CHINA-IRAQ OIL CONTRACT HIGHLIGHTS PRESSURES ON

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 003575

SENSITIVE
SIPDIS

STATE FOR EAP/CN JHABJAN
STATE FOR EEB/ESC/IEC/ENR
STATE FOR INR/EC
STATE FOR INR/EAP
STATE FOR INR/NESA
STATE FOR NEA/I

E.O. 12958: DECL: 09/10/2023
TAGS: ECON EFIN ENIV ENRG IZ CN
SUBJECT: CHINA-IRAQ OIL CONTRACT HIGHLIGHTS PRESSURES ON
CNPC

REF: A. BAGHDAD 02951

B. BEIJING 03366

C. BEIJING 01374

BEIJING 00003575 001.2 OF 002


Classified By: Minister-Counselor Robert Luke for Reasons 1.4 (b) and (
d)


1. (C) Summary. Iraq drove the terms of the oil service
contract with China signed in August 2008, and China will
probably move slowly in implementing the terms of the
agreement, according to Chinese energy experts. CNPC signed a
USD 3 billion oil service contract to develop the Al Ahdab
oil field southeast of Baghdad (see reftel 03366). The
experts said that CNPC was under tremendous pressure from the
central government to ensure a stable supply of oil and
signed the contract because of growing international energy
competition, rising domestic demand for oil, and its interest
in getting into the Iraqi oil market. The deal is probably
linked to China's decision to forgive USD 8 billion in Iraqi
debt in 2007 and while the terms of the contract are not
particularly favorable, China may see the contract as a way
to win future preferential treatment from Iraq. End Summary.

Deal Less than Favorable
--------------


2. (C) The decision to structure a deal as a service contract
instead of a production-sharing contract was driven by Iraq
(see reftel 02951),according to Peking University Professor
Zha Daojiong. He speculated that Iraq pushed the deal with
China to signal to other countries, such as the United States
and Great Britain, that Baghdad would take a tough
negotiating position in signing future oil contracts. Given
the less than favorable terms of the deal for China, Zha
expected China National Petroleum Company (CNPC) to move
slowly in implementing the agreement, saying China would
probably not send oil workers anytime soon and it was
unlikely that we would see oil from the field for at least
two years. (Note: According to press reports, Iraq announced
that if work did not start on the Al Ahdab field within two
months, China would risk losing the contract. End note.)


3. (C) Zha said CNPC agreed to the contract because it was
managing three "squeezes". CNPC was being squeezed by global
energy competition, which increased the negotiating leverage
of oil exporting nations, growing domestic demand for oil,
and what Zha described as the tenuous nature of energy
contracts, which are often renegotiated. Zha emphasized that
as a major oil importer, China benefited from bringing
additional oil supplies onto the market, even if CNPC would
not enjoy a share of the profits. Energy Foundation Chairman
Yang Fuqiang added that CNPC aimed to get its foot in the
door in the Iraqi oil market and further diversify its energy
sources.

Business and Political Considerations
--------------


4. (C) Zha and Yang said the deal was driven by both business
and political considerations. CNPC has a history of
engagement in Iraq going back to the oil for food program and
is actively seeking replacement reserves abroad to supplement
stagnant domestic production. Additionally, the cost of
domestic oil exploration for CNPC is high. At the same time,
CNPC is under tremendous pressure from the government to
ensure China has a sufficient supply of oil and the deal
would not have gone through without the central government's
approval.

Indirect Link to Debt
--------------


5. (C) The oil service contract is probably indirectly linked
to debt forgiveness (Note: According to reftel 01374, an
official at the Iraqi embassy in Beijing said a deal to
forgive Iraqi debt owed to Chinese state-owned entreprises
was contingent on an Iraqi decision to uphold Saddam-era

BEIJING 00003575 002.2 OF 002


contracts for oil exploration by Chinese firms. End note.)
Zha said that Iraq repeatedly pressured China to forgive its
debt and hinted that it would link energy deals to China's
willingness to comply, but added that the USD 3 billion
service contract was not a sufficient return for the debt
forgiveness. Yang added that China was adopting a long-term
perspective on the issue and probably viewed debt forgiveness
as a way to win preferential treatment from Iraq as the Bush
administration neared the end of its second term.
RANDT