Sinochem exits Iraq oilfield deal

Rival CNOOC remains as head of group working at Nassiriyah

A Chinese state-controlled petroleum company has quit an Iraqi oil project, voting with its feet against the scant returns on investment offered by Baghdad. Despite the undoubted importance of Iraq's oil resources to China, which already imports significant volumes of Iraqi crude to fuel its economy, Sinochem International has withdrawn from a consortium led by China National Offshore Oil Corporation (CNOOC) to develop the Missan oilfield complex in the south-east of Iraq.

"Sinochem was not interested in the deal," Abdul al Ameedi, the director of the licensing and contracting office of the Iraqi oil ministry, told Reuters. The withdrawal from one of a dozen big oil developments, on which Baghdad was pinning its hopes of more than quadrupling Iraq's oil production capacity by 2017, is the second this year. Iraq, which pumps 2.4 million barrels per day (bpd) of crude, has set 12 billion bpd as its target production capacity, rivalling that of Saudi Arabia, as it seeks to rebuild its shattered economy.

But in late February, Iraq broke off talks with a Japanese consortium led by Nippon Oil, which Baghdad had chosen over rival groups led by Italy's Eni and Spain's Repsol to develop the Nassiriyah oilfield. During the failed negotiations, the Japanese companies had indicated concerns over how Baghdad would reimburse their costs for field development and handling workforce security and safety. In general, Chinese companies bidding on foreign oil projects have been more tolerant of tight contractual terms than western companies, because of the strategic energy agenda of their controlling shareholder, Beijing.

The Chinese government, however, also encourages the various state petroleum enterprises to compete with each other for international investment, requiring that they pay attention to the bottom line. Sinochem may have baulked at the decision by the larger CNOOC to accept Baghdad's offer of a remuneration fee of US$2.30 (Dh8.44) a barrel for boosting output from the three Missan oilfields to a combined 450,000 bpd from about 100,000 bpd.

The Iraqi oil ministry had rejected the CNOOC-led consortium's initial bid to develop the fields for remuneration of $21.40 a barrel, and a follow-up offer to drop the fee to $18.09 a barrel. Missan contains an estimated 2.5 billion barrels of crude, and Nassiriyah an addition 5 billion barrels. In total, that represents 6.5 per cent of Iraq's 115 billion barrels of crude oil reserves, the world's third largest.

Sinochem has lined up several other investment opportunities worldwide. It is reportedly preparing to bid on oil and gas exploration licences in Colombia and for at least part of the 40 per cent stake in a Brazilian offshore oilfield for which Norway's Statoil is seeking offers. In Iraq, the Turkish Petroleum Corporation will take Sinochem's place in the Missan consortium. The Turkish government-owned oil company also is part of a group led by Russia's Gazprom that is developing Iraq's Badra oilfield.

Baghdad, which is looking at future gas exports to Europe through Turkey, has recently sought to bolster relations with its northern neighbour. [e-mail]