with the matter said. .
Oil Minister Abdul Jabbar led efforts to convince BP not to leave as the government feared its partner on the ground, the China National Petroleum Corporation (CNPC), would buy out BP’s stake, the sources said. . Baghdad was also keen to keep such a prestigious major international oil company in the country, they said.
BP declined to comment.
Meanwhile, when Exxon signaled its intention to leave Iraq in January 2021, US officials told Exxon they were unhappy with the prospect of America’s biggest oil major pulling out – for reasons that echoed Iraqi concerns.
State Department officials have said Exxon’s departure could create a void for Chinese companies to fill, a person familiar with the conversations said.
US officials then asked Exxon what it would take to stay in Iraq, the person said, declining to give further details.
A State Department spokesperson said, “We regularly engage with our Iraqi counterparts to foster an enabling environment for private sector investment.”
Exxon has signed an agreement to sell its stake in West Qurna 1 to CNOOC and PetroChina (601857.SS), the publicly traded subsidiary of CNPC, people familiar with the matter said.
Neither CNOOC nor CNPC responded to requests for comment on the deals.
Exxon’s stake was valued at between $350 million and $375 million, people familiar with the matter said.
Iraq, however, has veto power over oil deals and did not approve the deal.
Exxon has filed for arbitration with the International Chamber of Commerce against Basra Oil Co., arguing that it followed the terms of its contract for West Qurna 1 and had a good deal on the table, people familiar with said. folder.
The Department of Oil then took the unusual step of trying to broker a deal on Exxon’s behalf. The ministry offered Exxon’s stake to other Western companies, including Chevron Corp (CVX.N).
No one was interested. Rather than leave the stake to Chinese companies, Baghdad said the state-run Iraqi National Oil Company (INOC) would take it instead, although INOC is still being revived after disappearing. for many years.
“(Exxon) will continue to work closely and constructively to reach a fair resolution,” a spokeswoman said.
SERVICE CONTRACTS
Iraq’s oil industry relies primarily on technical services contracts between the state-backed Basra Oil Co. and foreign companies that get reimbursed for costs plus a fee per barrel to develop the fields, while the Iraq retains ownership of the reserves.
Oil majors generally prefer agreements that allow for a share of profits rather than a fixed royalty.
The priority for Chinese companies, however, is securing secure oil supplies to fuel China’s growing economy, rather than returns for investors, said a Chinese oil executive with first-hand knowledge of global investment from China. CNPC.
There are, however, signs that Iraq is trying to make its terms more attractive.
France’s TotalEnergies (TTEF.PA) signed a $27 billion deal in September that included paying 40% of a field’s revenues. The deal, however, has stalled due to disputes over terms and still needs to be approved by some Iraqi government agencies, Reuters reported in February. Read more
TotalEnergies said it was fully committed to the project.
An oil company executive said he was skeptical of Iraq’s introduction of more attractive terms. But unless they improve significantly, analysts say it’s hard to imagine Iraq will be able to stem the outflow as the energy transition gathers pace.
“Many energy majors are looking at carbon emissions, their ability to generate cash flow if commodity prices are low, and they are looking to improve returns,” said Ian Thom, research director at the consulting firm Wood Mackenzie.
“As the priorities of energy companies change, the relative attractiveness of Iraq changes.”
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Reporting by Sarah McFarlane in London, Aref Mohammed in Basra and the Iraq office; Additional reporting by Aizhu Chen in Singapore; Editing by Simon Webb and David Clarke
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