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China reaps benefits of Iraq war

Perspiration staining their orange jumpsuits, the Chinese engineers and laborers form Al-Waha Oil Co. work alongside their Iraqi counterparts under a sweltering sun.
/ Source: The Associated Press

Perspiration staining their orange jumpsuits, the Chinese engineers and laborers form Al-Waha Oil Co. work alongside their Iraqi counterparts under a sweltering sun readying an expanse of arid land southeast of Baghdad for infrastructure to extract and carry the viscous liquid on which Iraq's future lies: oil.

A red banner hangs at the entrance of the office of the company — the Iraqi affiliate of China's state-owned China National Petroleum Corp. — its Chinese characters promising anyone who can decipher them: "We will try our best to make this project a success."

The scene, an increasingly common one in the new postwar Iraq, is more than a reflection of how the country home to the world's third largest proven reserves of crude is pushing to boost its output. It's also a testament to the lengths to which China will go to secure the oil it sorely needs to fuel its galloping economy as its own crude supplies fall far short of demand.

"For China, oil security is largely about avoiding disruption to supplies and cushioning the effects of dramatic fluctuations in oil prices," said Barclays Capital oil analyst Amrita Sen. "Iraq has become an obvious target to secure the barrels of oil for future consumption."

From among the most outspoken of critics of the 2003 U.S.-led invasion to topple Saddam Hussein, China has emerged as one of the biggest economic beneficiaries of the war, snagging five lucrative deals. While Western firms were largely subdued in their interest in Iraq's recent oil auctions, China snapped up three contracts, shrugging off the security risks and the country's political instability for the promise of oil.

The quest for crude has left a heavy Chinese footprint in a number of countries where others have shied away, whether because of violence, human rights violations or sanctions.

In the broader Middle East, China has helped develop and expand the oil industry in Sudan, a nation whose president is under international indictment for war crimes. It has also signed deals in Iran, where the hardline government is facing a potential fourth round of U.N. sanctions over its controversial nuclear program. Iran has denied claims by the U.S. and others that its nuclear efforts are geared to weapons production.

The result of its efforts is that about half of China's oil comes from the region. It has ousted the United States as OPEC kingpin Saudi Arabia's top oil customer. Saudi Arabia has also set up a joint venture refinery in China.

Iraq, however, has emerged as one of Beijing's best hopes for oil in a world where cheap, reliable sources of new crude are increasingly harder to obtain. While dealing with Iran carries political baggage for China, Iraq is a more calculated risk.

Sanctions in place against Iran sharply limit investments in the country and have largely precluded Western oil majors from aggressively following up on projects there. A potential new sanctions round before the United Nations could expand those restrictions. Even so, Iran is China's third largest supplier.

"Iraq is extremely important for Chinese companies' growth strategy, especially given that Iran is likely to face much of a standstill for years," said IHS Global Insight's Mideast oil analyst, Samuel Ciszuk.

The country, whose oil sector has been battered by years of neglect, war, sabotage and under-investment, produces only about 2.4 million barrels per day — well below its pre-2003 invasion production levels.

But contracts awarded during two oil and gas field auctions over the past year are expected to raise output to as much as 12 million barrels per day within seven years, according to Iraqi officials. Analysts say those estimates are too ambitious.

Either way, production will rise, and China will play a role and stands to benefit.

While the 20-year contracts mainly gave companies a fixed price for every barrel they produce, they also carry the option of payment in crude. That affords the firms a long-term and stable supply of oil. The contracts can also be extended for five more years.

China's energy needs are as obvious as they are challenging. While the world struggled with its worst recession in over six decades, China's economy expanded by 8.7 percent in 2009. The International Monetary Fund forecasts growth of 10 percent this year.

A recent report by Platts, the energy information arm of McGraw-Hill Cos, found that China's demand for oil hit 8.43 million barrels per day in April, a 12.7 percent increase over April 2009 levels. Current demand is more than twice China's domestic production.

Of a dozen deals the Iraqi central government awarded since 2003, four went to China. The autonomous, oil-rich Kurdish region in the north independently signed nearly two dozen oil deals with foreign companies, one of them with China.

The Chinese oilmen with Al-Waha, sweating under the sweltering Iraqi sun while drilling wells and preparing the ground to build other infrastructure in the relatively peaceful Wasit province, are among the first signs of that new cooperation.

The company started exploring the southeast of Baghdad near the Iranian border last year, but ran into trouble with farmers there after it destroyed some crops.

Iraqi officials stepped in quickly, meeting with local tribal leaders to calm tensions.

The incident showed Iraq's determination to not upset the international oil companies operating in the country. It also speaks of the growing presence of Chinese wildcatters in an industry once dominated by western oil majors. Those companies, however, failed to bid as aggressively as many anticipated — focusing their sights instead on fields in relatively stable regions where the oil was also easy to extract.

The Chinese had no such qualms.

Officials have hired 350 people from the area to protect the oil infrastructure, and dozens more will provide support services.

"I think the political and social environment is good, said Miao Youliang the Chinese project manager at al-Waha. "The security was not so bad as we imagined."