Why China’s Growing Appetite For Iraqi Oil Is Good For America, And The World

by Michael Diaz Jr. - Diaz Reus International Law Firm
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For the mass media chorus, postwar Iraq has come to resemble an emblem of American failure. Spurts of violence seem to be embedded into the fabric of everyday life, plaguing the country with disturbing regularity. Meanwhile, sectarian strife has continued to worsen. Inflamed by the civil war in neighboring Syria, unresolved sectarian tensions have sent violence in Iraq to its highest since the U.S. troop withdrawal nearly two years ago. To make matters worse, there is a prevailing sentiment – particularly in the West – that China has become the “true victor” in the Iraq War, benefitting from lucrative oil deals despite having taken no part in the fighting.  But be it fear or envy, this grievance is largely unfounded.

Despite these challenges, Iraq has established itself as a top oil producer. Today, China buys almost half of Iraq’s oil at nearly 1.5 million barrels a day.  But this is not enough to quell China’s insatiable energy demands. China National Petroleum Corporation (CNPC), China’s state-owned oil company, is rapidly expanding the country’s share in the Iraqi oil market, pouring over US $2 billion a year and hundreds of workers into Iraq. Since late 2012, CNPC has been seeking to divest Exxon Mobil of its sixty-percent stake in the West Qurna I oil field, one of Iraq’s largest and most lucrative. China is also making aggressive moves to secure its holdings in light of flaring conflict between the Iraqi government and the semiautonomous Kurdish region, which has entered into separate agreements of dubious legality with other foreign oil companies at more generous terms.  Quickly capitalizing on the lifting of international sanctions and renewed access to vast oil reserves, China has become the biggest beneficiary of Iraq’s post-Saddam oil boom.

Symbolism aside, however, Chinese business success in postwar Iraq is not necessarily at odds with U.S. strategic interests. Success in Iraq reduces China’s traditional energy reliance on Iran. As sanctions and potential for instability make Iran an increasingly unattractive source for oil, Beijing’s success in tapping Iraq’s oil reserves makes China more likely to condone – and to enforce – international sanctions against Iran for its nuclear program. At the same time, through its willingness to invest in the high-risk Iraqi market and to purchase large quantities of Iraq’s oil, China helps maintain a stable global oil supply, which keeps petroleum prices in check. In fact, without China’s active involvement in Iraq, the West would not have been able to enact sanctions on Iran’s oil exports without risking the prospect of severe global disruptions in oil supply. Further, while the present situation in Iraq may not be ideal, allowing the country’s oil infrastructure to decay and atrophy without Chinese investment would be crippling for an already fledgling, heavily oil-dependent economy in a volatile region. The resulting economic chaos and social instability would only further erode U.S. interests in that part of the world and beyond.

But above all, success in Iraq reduces China’s demand for oil in more amenable markets, including Venezuela, Russia, and Angola. This benefits the U.S. and its allies, enabling them to pay lower prices for oil and become more strategically entrenched in these countries in the relative absence of Chinese competition. Indeed, China has outcompeted others in Iraq largely due to Baghdad’s tight restrictions on drilling rights. These restrictions reduce profit margins and lessen Iraq’s attractiveness to U.S. and other Western firms. China, on the other hand, is more concerned about securing energy supply to fuel its rapid development than with corporate profit. As such, it has shown a willingness to play by Baghdad’s rules and to accept lower profits to win contracts – primarily because China’s state-owned firms do not have to answer to any private shareholders. In its willingness to accept service contracts at a very low per-barrel fee without the promise of rights to future oil reserves, CNPC has carved out a near-surmountable competitive advantage over U.S. and other Western oil companies in Iraq.

Ultimately, the “true victor” stereotype proves to be nothing more than a politically expedient misnomer. Global energy supply is not a zero-sum game. Although China opposed the U.S.-led war, it has now largely assumed the risk in helping to rebuild war-torn Iraq through its heavy oil investments. China – not the U.S. – is now the main stakeholder in Iraq’s future.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Diaz Jr. - Diaz Reus International Law Firm | Attorney Advertising

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