#14 - JRL 6525
Asia Times
October 31, 2002
China, Russia and the Iraqi oil game
By Pepe Escobar

Eleven percent of the world´s reserves (second in the world after Saudi Arabia); 112 billion barrels of proven reserves; and at least 220 billion barrels of probable reserves. As Iraq is universally acknowledged to be the new promised land of oil, the name of the game in the industry is PSA.

PSA stands for "production share agreement": Iran and Kuwait, for instance, don't approve PSAs, they flatly refuse to share sovereignty over their natural wealth. Iraq is another matter entirely.

Because of the UN sanctions, and with its oil infrastructure in tatters, recent agreements approved by Saddam Hussein, with French conglomerate TotalFinaElf, for instance, had to be PSAs. But anyway, these are only agreements; TotalFinaElf boss Thierry Desmarest said not long ago that no contract had been formally signed yet.

The war of positioning for a possible post-Saddam Iraqi environment is getting more ruthless by the minute. American oil conglomerates are openly courting representatives of the Iraqi National Congress (INC), the umbrella opposition. The darling of Exxon Mobil and Chevron Texaco is Ahmed Chalabi, US vice President Dick Cheney's pal and major contender for the title of Iraq's number one opposition figure. Chalabi, the INC leader, has already stressed on the record that he favors the creation of a "US-led consortium to develop Iraqi oil fields. American companies will have a big shot at Iraqi oil."

To widespread doubts about how a pro-American post-Saddam government would respect contracts signed with non-American oil giants, the INC has reassured all players - mostly Russian and European - that the new post-Saddam administration will honor all its PSAs.

The Future of Iraq Group, a State Department task force, officially is not talking about oil - which sounds like a joke. And there's also no official confirmation that oil has been a key issue in the current hardcore Security Council negotiations between the US and Britain, on one side, and France, Russia and China on the other. But it is obviously not by historical accident that oil companies from these five permanent Security Council members are all positioning themselves for the post-Saddam environment.

People like former CIA supremo James Woolsey are not even disguising Washington's plan to turn Iraq into an American protectorate with an Arab Hamid Karzai al-la Afghanistan eager to open the oil taps for American oil giants. Woolsey had been openly saying that if France and Russia contributed to "regime change", their oil companies would be able to "work together" with the new regime and with American companies. Otherwise, they would be left contemplating passing cargoes in the Gulf.

Iraqi oil is so attractive to anyone most of all because it's cheap. Industry sources in the Gulf and Singapore confirm the production cost of a barrel of oil in the Caspian sea is around US$8. The same thing in Iraq costs only 70 cents. So the new oil frontier in Central Asia for the moment is little more than a mirage. The same sources confirm that Iraq is currently producing around 1.5 million barrels a day. But its production capacity is supposedly between 3 million and 3.5 million: this is what Iraq produced when it was an oil giant, in 1979, before the Iran-Iraq war. Even without an American attack, two years and a lot of investment would be necessary to get back to this figure. And to double oil production, it would take five to six years, and extra billions of dollars.

Not only the Americans, but also Royal Dutch Shell is back in the Iraqi game - after a charm offensive in 1998. British Petroleum (BP) is also lobbying - it was thrown out of Iraq in the early 1960s. To cover the growth of world consumption in the next few years, everybody has to look for new sources. ExxonMobil and Chevron Texaco, for instance, prospect mainly in America. BP works basically in the Gulf of Mexico, Alaska and the North Sea. Royal Dutch Shell is exposed to Africa - Nigeria and Angola - a continent considered "unstable".

Russia is playing a very clever game. Moscow wants to be a very big player in the oil industry - and is betting that one day the US will badly need Russian oil. Some in Moscow dream of Russia as a major supplier for the US instead of Saudi Arabia. But others, more realistically, know that Russia can be an extremely trustworthy supplier to Western Europe.

Russia is capable of producing more oil than Saudi Arabia. But its capacity to produce more is also more limited. Extraction and transport of Siberian oil to America can be extremely costly. That's one of the key reasons why Russia definitely does not want low world oil prices: it would render exploitation of Siberian oil much less appealing. With high oil prices, Russia has the best of both worlds: it develops its position as a big oil player and it pays most of its bills.

China has been a major oil importer since 1993; the third-biggest oil consumer in the world, behind the US and Japan. In the 1990s, its oil consumption rose 6 percent while its domestic production decreased 2 percent. In 2001, Chinese imports were one-third (65 million tons) of the total (200 million tons) consumed.

Reserves in northern China are practically extinct. New oil fields in Xinjiang are very hard to exploit. Two-thirds of China's oil imports are from the Middle East: the main suppliers are Iran, Saudi Arabia, Oman and Yemen. In 2010, they could be responsible for 80 percent of China's needs. No wonder Beijing is so worried.

Iraq contributes only 0.6 percent of Chinese oil imports - but its strategic importance is increasingly vital. China wants an immediate end to the UN embargo and sanctions. In 1997, China National Petroleum Corporation (CNPC), along with China North Industries Corporation (Norinco), signed an agreement with Iraq for a 22-year-long exploitation of half the Al-Ahdab field. The Chinese were supposed to invest $1.3 billion. In 1998, CNPC kept negotiating for an agreement regarding the Halfayah field. But in the end - because of the sanctions - the Chinese were only able to conduct feasibility studies.

China has been playing an extremely active role behind closed doors in the current negotiations on the text of the new Security Council resolution on Iraq and arms inspections. The dispute only apparently is between a US-led and a French-led text. UN sources confirm the Chinese align with the French position - even though President George W Bush has said that he had a "deal" after he met Chinese President Jiang Zemin in Texas at the weekend. China is positively against an American attack on Iraq: it fears subsequent sky-high oil prices or even the interruption of supplies.

China is also setting up its own strategic oil reserve. Reserves for the moment would only last for a few days. US reserves are good for three months. Until 2010, the Chinese want to be in the same position. The heart of the matter for China is to be less dependent on Middle East oil. Middle East oil travels through the Malacca Straits - controlled de facto by the US. Chinese oil companies have been increasingly active in Kazakhstan. But now, with the American presence in Afghanistan, it's for the Chinese to make the next move: how to combat encirclement by America from the Eastern and Western fronts.

Security Council members China, Russia and France will only follow Washington's plans for regime change if they are absolutely sure of a level playing field in a post-Saddam Iraqi oil industry. Meanwhile, a doomsday scenario is deeply bothering Bush-Cheney and the American oil army: attack against Iraq. Middle East in flames. $60 a barrel of oil. Game over.

But hopes are high on a dream scenario. Saddam is out in no time. Negligible "collateral damage". Iraq starts pumping oceans of oil. The Organization of Petroleum Exporting Countries is knocked out. $10 a barrel of oil. Victory.

This explains why Washington is going all the way - with or without UN resolution, weapons inspectors, whatever. To get to the oil, you need a vassal state. Ergo, Saddam's days are numbered.