Chinese energy companies scooped up all but three of the oil and gas blocks offered by Iraq in its latest licensing round, consolidating their position as the dominant foreign operators in Iraq’s energy sector. Of the non-Chinese international energy companies, Shell was the only Western multinational to submit a bid (jointly with the Abu Dhabi National Oil Company), but it lost out to the Iraqi Kurdish KAR Group. Russian Lukoil was another non-Chinese bidder.

All the other Western energy companies steered clear despite improved contractual terms offered by Baghdad, a clear sign that the once promising Iraqi upstream sector has lost its sheen.

Chinese Firms Deepen Ties as Western Firms Exit

The interest of Chinese companies is not surprising. Iraq is the second-largest oil producer in OPEC after Saudi Arabia and among the top-three suppliers of crude oil to China, the world’s top importer of crude. Iraq was the third-largest exporter of crude oil to China in April, after Russia and Saudi Arabia. China imported nearly 1.4 million barrels per day of Iraqi crude in April, the highest monthly volume since 2022.

China is keen to secure stable supplies from the Middle East, and its state-owned and private energy companies already have a foothold in Iraq, including in the giant West Qurna 1 oil field previously operated by ExxonMobil. In 2023, ExxonMobil sold its stake in West Qurna 1 – a field with the capacity to produce 540,000 barrels per day of crude oil – to PetroChina, which has taken over as operator. PetroChina’s state-owned parent company, the China National Petroleum Corporation, is a partner with BP in the 1.4 mb/d Rumaila oil field development, the Halfaya oil field with partner TotalEnergies, and the Al-Ahdab project in partnership with China North Industries Corp.

With the new awards, Chinese companies will have stakes in 24 oil and gas developments across Iraq, though they have no title to the actual subsurface resources. Iraq does not offer production-sharing contracts to foreign investors. It initially attracted the major energy companies when it first opened its upstream sector to foreign participation in 2009 by offering long-term technical service contracts. Baghdad managed to secure the participation of nearly all the big international companies, including BP, ExxonMobil, Italy’s Eni, and Shell. Shell sold its stake in the Majnoon oil field in addition to West Qurna 1, though it retains its presence in the gas sector with a stake in the Basrah Gas Company joint venture.

Iraq’s Ministry of Oil has in recent years amended its contract terms in a bid to attract investors by offering a type of profit-sharing contract that offers higher returns. The revised terms led TotalEnergies to sign up for a $27 billion, 30-year bundle of contracts to develop oil, gas, and solar projects and a water injection facility needed for upstream operations.

This time around, the Oil Ministry offered 29 blocks, some of them holdovers that were not awarded in a previous bid round. Only 13 of the blocks were awarded during the May 10-12 auction, with mainly small Chinese companies snagging 10. The remaining three went to KAR Group, which operates in the Kurdistan region of Iraq.

The winning bids were primarily for oil blocks rather than gas acreage located in the relatively unexplored western desert, a blow to the Oil Ministry’s aspiration of boosting its domestic natural gas production. Of the gas acreage offered on the second day of bidding, only three of the 14 blocks, which lie in the high-risk Anbar province in northwestern Iraq, were awarded. Security concerns in the border area appear to have deterred investors.

The winning bids were for previously discovered blocks with oil potential or those near producing fields in central Iraq and the southern Basra region, home to Iraq’s super giant oil fields. Two Chinese state-owned companies, the China National Offshore Oil Corporation and Sinopec, snagged one block each with the rest going to Chinese minnows.

While 12 of the blocks on offer were not contested, Shell and ADNOC bid for the Daimah block, which drew several offers. Daimah is in the southern Maysan province next to the border with Iran and close to the Majnoon field that was previously operated by Shell. Russia’s Lukoil, which operates the nearby giant West Qurna 2 oil field, and four Chinese companies also submitted losing bids. The block was awarded to KAR, which submitted the lowest bid even though it does not have the same technical capabilities as a multinational, such as Shell, or a giant national oil company, such as ADNOC.

Under Iraqi Prime Minister Mohammed al-Sudani, relations with the United Arab Emirates and Saudi Arabia have improved, though this has not yet yielded a rush of investments into the mainstay energy sector by Gulf Arab national oil companies. Negotiations with Saudi Aramco for development of the Akkas gas field in Anbar province were unsuccessful. To date, only QatarEnergy has made a foray into Iraq with a 29% stake in TotalEnergies’ Gas Growth Integrated Project, becoming the only Gulf national oil company to invest in the country.

Iraq is using a new contract model – an exploration, development, and production contract – first introduced in 2018, or a development and production contract for discovered but not yet developed fields. The contracts replace the technical service contracts that offered fixed remuneration for each additional barrel produced. The improved terms offer a share of revenue after deducting royalty and cost recovery expenses.

Low rates of return of the technical service contracts are not the only reason for the departure of the international energy companies, which have complained privately about Iraq’s bureaucracy and corruption as hindrances. Furthermore, the timing of the latest bidding round was not auspicious, as Iraq has been drawn indirectly into the Israel-Hamas war, raising concerns about security and stability in Iraq. Since October, Iranian-backed Shia militias have launched a number of attacks against U.S. targets in Iraq, Syria, and Jordan and have claimed attacks against Israeli targets.

On April 15, a few days after the upstream awards, another Chinese company, China National Chemical Engineering Corporation, was awarded a contract to build a 300,000 b/d oil refinery near the Al-Faw Grand Port in Basra, a massive project that is under construction to serve as a commercial maritime and industrial hub. Iraq is also in negotiations with a subsidiary of the company, Hualu Engineering and Technology, for a petrochemical complex on the same site. The decision to open discussions with the Chinese came after Shell informed the Iraqi government that it would not go ahead with an $11 billion petrochemical project that was first mooted over a decade ago.

Chinese investors are less risk averse than their Western counterparts, hence their strong showing in the latest upstream opportunities offered by Baghdad.

Future Risks for Iraq

In 2009-10, when Iraq offered its first and second bidding rounds following the U.S. invasion, it was producing between 2 mb/d and 2.5 mb/d of crude oil but hoped to raise capacity to 13 mb/d within a decade. However, that target was deemed unrealistic and has since been lowered several times. The Oil Ministry puts current production capacity at just over 5 mb/d, though independent estimates are closer to 4.8 mb/d. It is now targeting a capacity of 6 mb/d by 2027.  

To achieve a higher target, Iraq will need water for reinjection, a project that TotalEnergies has undertaken and is due to come online by 2027. Other infrastructure constraints and export bottlenecks might also delay progress. “Some of these projects are likely to be delayed because of Iraq’s political struggles, regulatory challenges, delays in restoring and expanding the southern export infrastructure, and the international oil companies’ uncertainty about the investment climate,” the U.S. Energy Information Administration stated in its latest analysis of Iraq’s energy sector.

There is also a risk that Iraq might be caught out by a decline in demand for oil as a result of the global energy transition and end up with idle capacity that it cannot monetize. Iraq depends almost exclusively on oil exports for its budget revenue, and its economy is not diversified enough to sustain a loss of income should oil sales decline. Iraq has no time to waste if it is to achieve its higher production target to take advantage of a narrowing window for oil demand growth. It is doubtful whether the small Chinese companies with little or no experience of how to operate in Iraq’s complex business and political environment can deliver.