As Exxon Seeks Iraq Exit, China Deepens Ties

Exxon Mobil's departure from Iraq is the clearest sign yet that Western oil companies are finally losing patience with the country, even as China continues to expand its presence there. The US supermajor confirmed that it has filed an arbitration case with the International Chamber of Commerce against Iraq's state-run Basrah Oil Co. (BOC) about the proposed sale of its 32.7% operated stake in the West Qurna-1 oil field. Exxon had wanted to sell its stake to CNPC/PetroChina and China National Offshore Oil Corp. (CNOOC) but Baghdad has blocked a deal so far. It said Indonesia's Pertamina -- which already owns a 10% stake in the 500,000 barrel per day West Qurna-1 field -- has since exercised its preferential right to buy the interest that would have been sold to CNOOC. The other stakeholders in West Qurna-1 are CNPC/Petrochina (32.7%), Itochu (19.6%) and Iraq's state-owned Oil Exploration Co. (5%). Iraqi sources say Oil Minister Ihsan Ismael has been trying to persuade another US company to replace Exxon. Prime Minister Mustafa al-Kadhimi essentially confirmed that on Monday, with Reuters reporting that he told reporters in Washington that Iraq would only allow Exxon to sell its stake to another US firm. Al-Kadhimi is hoping to secure fresh investment during his visit to the US. Only China Interested Chevron had been seen as the likeliest US candidate to replace Exxon, after it signed a memorandum of understanding (MOU) with Iraq during al-Kadhimi’s previous visit to Washington a year ago (IOD Aug.17'20). But all signs indicate that Iraq has failed to convince the Western majors of the country's merits, some 13 years after they flocked there to gain access to some of the world’s most abundant and low-cost oil reserves. "No Western company is interested to come and invest its money in Iraq these days, because it’s a bad environment for investors ... Just the Chinese companies are interested," says a former manager at Basrah Oil Co. The most recent evidence of that came just two weeks ago, when Iraq awarded a contract to build the 300,000 b/d Fao export refinery in southern Iraq to China National Chemical Engineering Co. Ismael hailed the agreement as the greatest foreign investment in the country’s refining and petrochemical sector. According to a senior Iraqi oil official and a Chinese source, the project has an estimated cost of at least $10 billion, which will be fully funded by the Chinese government. Not Giving Up Hope Despite Exxon's planned exit from West Qurna-1, the government has not given up hope of securing western investment in its upstream oil and gas sector. On Saturday the cabinet approved the oil ministry’s plan to finalize a deal with TotalEnergies that covers three big oil and gas projects. Ismael said in June that he hoped to sign a contract with the French major "in the near future" (IOD Jun.21'21). Meanwhile, a senior US administration official suggested on Monday that a long-delayed gas capture project in southern Iraq involving Baker Hughes would be finalized this fall -- three years after it was awarded. But as international oil companies (IOCs) become ever-more selective in their upstream investments and target "advantaged" barrels, it is becoming harder for them to accept the tough conditions in Iraq, which range from corruption, stifling red tape and razor-thin margins to its high-carbon oil. The MOU that Chevron signed last year has not yet led to anything of substance, and Ismael told parliament in early July that BP and Lukoil are looking to leave Iraq, too (EC Jul.23'21). The former BOC official says there is little chance now of Iraq offering these companies the kind of deal that would satisfy them, adding that Baghdad fears Exxon's departure will encourage others to leave. "The government has no authority to change the terms of the contract, especially before the [parliamentary] elections [in October] ... At this time, it is very difficult," he said. Different Priorities None of the things that worry IOCs appear to be deterring China, which dominates upstream work in Iraq. China's state-controlled companies weigh other factors in their decision-making, including security of oil supply and opportunities for affiliated contractors. Iraq was China's third largest supplier of crude oil in the first six months of this year, and the Iraqi refinery that Beijing has decided to fund will export all of its products, the Chinese source notes. Meanwhile, China's Sinopec won a contract in April to develop the 4.5 trillion cubic foot Mansuriyah gas field -- potentially Iraq's biggest upstream contract in years -- after submitting the winning bid, according to the oil ministry. Chinese sources said at the time that Sinopec wanted to use its own service teams -- like other Chinese operators in Iraq, such as CNPC/Petrochina -- which should boost its profits (WGI Apr.28'21). Simon Martelli, London