Iraq is at a crucial tipping point in its history. The past few months especially have seen a surge in activity from Western firms looking to re-enter the country’s oil and gas sector following a prolonged hiatus that had allowed the previous build-up of influence of China and Russia to accelerate and expand. Both sides – West and East – see Iraq as a crucial part of their global strategic plans, with no room for the other in this zero-sum game. As exclusively revealed to OilPrice.com by a very high-ranking official from the Kremlin: “By keeping the West out of energy deals in Iraq, [Russia and China will see] the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” On the other side of the equation, the U.S. and its allies believe removing the influence of China and Russia in Iraq will critically diminish their ability to project power elsewhere in the region and around the world. Following the recent elections in Iraq, no new prime minister has yet been chosen, so it is little wonder Beijing has been holding talks with Baghdad in the past few days to discuss deeper cooperation.
Specifically, according to local news sources, China outlined priorities under its fifteenth ‘Five-Year Plan’ and expressed interest in strengthening multilateral cooperation with Iraq. Talks covered expanding cooperation under Beijing’s ‘Belt and Road Initiative’ (BRI) and Chinese proposals for deeper and broader initiatives in governance, development and security. On Iraq’s side, Foreign Minister Fuad Hussein described China as a pivotal strategic partner and the largest market for Iraqi oil. It was what was not in the notes that was the interesting bit, but OilPrice.com was exclusively told by two sources who work very closely with Iraq’s Oil Ministry with close knowledge of the talks. “It was stressed that whoever became the new leader [prime minister], Iraq would continue to welcome Chinese investment into the country across all sectors, and also specifically into the oil and gas sectors,” said one of the Iraq sources. “Such developments would continue the ideas contained in the two previous agreements between Iraq and China that are still operational, although the parameters of those that deal with any dual use [for military and civilian purposes] trade or dual use projects, may have to be discussed again in terms of how they are applied,” he said. “In reality, it looked like we [Iraq] are trying to keep China onside for any eventuality that might happen, as we don’t know yet who the new leader will be, but at the same time we don’t want to do anything to upset the Americans either,” he added.
The two previous agreements in question were negotiated during the period in which the U.S. and its allies were nearing or at their weakest point in Iraq since the allied removal of then-President Saddam Hussein in 2003. This saw increasingly active antagonism towards the Western military forces that remained, spearheaded by attacks from Iranian-backed military proxies in Iraq that continued even after the U.S.’s official ‘end of combat mission’ in Iraq in December 2023. Against this backdrop, the groundwork for all future developments by China in Iraq was laid out in the wide-ranging ‘Oil for Reconstruction and Investment’ agreement signed between China and Iraq in 2019. The basic template for this agreement – which includes priority on new field contracts for Chinese firms and substantial discounts for them on oil and gas recovered – was the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ first revealed anywhere in the world in my 3 September 2019 article on the subject, and analysed in my latest book on the new global oil market order.
The 2019 China-Iraq deal was then substantially broadened and deepened into the ‘Iraq-China Framework Agreement’ of 2021. Part of this featured even bigger discounts given to Chinese firms on oil and gas discovered in Iraq (up to 30%, depending on the field). However, crucially for China’s bigger territorial ambitions in Iraq and the Middle East, it also gave its firms developing such fields wide-ranging rights to station significant security forces in and around these areas and to engage in a massive build-out of accompanying infrastructure. This includes road and rail networks connected to bigger infrastructure hubs with links across the Middle East, the right for the Chinese military to use selected Iraqi military and civilian seaports and airports, and permission to construct further businesses, schools and other support facilities tangential to China’s ongoing interest in the region.
Typical of the underlying idea and structure behind these cooperation agreements were three far-reaching infrastructure deals that heavily involved China in the heartland of Iraq. One was Baghdad’s approval of nearly IQD1 trillion (USD700 million) for infrastructure projects in the city of Al-Zubair in the southern Iraq oil hub of Basra. Judging from comments made by the city’s Governor at the time, Abbas Al-Saadi, China’s heavy involvement in Phase 2 of the projects was part of the broad-based ‘oil-for-reconstruction and investment’ agreement signed by Baghdad and Beijing in September 2019. This agreement allowed Chinese firms to invest in infrastructure projects in Iraq in exchange for oil. The Al-Zubair announcement followed shortly after the awarding by Baghdad of another major contract to another Chinese company to build a civilian airport to replace the military base in the capital of the southern oil rich Dhi Qar governorate. The Dhi Qar region includes two of Iraq’s potentially biggest oil fields – Gharraf and Nassiriya. This airport project, it announced, would include the construction of multiple cargo buildings and roads linking the airport to the city’s town centre and separately to other key oil areas in southern Iraq. This, in turn, followed yet another deal, involving Chinese companies building out Al-Sadr City, located near Baghdad, at a cost of between USD7-8 billion, also within the framework of the 2019 ‘oil-for-reconstruction and investment’ agreement.
Happily for China, much of this investment to secure land in Iraq vital to its key commercial and military strategy underlying its BRI project came indirectly and directly from the dramatically cut-price oil it was able to extract from Iraq in the first place. This, on top of those strategic advantages, was what had made the country so appealing to Beijing (and to Moscow, and Washington, and London, and Paris). As also analysed in depth in my latest book on the new global oil market order, Iraq remains a huge repository of oil at the world’s joint lowest average lifting cost of $2-4 per barrel, together with large quantities of associated and non-associated gas – with both its oil and gas reserves still enormously underestimated. Another strategic advantage, is that it occupies the geographical heart of the region, lying west of Iran, north of Saudi Arabia and Kuwait, east of Jordan and Syria (with its long Mediterranean coastline offering access to further critical sea routes), and south of Turkey (affording an entry into the European continent). And a final one is that Iraq is a key member of the ‘Shia Crescent of Power’ geopolitical arc that stretches from Iran through Iraq, Syria, and Lebanon, where Shia communities and Iran-backed groups exert significant influence over regional politics, economics, and security.
Beijing has done exceptionally well in exploiting these agreements with Baghdad, with some 34% of Iraq's proven reserves and two-thirds of current production now managed by Chinese companies. These combined have direct shares in around 24 billion barrels of reserves and are responsible for production of around 3 million barrels per day. Crucially, though, the past few months have seen Western firms take and consolidate their control over critical projects in Iraq that are vital to its further development as an oil and gas resource. France’s TotalEnergies holds the key to its ability to dramatically increase its oil output via the crucial Common Seawater Supply Project, as detailed in full in my latest book on the new global oil market order. And there are three other major projects included in its US$27 billion deal with Baghdad. The UK’s BP is now in a strategically key position to act as a conduit for change in Iraq’s north through its US$25 billion five-field deal recently formally activated. And there have been similar announcements from the U.S.’s Chevron and ExxonMobil, among others. Tellingly as to the direction Iraq may be headed if current Prime Minister Mohammed Shia’ al?Sudani emerges again as leader following the ongoing post-election haggling, Iraq recently sent out special invitations to U.S. firms to bid for its huge West Qurna 2 at the expense of forced-out Russian giant Lukoil. Consequently, China may find that any new cooperation deal with Iraq does not in fact continue every element of the 2019 and 2021 versions, if Sudani regains power. If he does not, then the game will be firmly back on for Beijing.
By Simon Watkins for Oilprice.com