Global Policy Forum

Turning Eastward for Oil Contracts

September 27, 2006


Iraqi Oil Minister Hussein Shahristani is looking to discuss oil projects with China, Japan and Australia -- and particularly wants to talk with the Chinese about honoring contracts from the Saddam Hussein era. This indicates a change in Iraqi energy development that could shut out U.S. oil companies.


The Iraqi Oil Ministry announced Sept. 27 that Iraqi Oil Minister Hussein Shahristani will soon visit China, Japan and Australia to discuss oil development and export projects, specifically noting that he will talk with the Chinese about honoring Saddam Hussein-era contracts. The announcement could change the face of energy development in the country and leave U.S. firms completely out in the cold.

Though nearly any U.S. energy firm -- and certainly the U.S. supermajors -- have far better technology and technical performance records than the Chinese state oil majors, that does not mean the Americans enjoy a huge advantage in Iraq. U.S. firms, while salivating at the chance to drill in the Middle Eastern state, face critical constraints. For issues of insurance, legal vulnerability and employee safety, no U.S. firm will go into Iraq until Baghdad boasts an internationally acceptable, domestically chosen, physically secure government. That does not exactly appear to be inevitable, and certainly not imminent.

And so long as that is the case, the Chinese have the edge, because Beijing is willing to send its firms into far more turbulent waters. For example, while U.S. energy firms refuse to do business in places such as Syria and Sudan, Chinese firms happily work there. Firms from other states -- Indonesia, India, Russia and Malaysia -- might also be willing to play the Iraqi game if approached by the Oil Ministry.

China's Hussein-era contracts are not exactly in places where angels would choose to tread as of late -- China National Petroleum Corp.'s biggest contract was for the Ahdab field, deep in the heart of Shiite country in Iraq's south, where much of the violence is occurring -- but there is nothing to say that Chinese firms would be limited to contracts signed a decade ago.

Instead, it would make far more sense for the Iraqis to grant the Chinese rights to work in the unpopulated deserts west of Basra. Unlike the country's northern oil region, violence in these areas is nonexistent (it helps that there are no people there), and security is relatively easy to achieve. There also are many already discovered fields in the area that could quickly be brought on line. Such efforts could have an immediate impact on exports and, by extension, on Iraqi income.

The Chinese -- or anyone else brave enough to jump into the Iraqi pool -- can drill and have the space to set up huge security perimeters in the open desert. Building and protecting a pipeline would be a different story but, in the area immediately west of Basra, the pipeline infrastructure is already in place and has not (yet) been a target of insurgent attacks. Also, while the Chinese certainly would not be immune to insurgent attacks, they benefit from one critical characteristic: They are not Americans. The "only" elements that would attack the Chinese are those who seek not a specific domestic political goal but simply the general destabilization of the country.

All that is required is sufficient financial desperation on the Iraqi government's part to force a political decision to annoy the Americans and allow the Chinese in. With the country's stability in such a dangerous flux, Shahristani's upcoming trip indicates Iraq could be closer to such desperation than anyone might have thought a few weeks ago.

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