Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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• Iraq’s Common Seawater Supply Project is essential to unlocking massive oil output gains.
• CNPC-linked CPECC has secured a major $2.5B contract tied to the CSSP, raising questions about China’s long-term takeover ambitions.
• Chinese firms already manage a third of Iraq’s reserves and two-thirds of its production

The Common Seawater Supply Project (CSSP) is the key to unlock massive gains in oil output from Iraq. Consequently, control over the project is pivotal to gaining control over the country’s enormous oil and gas resources. It is little wonder, then, that the battle between firms from the West and the East for the principal development spot in the CSSP has been intense over the years. It began in earnest with the U.S.’s ExxonMobil taking the lead role, with China National Petroleum Corporation (CNPC) in a secondary position. When the U.S. firm felt compelled to withdraw for reasons outlined below, the Chinese firm stepped into the lead role. It made little progress, whereupon after a while France’s TotalEnergies was given the key development role in the CSSP as part of a US$27 billion four-pronged deal broadly aimed at increasing Iraq’s oil and gas output. Last week, though, China Petroleum Engineering & Construction Corporation (CPECC) announced that its wholly-owned subsidiary, China Petroleum Pipeline Engineering Corporation (CPPE), had been awarded a US$2.524 billion engineering, procurement, and construction contract by Iraq’s Basra Oil Company for the Basra Province Seawater Transmission Pipeline Project (BSPP). This includes the building of pipelines to deliver seawater from treatment facilities to various oilfields across Basra and the overground pipeline infrastructure. It is highly apposite to note here that CPECC is a subsidiary of the CNPC – the company that was pushed out of the broader CSSP by TotalEnergies. So, does CNPC’s presence in the BSPP – one part of the bigger CSSP – mark a new play to take over the CSSP once again from the West’s point-firm on the job when the timing is right for Beijing?

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To East and West alike, Iraq is perhaps the biggest prize in the Middle East. One reason is its huge oil and gas reserves. Officially, according to the Energy Information Administration, the country holds 145 billion barrels of proved crude oil reserves (nearly 18 percent of the Middle East’s total, and the fifth biggest on the planet). Unofficially, it is extremely likely that it holds much more oil than this, as analysed in full in my latest book on the new global oil market order. In October 2010, Iraq’s Oil Ministry stated that Iraq’s undiscovered resources amounted to around 215 billion barrels. However, even this figure did not include the parts of northern Iraq in the semi-autonomous region of Kurdistan. As highlighted by the International Energy Agency (IEA), most of these had been drilled during a period before the 1970s began when technical limits and low oil prices gave a narrower definition of what constituted a commercially successful well than would be the case now. Overall, the IEA projected that the level of ultimately recoverable resources across all of Iraq (including the Kurdistan region) was around 246 billion barrels (crude and natural gas liquids). As an adjunct positive to this, the average lifting price of Iraqi crude oil is the equal lowest in the world (alongside that of Iran and Saudi Arabia) at US$1-2 per barrel.

Another broader reason why Iraq is so important to both sides in the superpower struggle is that its geographical location puts it square in the centre of routes from the East to the West, with independent borders running into Syria (and the Mediterranean Sea) to the west and Turkey to the north. This makes it vital to China’s multi-generational power-grab project ‘The Belt and Road Initiative’ (BRI), which includes a corollary build-out of infrastructure and personnel that could be used to a dual civilian and military purpose. Oil and gas development contracts also carry with them the legal right to fully secure the development sites through whatever means the developer firms think necessary, including stationing unlimited numbers of security personnel in and around the immediate sites. Such opportunities are part of the far-reaching ‘Oil for Reconstruction and Investment’ agreement signed between Baghdad and Beijing in September 2019, which allowed Chinese firms to invest in infrastructure projects in Iraq in exchange for oil, and then all-encompassing ‘Iraq-China Framework Agreement’ of 2021, also fully detailed in my latest book. These oil, commercial and geopolitical aspirations in which Iraq plays a key part for China are evidenced in the plans to link Iraq’s US$17 billion Strategic Development Road (SDR) programme directly into China’s BRI. Broadly, Iraq’s SDR will create a seamless transport corridor running from the flagship deepwater Al Faw Grand Port (due to be finished with Chinese help this year) in its key oil export hub of Basra in the Persian Gulf, all the way through several of its biggest oil and gas fields, and finally into Fishkabur on the Iraqi border with Turkey. From there it will extend via road and railway links into the rest of Europe.

