China steps up presence in Iraq's oil, gas sector as US players stay on sidelines

In the geopolitical battle between Washington and Beijing over Iraq's oil and gas resources, China appears to be winning.

Despite Iraq's wealth of resources and ambitious production targets -- as well as strong encouragement from Washington to invest -- US companies remain deterred by high levels of risk and corruption, analysts and industry officials say, dealing a blow to the Washington's efforts to counter the influence of Iran in Baghdad and China's growing sphere of influence.

Iraqi Prime Minister Mohammed al-Sudani has visited the US twice in the last seven months and dispatched his oil minister stateside in September, seeking to drum up American capital, but the trips have been largely fruitless, generating just a handful of non-binding memorandums of understanding.

"American companies are standing on the sidelines," said Matt Zais, vice president of government affairs for HKN Energy, one of the few US-based companies operating in Iraq. In HKN's case, it is a crude producer in Iraq's semiautonomous Kurdistan region, which has been locked in a sovereignty dispute with the federal government in Baghdad over its oil exports.

In the relative absence of US interest, Iraq has pivoted towards China for investment. China is already a key customer of Iraqi crude, importing about 1.18 million b/d from Iraq, or about 35% of the country's production, and has eyed closer ties with Baghdad, motivated by energy security concerns, analysts say.

For current and future licensed oil and gas development projects in Iraq, Chinese companies operate 7.27% -- the biggest slice of project shares behind Iraq, according to S&P Global Commodity Insights analysis. US companies, on the other hand, own just 1.82% of shares in Iraqi projects.

Downstream, Chinese companies own interests in five oil refineries and seven gas processing plants, including the Halfaya gas processing complex built and operated by state-owned CNPC, according to Commodity Insights data. That excludes the latest licensing round, in which Chinese companies were awarded 10 of the 13 oil and gas projects awarded in May.

"From the first bidding rounds about 16 years ago, it was Chinese companies that were eager, and Western companies were perhaps more hesitant," said John Calabrese, an assistant professor at American University who focuses on Middle East and East Asia foreign policy.

Iraq pumped 4.14 million b/d of crude in October, according to the latest Platts OPEC+ survey by Commodity Insights, and is aiming for output capacity of 7 million b/d by 2027.

To hit that target, cash-strapped Iraq, still rebuilding from decades of war, needs foreign investment to explore new fields, rehabilitate deteriorating export infrastructure and build new pipelines.

The second biggest producer in OPEC is also a major flarer of associated gas, which it could capture to help alleviate frequent power outages and shortages that leave it dependent on neighboring Iran for gas and electricity imports. Iraq flared 18.2 Bcm of gas in 2022, one of the highest amounts globally, according to analysis by Commodity Insights.

The US, which has imposed sanctions on Iran over its nuclear program, has granted Iraq waivers to those sanctions to continue importing Iranian supplies but has long sought to eliminate the trade -- in part by trying to boost US energy investment in the country.

Sudani, a partner for the US

Iranian influence in Iraqi affairs extends to allegations of oil smuggling by Tehran-affiliated militia in Iraq. Many Iraqi governments have been unable or unwilling to contain the militia, but Geoffrey Pyatt, the US assistant secretary of state for energy resources, said the Biden administration backs Sudani -- who has been prime minister since October 2022 -- to combat the militias' prevalence and create more investable conditions for US financing.

Sudani "has shown he's focused on getting out from underneath Iraq's vulnerability to Iranian coercion because of its high degree of dependence on Iran for energy imports, both gas and power," Pyatt said in an interview.

Incoming President Donald Trump withdrew the US from the Iran nuclear deal during his first term in office and has taken a harsh stance towards Tehran, which may change the dynamic in Baghdad. He has also indicated he sees China as the US's main geopolitical and trade rival.

"US government support for infrastructure investment and foreign direct investment is an important aspect of managing the strategic competition with China," Courtney Fingar, a global fellow in the Wilson Center's Wahba Institute for Strategic Competition, told Commodity Insights.

"In general, mobilizing private investment into international infrastructure is in line with the US's interests, especially in strategically important emerging markets and developing countries."

China's dominance

China has swooped into Iraq, unperturbed by an uncertain security environment and endemic corruption – and looking to meet its own domestic energy needs, analysts say.

PetroChina has taken over operations at Iraq's major West Qurna 1 oil field – with a production capacity of 540,000 b/d – following ExxonMobil's exit from the country.

CNPC, the largest Chinese investor in Iraq, holds stakes in Rumaila, Halfaya, Ahdab and West Qurna 1 fields, while CNOOC, Union, ZenHua and other minor players also have holdings in the country.

In Iraq's latest upstream licensing round in May, Chinese companies were awarded all but three of the oil and gas blocks on offer.

Iraq and China signed in 2019 a controversial oil for reconstruction and investment deal. The 20-year contract includes a deal to supply Chinese companies with 100,000 b/d of crude in exchange for investment in infrastructure, with revenue from oil exports earmarked for funding development projects. Critics said the deal's terms risked fueling corruption and waste and would leave Iraq in China's debt.

Chinese government representatives could not be reached for comment. Iraq's oil ministry did not respond to a request for comment.

Alessandro Bacci, a senior legal analyst within Commodity Insights' petroleum economics and policy solutions team, said China's government has sought to expand its presence in Iraq and other key Middle East oil producers for energy security reasons that may override profitability concerns that have caused US companies to withdraw.

"Over the past years, Western energy companies, including US companies, have lost at least some interest in the Iraqi petroleum (oil and gas) acreage," Bacci said.

In a space once dominated by Chinese majors, including CNPC and CNOOC, smaller firms like JeoGade and Jerah are now winning contracts. American University's Calabrese said that smaller Chinese companies might be capitalizing on opportunities in construction, renewable energy and telecommunications, driven by Iraq's rebuilding needs in infrastructure and housing.

These small players may also find joint ventures or partnerships with Iraqi companies to leverage local networks, he said. One of these small firms, Jereh, in May signed a contract with Iraq's oil ministry to develop the Mansouriya gas field.

"They've found a way to operate," Calabrese said.