China prepared to take the gamble to secure future oil supplies in Iraq

17 March 2010

The country is now the biggest foreign investor in Iraq’s oil sector

After making just award in its first post-war licensing round in July last year, Baghdad has succeeded in attracting oil companies from all over the world, signing nine new contracts, with just one still awaiting approval.

China alone is spending a total of $577m in signing-on fees, making it the largest investor in Iraq with almost double that of the US.

China’s emergence as the biggest investor in Iraq’s oil and gas sector is no surprise to anyone who has watched the state’s hunt for energy resources over the past decade.

The country’s demand for energy continues to grow despite it being the fifth-largest producer of crude oil in the world, with an output of almost 3.8 million barrels a day (b/d). The country consumes almost 8 million b/d of oil, second only to the US.

China’s appetite for oil in the short term will grow less quickly than the double-digit economic growth it has witnessed over the past few years. But in the medium term, China’s dependence on Middle East oil will continue to rise. Finding enough sources of oil has become critical for the Chinese economy to maintain strong annual growth.

Beijing’s relationship with Riyadh has oil at its heart. Since 2007, Saudi Arabia has been China’s largest source of oil imports with more than 700,000 barrels a day. China is also increasingly becoming a major investor in neighbouring Iran, showing interest even for lower-margin projects.

Watching the way that Chinese diplomats and trade missions operate gives a clue to why the country is leading the race for Iraq’s oil resources. Western missions live walled off from the outside world in a fortress-like embassy compounds.

By contrast, the Chinese go out into the market and meet local decision-makers.

Concerns over security have been well-documented. But China is prepared to take on the risk and play a big part in the biggest single emerging oil market in the world.

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