Beijing to Baghdad: China’s growing role in Iraq’s energy sector

Iraq’s economy is overwhelmingly dominated by the oil sector. According to the World Bank, over the last decade oil revenues have accounted for more than 99% of exports, 85% of the government’s budget, and 42% of GDP. Despite the strong rebound of the economy after the pandemic thanks largely to high oil prices and increased export volumes that last year drove oil revenues to exceed $115 billion, Iraq’s long-term economic prospects remain challenged by its lack of diversification, limited investment, anemic private sector, and widespread corruption.

Yearlong political paralysis left Iraq without a budget for 2022, holding up spending on much-needed energy-related and other infrastructure projects. Yet, since the formation last October of a new government headed by Prime Minister Mohammed Shia al-Sudani, Iraq has pressed ahead with plans to boost oil production capacity, develop domestic gas supplies, and repair and expand refineries.

Chinese companies are well positioned to participate in Iraq’s capacity expansion efforts, as they are actively engaged in various energy-related undertakings throughout the country. However, if indeed China’s strategy is, as some have suggested, to become the dominant player in Iraq’s economy, achieving that objective will likely prove difficult given Iraq’s challenging operating environment and contentious politics.

China expands its energy footprint

The oil trade is the central pillar of the bilateral relationship, with China accounting for about 30% of Iraq’s oil exports. China’s purchases of oil from Iraq, its third-largest supplier, increased by nearly 50% in 2022 over the previous year, part of an overall surge in trade.

Yet China’s energy ties with Iraq extend well beyond trade in crude oil. China’s leading state-owned energy enterprises have established a strong foothold in Iraq’s upstream, midstream, and downstream market. And despite the recent broad downturn in Belt and Road Initiative (BRI) outward investment, China’s BRI engagement with Iraq has continued to grow, mostly in energy and transport infrastructure.

China’s leading energy enterprises — the China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC), and China Petrochemical Corporation (parent of Sinopec) — have been present in Iraq for years. However, over the past decade, there has been a dramatic shift in the strategic positioning of international oil companies (IOCs) in Iraq, with some consolidating and others weakening. State-owned Basra Oil Company’s purchase of ExxonMobil’s stake in the West Qurna 1 oilfield in June of last year left Shell and BP as the only international majors still in the market. By contrast, Chinese companies have deepened their involvement in upstream, midstream, and downstream operations in Iraq.

CNPC now holds substantial stakes in the al-Ahdab, Rumaila, Halfaya, and West Qurna oilfields. In fact, more than half of Iraq’s oil production comes from fields where CNPC and other Chinese companies are operators or non-operating partners. In late 2022, the Iraqi Oil Exploration Company signed a contract with CNOOC to move ahead with a project, agreed in 2019, to explore an offshore oil block in Basra. PetroChina — the listed arm of CNPC — is seeking to take over as the sole lead operator of Iraq’s supergiant West Qurna 1 oilfield.

Smaller, publicly traded Chinese oil and gas companies, such as Geo-Jade Petroleum and United Energy Group (UEG), are also in the mix. Geo-Jade recently signed contracts to develop the Huwaiza and Naft Khana oilfields located along the country’s border with Iran, while UEG sealed a deal to develop the Sindbad field near Basra.

The Chinese presence in Iraq’s energy sector also includes numerous service companies involved in upstream petroleum activities such as drilling, supply and construct surface installations, pipelines, and field management. Having profited from CNPC’s position in oilfield development and operation, its service affiliates China Petroleum Engineering & Construction Corporation (CPECC), BGP Inc., China Petroleum Pipeline Bureau (CPP), Bohai Drilling Engineering Co., and Daqing Oilfield Co. all operate in Iraq. 

Chinese contractors have ramped up their activities in Iraq’s energy sector in recent years. According to the AEI China Global Investment Tracker, 24 of 41 construction contracts awarded by Iraq to Chinese companies between 2007 and 2022 were for energy projects, 15 of them undertaken by CNPC. In 2021, Iraq was the top recipient by far of BRI energy project investments. Several significant deals were struck that year. In April, Sinopec won a deal to develop Iraq’s Mansuriya gas field near the Iranian border.

CPECC and other Chinese contractors seeking new opportunities in Iraq maintained their positive growth momentum last year, winning 87% of all oil, gas, and power project contracts awarded by Iraq, worth $3.35 billion. China CAMC Engineering Co. (CAMCE) landed two contracts to provide natural gas and oil processing facilities in Basra. Last November, Iraq’s Planning Ministry drew up a list of strategic projects to be carried out by Chinese firms, pursuant to the “oil-for-reconstruction” deal forged in mid-2019, whereby building projects in Iraq are funded on a deferred payment basis by the sale of oil to China.

