China Becomes Iraq’s Biggest Oil Customer

June 14, 2013
By Vlad Karpel

While the United States spends billions of dollars a year to maintain its Fifth Fleet and air forces in Iraq, China, on the other hand, earns from Iraq’s oil reserves and obtains vast supply of oil to power up its industries back home.

Today, China has already earned the title as Iraq’s biggest oil customer. China buys almost half the total number of oil barrels produced from Iraq, nearly 1.5 million barrels a day and continues its thrusts to obtain a greater share in the market by bidding for a stake that is currently owned by Exxon Mobil in one of Iraq’s largest oil fields.

Before the American-led invasion in 2003, Iraq was barely profiting from its oil industry due to the imposition of international sanctions in the world market against Saddam Hussein’s oppressive regime. After the fall of Saddam Hussein, such international sanctions were immediately lifted and Iraq’s vast and promising oil fields were catapulted to the international spotlight.

While countries such as the US and EU member states saw Iraq’s transition as an opportunity to gain a strategic military location and a political partner in the Arab world, China simply saw Iraq as a favorable economic partner. Not for long, China seized this huge opportunity and started sending out state-owned companies to tap into Iraq’s oil reserves. Since then, China has invested at least $2 billion a year and deployed hundreds of skilled workers into Iraq.

One thing remarkable about Chinese state-owned companies is their willingness to play by the new Iraqi government’s rules and to accept incredibly lower profits to close contracts. Chinese companies did not complain even if they were subject to stringent terms in Iraq’s oil contracts and even if operations only yield very minimal profits. This is because China is more interested in fueling its economy with the energy it needs than to accumulate profits for its oil companies. How does China do this? Simple. The companies it sends out to Iraq are state-owned ones and as such, are not geared towards increasing shareholders’ wealth (i.e. paying dividends and ensuring high bottom lines). After all, these companies were essentially sent by the Chinese government as its arms in ensuring sufficient supply of energy to satisfy the needs of its increasingly energy-hungry populace.

This communist agenda is what sets Chinese state-owned companies apart from profit-driven US corporations like Exxon Mobil. This same agenda has resulted in the former’s apparent advantage. While Western oil giants reject the strict terms of Iraq’s oil contracts, Chinese companies welcome them with open arms. This strategy has allowed them to easily and effectively penetrate the market.

“We lost out,” said Michael Makovsky, a former Defense Department official in the Bush administration who worked on Iraq oil policy. He stressed out that while it was the US that paved the way towards Iraq’s improving economy, it is China that benefits the most.

However, American energy experts posit that the unexpected turn of events is not necessarily unhealthy for United States’ interests. The increased Iraqi production, propelled by Chinese workers, has protected the world economy from a surge in oil prices that would have been brought by Western sanctions on Iranian oil exports. And with the boom in American domestic oil production in new shale fields surpassing all expectations over the last four years, dependence on Middle Eastern oil has declined, making access to the Iraqi fields less vital for the United States. Furthermore, the American energy experts also implicitly point out that, unlike the US, China is now more greatly dependent on Iraq for its energy demands which is a solid indication of economic vulnerability.

From Iraq’s perspectives, China’s aggressive thrusts turn out to be a win-win situation for them both.  While China needs energy, the Iraqi government needs the investment. It’s that simple. Right now, Iraq estimates that its oil fields, pipelines and refineries need $30 billion in annual investments to reach production targets that will make it one of the world’s premier energy powers for decades to come and China seems firm in keeping and improving the deal.

 For smarter trades subscribe to Tradespoon!

Comments Off on

Find Winning Trades
in Minutes

Tradespoon Tools make finding winning trades in minute as easy as 1-2-3.

Our simple 3 step approach has resulted in an average return of almost 20% per trade!

Start Free 7-Day Trial

Latest Tweets