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China’s oil risks are limited despite Iraq crisis

The country holds a large stake in Iraqi crude, but there is little immediate danger

Since Iraq’s post-war oil boom, China has emerged as the largest buyer of Iraqi crude and its companies are some of the most significant investors in Iraq’s oil patch. China imports around 1.5 million barrels a day (b/d) of crude from Iraq, about half of the country’s exports, and its state-run companies own stakes in some of Iraq’s largest oilfields.

The pace and ease with which Islamic State in Iraq and al-Sham (Isis) militants have swept through the Sunni regions of Iraq, raising the prospects of a renewed civil war in the country, will have Beijing’s policymakers and oil executives worried. But the risks to China in the crisis are not as high as they may appear on first glance.

In spite of the fighting, there is little immediate threat to Iraq’s oil industry. The Isis militant stronghold is in the central Sunni-areas of the country, far from the major oilfields in the southern Shiite-dominated areas and the Kurdish north. Moreover, analysts say that an aggressive push by Isis into the Shiite south would likely trigger a stronger response from the Iraqi Army, Shiite militias and outside forces, including the US and possibly Iran, to repel the ISIS forces.    

If the fighting spills over into the oil-producing regions causes a partial supply disruption, oil prices would spike, but Saudi Arabia has around 2.5m b/d of production it could bring online relatively quickly to help fill the gap. Increasingly close energy ties between Riyadh and Beijing would likely help smooth the redirection of oil flows. Saudi sources have been briefing that the kingdom would be ready to act to stop a price spike. 

Chinese oil companies’ investments would also be put under threat, though there would not necessarily be a major affect on their bottom lines. PetroChina is the largest Chinese investor in Iraqi oil. The company holds stakes in the Rumaila, Halfaya, West Qurna-1 and Al-Ahdab oilfields, some of Iraq’s largest. 

However, PetroChina would be relatively unscathed if its Iraqi operations were interrupted, argue analysts at Nomura, an investment bank. Part of the reason is that thanks to Iraq’s tight fiscal terms foreign oil companies are making so little money compared to their other projects. PetroChina, Nomura notes, makes just $1.40 to $3 a barrel under its Iraqi services contracts, making them some of the company’s least lucrative projects in its portfolio. Moreover, its output of 63,800 barrels of oil equivalent a day (boe/d) from the country makes up only around 2% of its total volumes.  

China National Offshore Oil Corporation also has a major investment at the Misan oilfield. But it too gets paid a low per-barrel fee for its Iraq work and gets only a small portion of its total production from the country. Its share of production from the Misan field is 6,700 boe/d, just 0.6% of overall output and it gets just $2.30/b produced, according to Nomura.

China’s private oilfield service companies, which have found fertile ground in Iraq, are more exposed, and could take a larger hit if violence spreads to Iraq’s oilfields. “For the oilfield services firms, these contracts are likely to be higher margin, compensating for higher risks in operating in that region,” says Nomura.

Anton Oil, for instance, earned around 16% of its 2013 revenues from its work in Iraq, which includes contracts in the southern Halfaya, Al-Ahdab and Buzurgan fields. Nomura reckons the contracts earn rates of return higher than Anton’s average of around 20%. The country’s work is in the south of the country and it is operations have not been effected by the fighting, the company told Petroleum Economist

Petro-King is another Chinese services company that could see its bottom line hit by a disruption to Iraq’s oil sector. The company is looking to Iraq for growth. In April it announced it had won a $23m drilling deal with Malaysia’s Petronas and analysts are expecting Iraq to account for 20% of its total revenue this year, up from less than 5% last year. Those hopes could be sunk if drillers are forced to pull back their operations under the security threat. 

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