China signs oil deal with Iraq

China National Petroleum Corporation signs US$3 billion deal to develop and operate Iraqi oil fields for 20 years.

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China National Petroleum Corporation (CNPC) has signed a US$3 billion (Dh11bn) agreement to develop and operate Iraq's al Ahdab oil field under a 20-year service contract. The massive deal, which was announced yesterday in Beijing, is the first major oil-development contract Iraq has signed with a foreign company since the 2003 ouster of its former dictator Saddam Hussein. It replaces a cancelled agreement between CNPC and Hussein's regime, but under very different terms from the original contract.

Hailed by both parties as a triumph of negotiation, the deal is expected to yield 11,000 barrels per day of additional Iraqi oil production by 2011. But analysts warn it is unlikely to prompt other oil companies to sign a series of smaller but similarly structured contracts that Iraq is offering, in the hope of rapidly increasing its oil production capacity as early as next year. The agreement with the state-owned Chinese oil company, as well as the other proposed short-term deals, would provide foreign participants with fees for services instead of a share of profits from oil production, as stipulated in CNPC's earlier contract.

Several large US and European oil companies, which Iraq's government had invited to participate in fee-for-service arrangements, are believed to be holding out for more lucrative production-sharing contracts. Baghdad has said it plans to offer those contracts up for bidding next year. Even Iraq's oil minister, Hussain al Shahristani, is expressing pessimism that any of the short-term deals will proceed.

"It seems more and more unlikely that these technical service contracts can be implemented now in such a short remaining time," he said. But the new deal with China adds significant uncertainty over whether Iraq will ever be willing to offer production-sharing contracts, reducing the lure of service contracts as a means for an international oil company to get its foot in the door. Apart from CNPC, "oil companies have proved unwilling to deploy instantly for low-margin work in such a high-risk environment", said Samuel Ciszuk, the Middle East energy analyst with the consulting firm Global Insight.

The prospect of more rewarding deals in the future has continued to diminish, with a growing political consensus in the Iraqi parliament towards continued nationalisation of the oil and gas industry, said Mr Ciszuk. "The result could be a lower-than-expected turnout at next year's licensing round, despite Iraq's vast [energy] potential," he said. Mr Ciszuk concluded that the deal with CNPC, which satisfies Beijing's overriding need to establish good relations with oil-producing countries to secure long-term access to oil supplies, "might damage the speed of Iraq's hoped-for production capacity increase severely".

* With Reuters @Email:tcarlisle@thenational.ae