China hails $3bln oil deal with Iraq

August 28, 2008
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, BEIJING, August 28  – China hailed Thursday a three-billion-dollar oil agreement with Iraq as a win for both nations, as it sought to reassure the rest of the world that it should not be concerned by the deal.

Becoming the first foreign firm to enter such an agreement since the end of Saddam Hussein\’s regime, state-owned China National Petroleum Corp. (CNPC) this week won the right to develop the Al-Ahdab oil field south of Baghdad.

"The cooperation between the relevant oil companies from China and Iraq is mutually beneficial," foreign ministry spokesman Qin Gang told reporters after the Iraqi embassy in Beijing said the deal had been reached.

"It will be conducive to the economic development of Iraq, and will meet China\’s demands in the oil field as well, and is also conducted according to market rules and will not harm any interests of any third parties."

The agreement, reached during a visit to China by Iraqi Oil Minister Hussain al-Shahristani, revives a 1997 contract that granted China exploration rights to the Al-Ahdab oil field in the province of Wassit.

After China won the rights to the al-Ahdab field in a deal then valued at 700 million dollars over 23 years, activities were suspended due to UN sanctions and security issues following the US-led war in 2003 that toppled Saddam Hussein.

Planned oil production was then 90,000 barrels per day (bpd), and CNPC had been expected to win the new exploration rights.

The Iraqi embassy statement said the new deal would be worth three billion dollars, but other details were sketchy.

For China, the deal is another potential success in its sometimes controversial global quest for oil that has seen it sign a flurry of contracts in Africa and the Middle East in recent years.

China\’s demand for oil has grown markedly in recent years, as its economy has grown at double-digit pace and its population of more than 1.3 billion people has grown richer.

"This is certainly a breakthrough," said Liu Youcheng, a Beijing-based analyst with Hongyuan Securities.

"With oil prices surging, the global contest for oil resources is becoming ever fiercer. Many governments have realised this and have become unwilling to sell their oil resources cheaply to the multinationals."

The Al-Ahdab oil field deal is a service contract, which gives oil companies a flat fee for their efforts rather than a share of the profits from the exploitation of oil resources.

In this light, the deal may not be as attractive to China as it could have been.

However China, a net importer of oil since the 1990s, is so desperate for energy that it is prepared to make significant concessions to secure oil supplies, according to Hongyan Securities\’ Liu.

"Since it has become more and more difficult to obtain equity and exploit rights in oil fields, it\’s good for China to participate in the development through a service contract. It diversifies our oil sources and helps guarantee China\’s oil supplies," he said.

At the end of June, Iraq\’s oil ministry threw open six oilfields and two gas fields for international bidding by 41 companies.

The deals, which are service contracts only, pave the way for energy firms based abroad to return to Iraq 36 years after Saddam Hussein threw them out.

Iraq wants to ramp up output by 500,000 barrels per day from the current average production of 2.5 million bpd, about equal to the amount being pumped before the US-led invasion of March 2003.

CNPC declined comment Thursday on the revived deal.

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