Chinese companies have gained ground in Iraq’s downstream and power sectors as well. Iraq’s Ministry of Oil (MoO) recently awarded contracts to a Chinese consortium to develop a refinery in the Dhi Qar Governorate and to state-owned China National Chemical Engineering Co. (CNCEC) to build a new integrated refining and petrochemicals complex — to be fully funded by the Chinese government — on the al-Faw Peninsula. CITIC Group signed a contract to build and operate the first and second phases of the aI-Khairat heavy oil power plant in Karbala. Shanghai Electric Group, which late last year signed a framework agreement to develop a power and desalination plant in Basra, signed a contract in April of this year to expand the output of the al-Mansuriya power plant in Diyala Governorate.

Iraq’s China conundrum

Several factors have contributed to China’s expanding presence in Iraq’s energy sector. To be sure, Chinese state-owned companies have proven themselves willing and able to capitalize on their Western counterparts’ hesitancy to invest, and in some cases push to divest their assets, in Iraq. Yet Iraq’s contentious politics is at least partially responsible for the success that Chinese companies have had and the obstacles they continue to face in acquiring stakes and undertaking energy-related projects. Control of Iraq’s energy wealth has been the focal point of intra-elite domestic political infighting, grassroots mobilization fueled by popular discontent, and geopolitical maneuvering. As a result, China’s role in in the country’s energy sector has exposed and perhaps deepened Iraq’s political fault lines.

At the national level, former Prime Minister Adel Abdul-Mahdi openly advocated for Iraq to look eastwards to shed Western influence and depicted China as the champion of “developing-world people.” But the “oil-for-reconstruction” agreement Abdul-Mahdi forged with China in mid-2019 sparked controversy, with domestic critics and opponents concerned that the terms of the arrangement risked mortgaging the country’s patrimony and further fueling corruption and waste. Mustafa al-Kadhimi, the “consensus candidate” and successor to Mahdi, sought to diversify Iraq’s energy sector partners.

On several occasions during Kadhimi’s term as prime minister (May 2020-October 2022), Iraq rebuffed fresh Chinese investment proposals amid MoO officials’ concerns that Beijing’s tightening hold over the country’s oil industry could accelerate the exodus of Western companies. The government blocked an endeavor by Sinopec to form a joint venture with Lukoil to develop the West Qurna-2 field, opting instead to enter as a partner via the state-owned Basra Oil Company. Similarly, when CNOOC and PetroChina attempted to acquire ExxonMobil’s stake in the West Qurna-1 oilfield, even though the Chinese company already had a similar stake in the same field, the Iraqi government thwarted the deal. Iraqi officials also reportedly dissuaded BP from selling its stake in the Rumaila oilfield to CNPC.

Kadhimi came under pressure to defend the government’s approach against allegations that he was obstructing implementation of the oil-for-projects agreement with China. Throughout Kadhimi’s tenure, his government attempted to thread the needle by seeking to induce Chinese investment in the economy though without ceding too much control over it. Performing this delicate balancing act was both necessitated and complicated by intense domestic political factionalism, fierce economic turf battles, popular unrest, and external pressure.

At the subnational level, these dynamics, though evident throughout Iraq, are most sharply pronounced in the south, where the incongruity between the country’s riches and the destitution of its population are stark and where local political and non-state armed actors compete for economic resources to serve their patronage networks and regional allies.

The wrangling over the Grand al-Faw Port project is a case in point. Iranian-aligned militias such as Kataib Hizbullah and Asaib Ahl al-Haq advocated for Chinese companies to win the bid for the project, while the coalition headed by Shi’a cleric Muqtada al-Sadr favored South Korea’s Daewoo Engineering and Construction. When Daewoo won the contract over pro-BRI activists’ objections, pro-Iranian parties and militias mobilized protests in Basra and central Baghdad.

Indeed, China has suitors and supporters in Iraq, including a “Silk Road” alliance in the parliament. Its backers also include an ostensibly grassroots Iraqi campaign called the Popular Movement for the Silk Road that champions closer economic ties with China over Western, Korean, and Saudi investment opportunities. In addition, Chinese economic activities in Iraq enjoy the protection of Iran-allied militias. Nevertheless, as might be expected given Iraq’s contentious politics and regional pressures, Chinese firms and personnel have been targeted and extorted. Anger and frustration over poor services, high unemployment, and rampant corruption has coalesced with public unease about Chinese investment, feeding popular resentment that sparked protests in Dhi Qar and Maysan governorates last year.

Strengthening and balancing external partnerships

After taking office last October following a year-long political deadlock, Prime Minister Sudani laid out an ambitious agenda to tackle the many challenges he inherited, including the need to improve health services and educational facilities, increase electricity generation, and expand job opportunities. At the top of the agenda are policies related to Iraq’s petroleum industry.

