(MENAFN- Baystreet.ca) Various reports that Chinese oil giants, China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) are 'considering acquiring' U.S. oil titan ExxonMobil's 32.7 per cent stake in Iraq's supergiant West Qurna 1 oil (and gas) field are missing the point. The point is that China is already dominant at the site, not only through the 32.7 per cent stake held by PetroChina - the listed arm of CNPC - but also through the gradual acquisition of a range of huge supposedly 'contract-only' awards made to Chinese companies for work on the field. These most recently included the US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production to the China Petroleum Engineering & Construction Corp (CPECC) that was exclusively highlighted by OilPrice.com in this very regard. These reports also miss the point that the moment that ExxonMobil made it clear that it would not go ahead with the crucial Common Seawater Supply Project (CSSP) the door was left open for China – in the shape of CNPC – to take over that project too, and any other major project that Beijing wanted as well as part of the trade-off for taking on the, in itself, thankless and expensive CSSP task agreed back in 2010.
The CSSP involves taking seawater from the Persian Gulf and transporting it to oil production facilities to boost the pressure and recovery rates at key oil reservoirs and ExxonMobil's lead-participation in it was first seriously mooted in 2010 when Baghdad was looking to raise its oil production capacity to 12 million barrels per day (bpd) by 2018, to overtake Saudi Arabia's output. This project – and its newest iteration into the broader US$53 billion Southern Iraq Integrated Project (SIIP) - is the key to what has happened on West Qurna 1 from all perspectives, and in many ways to the broader geopolitical shift that is happening across Iraq away from the U.S. and towards China.
As exclusively highlighted by OilPrice.com nearly two years ago, sources who work closely with Iraq's Oil Ministry told us that – at the most basic level – ExxonMobil, and the U.S. in general, could simply not take the risk of becoming so integrally involved in such a corrupt project. 'The central problem for ExxonMobil was always that the risk/reward elements of the contract were profoundly unbalanced, with three key elements in the general risk/reward matrix that form the basis of the CSSP negotiations – relating to cohesion, security, and streamlining – of particular concern,' said one of these sources. Cohesion ensures that building out facilities that are connected to the CSSP are completed in full and in order, security relates to the on the ground security of personnel but also to soundness of the basic business and legal practices involved in the agreement, and streamlining means that any deal should continue as agreed, regardless of any change in government in Iraq.
Exactly the same 'contract-only' model was recently used in Iraq's massive Majnoon oil field. It is this field that was the focus of the extremely similar announcement that two major new drilling contracts had been signed: one with China's Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million and the other with the Iraq Drilling Company to drill 43 wells at a cost of US$255 million. In reality, it is China that is in charge of both, having given the funds required to the Iraq Drilling Company as a 'fee' for its own participation, according to the Iraq sources. Also located close to the Basra export hub, the supergiant Majnoon oilfield is one of the world's largest, holding an estimated 38 billion barrels of oil in place and is currently producing around 240,000 bpd. Longer term, though, the original production target figures for then-Shell-led consortium still stand: the first production target of 175,000 bpd (already reached), and the plateau production for the site of 1.8 million bpd at some point in the 2030s. West Qurna 1, in the meantime, is producing around 465,000 bpd, with an original plateau target of 2.825 million bpd having been re-negotiated down, to 1.6 million bpd again by some point in the 2030s.
Should ExxonMobil go ahead with selling its stake to China then the deal with Iraq's Oil Ministry for the oil that China ends up extracting from West Qurna 1 will be: 'Absolutely in line with the deal it has for Majnoon,' the Iraq source told OilPrice.com. Specifically, this will involve a 25-year contract but – critically – one that would only officially start two years after the signing date (yet to be determined), so allowing CNPC (or CNOOC) to recoup more profits on average per year and less upfront investment. The per barrel payments to China would be the higher of either the mean average of the 18 month spot price for crude oil produced, or the past six months' mean average price. It would also involve at least a 10 per cent discount to China for at least five years on the value of the oil it recovers. And finally, it would also involve whichever China firm that took over West Qurna 1 receiving a 30 per cent discount to the lowest mean one-year average market price at the key gas pricing hubs for the gas it captures, as this is the deal that was already agreed for CPECC on West Qurna 1, according to the Iraq source.
By Simon Watkins for Oilprice.com
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