The CSSP is the key to Iraq becoming the world’s top crude oil producer. The project involves taking and treating seawater from the Persian Gulf and then transporting it via pipe­lines to oil production facilities to maintain pressure in oil reservoirs to optimise the longevity and output of fields. In 2012, as also examined in full in my latest book on the new global oil market order, then-Iraq Prime Minister Nouri al-Maliki received a confidential report (the ‘Integrated National Energy Strategy’) showing exactly how Iraq could increase its oil output from just over 3 million bpd at that point to a plateau of 13 million bpd in the ‘High Production’ scenario by 2017. The ‘Medium Production’ scenario plotted a course to 9 million bpd plateau by 2020, while the ‘Low Production’ scenario planned for 6 million bpd by 2025. To reach and then sustain the higher levels of Iraq’s increased oil production profiles, Iraq would need water injection equating to around 2% of the combined average flows of the Tigris and Euphrates rivers or 6% of their combined flow during the low season. It would also need to ensure that the connecting infrastructure from wellheads to the trunk pipelines was built to a well-organised and regimented plan with clear financial expenditure linked to precise project objectives.

The U.S.’s ExxonMobil was eminently capable of delivering all of this, but was constrained in its attempts to do so by the pervasive culture of corruption in elements of Iraq’s oil industry, leaving the way open for CNPC to increase its role in the project. However, not possessing at that point the technology, know-how, or experience of the U.S. oil and gas giant, the Chinese firm made little progress, until the project was handed to TotalEnergies. Here again, the Iraq authorities attempted to impose the same dubious practices on the French firm as it had tried to do on ExxonMobil. This was most notable in 2022 when the firm refused to go ahead with the deal when faced with the prospect that Iraq would resuscitate its rightly-buried Iraqi National Oil Company (INOC) -- widely regarded as one of the most corrupt organisations to operate in any field anywhere in the world ever. Following this, the French firm appears to have established a solid position from which to move forward on its four-tier project. If Iraq manages to keep some of its questionable operating practices in check for the duration of TotalEnergies’ four projects, then it may yet see a lot more of its oil production potential realised.

Having said that, China – and specifically CNPC and CPECC – have a long history of removing Western firms from lead development roles in major projects. Not only did they remove ExxonMobil from the CSSP, but they did the same to it from Iraq’s huge West Qurna 1 oil field development as well. There are multiple other instances of this replacement strategy by China across Iraq, which have broadly been founded on two pillars, as also analysed in in my latest book on the new global oil market order. First, is politically and economically leveraging Beijing’s huge presence across the country. Currently, around 34% of Iraq’s proven reserves and two-thirds of current production is managed by Chinese companies. Combined, they have direct shares in around 24 billion barrels of reserves and are responsible for production of around 3.0 million barrels per day (bpd). And Beijing does not have the same qualms about indulging Iraq’s ‘commission culture’ in the awarding of contracts as the West. Second, is building up the number of anodyne-sounding ‘contract-only’ awards given to Chinese firms on major oil field developments. These include contracts such as drilling-only, field maintenance-only, parts replacement-only, storage-only, technology-only, and so on, and do not attract the attention of the West so much as headline-grabbing major field awards. The effect of these on any given site is to crowd out the lead developer. Indeed, this strategy was notably employed by CNPC and CPECC – the two firms now working on the CSSP under TotalEnergies – to remove ExxonMobil from West Qurna 1.

By Simon Watkins for Oilprice.com

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