Successive Iraqi governments have pledged to expand oil production and export capacity. The current government has prioritized achieving gas self-sufficiency, eliminating gas flaring, and meeting local gas consumption needs. This also entailed a shift in the government’s strategy towards encouraging foreign investment in oil refining and opening new horizons for international companies and the local private sector. Iraq’s current government has signaled that it is keen to work with IOCs to expedite implementation of bilateral contracts and has encouraged foreign investment in oil refining.

Whereas its predecessors had failed to sign off on Iraq’s fifth licensing round in 2018, the Sudani government got off to a fast start, signing six deals out of 11 oil and gas blocks in February. These signings were followed by three other promising developments. First, the Federal Government of Iraq (FGI) and the Kurdistan Regional Government (KRG) reached an agreement on the export of oil and management of revenues through the Kirkuk-Ceyhan pipeline, provided flows resume. Second, Iraq secured a deal with France’s TotalEnergies to move forward on the long-delayed multibillion-dollar Gas Growth Integrated Project (GGIP) to boost oil, gas, and power production in southern Iraq over 25 years — a deal that reverses the trend of companies exiting the country. Third and related, state-owned QatarEnergy and Saudi firm Acwa Power have been invited as stakeholder participants in the GGIP, which would be the first Gulf Cooperation Council state investments in federal Iraq’s upstream market.

In managing Iraq’s relations with regional and external powers — critical to unleashing the potential of the energy sector — the current government appears committed to both strengthening and balancing relations with key partners. At the regional level, Sudani has sought to build on the groundwork for strong ties with Iraq’s Gulf neighbors laid by his predecessors. His first trips outside Iraq were to Jordan and Kuwait. He visited Saudi Arabia last December to participate in the China-Arab States Summit, later traveling to Cairo and Istanbul. Iraq is well positioned to benefit from a thawing of regional geopolitical tensions stemming from the rapprochement between Saudi Arabia and Iran that Baghdad helped facilitate.

At the international level, the Sudani-led government has supported an indefinite American troop presence in Iraq while resisting U.S. pressure to distance itself from Iran. During visits in January to Paris, where he signed a strategic partnership agreement, and to Berlin, Prime Minister Sudani sought to attract investment, especially in the energy sector. Regarding the war in Ukraine, Baghdad has refrained from taking a strong position, while seeking ways to maintain its ties with Russian energy companies without running afoul of Western sanctions. Like most of its neighbors, Iraq has sought to avoid being drawn into a zero-sum great-power competition between the U.S. and China. Before taking office, Sudani reportedly expressed a desire to enhance the Strategic Framework Agreement (SFA) between Iraq and the United States. Since then, he has welcomed Chinese investment and activated the 2019 oil-for-projects deal.

Conclusion

A little more than six months into his term of office, Prime Minister Sudani’s government has forged ahead with efforts aimed at addressing the economic problems facing the country, with energy security at the center of the agenda. Sudani has encouraged the participation of foreign companies in Iraq’s oil and gas industry. With the activation of the oil-for-reconstruction agreement, Chinese companies, already deeply engaged in Iraq’s energy sector, have emerged as strong competitors, though they have not been designated as privileged or exclusive partners in the solicitation for new business opportunities in Iraq.

The principles guiding Prime Minister Sudani’s administration and the limitations it faces in engaging Chinese and other commercial partners are set by the parties that back his premiership. They reflect the contentious politics and contradictory compromises that brought him to power — and that persist. Indeed, acrimonious intra-elite competition lies just beneath the surface. The grand coalition of the Coordination Framework (CF) and Kurdish as well as Sunni parties that together formed Iraq’s government is fragile. The mostly Shi’a parties and factions that comprise the CF are themselves riven by rivalries and tensions. To govern in line with his declared aims and priorities for the state, Sudani must not only retain the support of this fractious coalition but contend with the Sadrist camp, which though having withdrawn from the political process can nonetheless mobilize thousands of protesters and armed militia members against the government.

Under these circumstances, whether Sudani’s administration will function any better than its predecessors or be fully able to seize on the oil revenue windfall to improve Iraqis’ welfare instead of further enriching the ruling elite remains to be seen. So, too, does the extent to which the roots and branches of China’s involvement in Iraq will grow deeper and longer.

Dr. John Calabrese teaches U.S. foreign policy at American University in Washington, DC. He is a senior fellow at MEI, the book review editor of The Middle East Journal, and previously served as the director of MEI's Middle East-Asia Project (MAP).

Photo by ASAAD NIAZI/AFP via Getty Images