China Power | Economy

A Quantum Leap Forward: Chinese Influence Grows in Iraq’s Oil Market

A Chinese company is nearing a multibillion-dollar deal with Iraq’s state-run oil marketing company.

By Sophie Zinser for
A Quantum Leap Forward: Chinese Influence Grows in Iraq’s Oil Market
Credit: Unsplash

Chinese ZhenHua Oil Company is finalizing a rare multibillion-dollar deal with Iraq’s state-run oil marketing company (SOMO), in which ZhenHua would agree to a monthly purchase of 4 million oil barrels over five years. ZhenHua plans to pay SOMO $2 billion up front, enough to significantly boost Iraq’s depressed and crude-oil reliant economy. The deal is still being debated in the Iraqi parliament, and newly appointed Iraqi Prime Minister Mustafa al-Kadhimi will have the final approval. But regardless of whether or not ZhenHua gets the deal, all the other major contenders are state-owned Chinese companies, as all have the liquid cash on-hand that the deal’s terms require. A multibillion dollar agreement at such a low point in Iraq’s economy would mark a quantum leap forward for Sino-Iraqi relations.

The COVID-19 pandemic and March’s subsequent oil price crash has led to Iraq’s economy contracting by 12 percentmore than any other OPEC country — this year. In Iraq, crude oil exports account for most of the government’s annual income. And despite China’s checkered attempts at “greening” its Belt and Road Initiative — including touting an ambitious carbon-neutral 2060 plan while bankrolling much of the developing world’s coal production — China still remains the largest crude oil importer globally, importing $238.7 billion, or 22.6 percent of overall crude oil imports as of 2019. Elected after months of political instability, Prime Minister Mustafa al-Kadhimi optimistically frames China as a robust partner for economic growth in Iraq, reaffirming the nation’s prominent role in the Middle East’s oil markets.

This is not the first time that ZhenHua and SOMO have embarked on large-scale collaboration. In 2018, Iraq aimed to supply China with more crude oil in another deal that nearly passed but was struck down at the eleventh hour. But on December 17, the Iraqi Cabinet agreed to renew a contract with ZhenHua, drilling three new directional oil wells in the oil field of East Baghdad, located about 10 kilometers to the east of Baghdad city. The field has approximately 8 billion barrels worth of oil. If the multi-billion dollar deal is approved, this recent contract could serve the first step towards ZhenHua’s investments’ broader impact on Iraq’s economy.?

Meaning “Revitalize China” in Chinese, ZhenHua oil operates a total of 11 oil exploration and production projects in six countries and is deeply involved in implementing the CCP’s “Going Global” energy security strategy. The company already works with several countries in the Middle East, and notably has acquired a 4 percent stake in Abu Dhabi National Oil Company’s (ADNOC)’s onshore concession.?

Originally set up in 2003 as a subsidiary of Chinese defense contractor Norinco, ZhenHua Oil is 100 percent indirectly owned by the Assets Supervision and Administration Commission of the State Council (SASAC). The SASAC manages hundreds of state-owned enterprises (SOEs), brings in over $3.6 trillion in revenue annually, and appoints all high-level executives across each SOE. If Iraq signs on with ZhenHua — or any of the other SOEs vying for the bid — cash loans will be liquidated as Chinese government funding, putting the governments directly in contact.?

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Bailing out a strained economy via SOE oil-backed loans is not a first for the CCP. In Angola and Venezuela, for example, loans from Chinese banks have looked like a good idea during the heydays of high oil prices. But global oil price declines have recently trapped both countries deeply in debt to China. Each now owes China over $20 billion. But analysts cite ZhenHua’s prospective deals with Iraq as more narrowly focused in their terms when compared to those of Angola or Venezuela, and only involve specific Iraqi commercial banks rather than federal funds.

But what of the loan’s promise to boost Iraq’s economy? With reconstruction needs estimated at around $88 billion, a loan from China has great potential to boost Iraq’s liquid capital. But with such a major loan up front and a checkered history of government corruption, the deal will likely end up merely as a salary bonus for those working in Iraq’s inflated public sector, with little to show across Iraq’s economy as a whole. Wages for Iraq’s government employees increased nine times from 2003 to 2018, while Iraqi public servants are estimated to work for an average of just 17 minutes during an eight-hour day. The 2020 postponement in passing of Iraq’s annual federal budget further stalled a measure for even more spending on federal salaries, set to reach nearly $45 billion. With most of Iraq’s government income from oil and spending on public sector salaries, it’s more likely that China will fuel further corruption in this sector.

And just as a large loan may trap Iraq’s government in debt, ZhenHua fears losing its cash should the security situation deteriorate within the country. A source told trade publication Energy Intelligence last week that: “Zhenhua is very worried that it won’t be able to take the oil and will lose all the advance payment if Iraq encounters output cuts or war or something else. Zhenhua has no solutions to avoid the risk if Iraq takes the money and doesn’t pay back the oil.” Chinese investments in Iraq go beyond oil, including cement factories, power plants, and water treatment facilities. It seems a risky bet for China to deepen its fiscal ties with Iraq during this period of economic turbulence if they have no stopgaps in place ensuring that their loans will actually be paid back.

While the new Biden administration in Washington may bring with it a new wave in Middle East policy later next month, the United States is unlikely to reverse a Trump-era retreat from its previous military and diplomatic presence in the nation. There are also rumors that another Chinese state-owned oil company — China National Petroleum Corporation — might attempt to buy out American MNC Exxon Mobil’s stake in the West Qurna-1 Oil field, further deepening ties between China and Iraq.

Enhanced reliance on China has been on the table for Iraq since before current Prime Minister Mustafa al-Kadhimi’s term. Bullish on China’s power to support Iraq’s economy, Former Prime Minister Adel Abdul-Mahdi led a September 2019 delegation to Beijing wherein Iraq signed a series of Memoranda of Understanding (MOUs) to officially join China’s Belt and Road Initiative. Abdul-Mahdi famously referred to the visit as a “Quantum Leap” in Iraq-China Relations. As Iraq’s number one trading partner and the agent of its latest oil bailout, China could end up triggering a quantum leap forward for Iraq’s floundering economy; on the off chance that Iraq can quell the corruption rampant at its highest ranks.

Sophie Zinser is a researcher focusing on China’s role in the Middle East, South and Central Asia. A former Schwarzman and Fulbright Scholar, Sophie has worked with refugees and migrants on developing community-focused policy solutions for five years across the Middle East and Asia.