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Iraqi Energy Sector: A New Target for Chinese Investments? - Can Arıhan

To respond to the title's question, the Chinese interest in the Iraqi energy sector is not something new. However, in the last few months, China is moving from a major player in the sector to a dominant player in the sector.

As a part of its mega Belt and Road Initiative, which aims to revive the ancient Silk Road and connect Central Asia and Europe with a trade and infrastructure network, China has been investing in numerous projects in Asia, Africa, and Europe. Iraq, being at one of the last junctures in China-Central Asia-West Asia Economic Corridor (CCWAEC) of the Belt and Road Initiative, is a strategic country for Chinese investments. Therefore, in addition to many other infrastructure projects, China is heavily investing in the Iraqi energy sector.

According to Energy Intelligence, Iraq is China's third-largest oil supplier, and it has shipped 1.25 million barrels per day to the world's largest importer in the first ten months of 2020. The giant deal between SOMO (a national company of Iraq that oversees oil exports) and Chinese Zhenhua Oil Company will only contribute to these figures. World Oil notes that Zhenhua will receive 130.000 barrels per day of Iraqi crude thanks to the deal. From July 2021 to June 2022, there will be a shipment of 48 million barrels, and the payment for that period will be over $2.5 billion.

China is not only a buyer of Iraqi oil. It also helps to build energy projects. For instance, in a $203.5 million engineering contract of March 2020, China Petroleum Engineering & Construction Corporation (CPECC) has pledged to undertake sour gas treatment at Majnoon oilfield. Energy Economic Times reports that this oilfield, which is operated by Iraq's national Basra Oil Company, is set to increase its production to more than 400.000 barrels per day in 2021 with the Chinese investment's help.

Chinese investments are vital for Iraq, as a country is still recovering from a devastating civil war that left the Iraqi government in a very difficult financial situation. The Covid-19 Pandemic only worsened the crisis with the energy prices (Brent Crude hit almost $20 per barrel in April 2020, which is the lowest figure in more than a decade) falling to historic lows. The Iraqi economy contracted nearly 10 percent last year, and the Iraqi Central Bank devalued the Iraqi Dinar 24 percent in December 2020 (Data of ECA International). In such an atmosphere, Chinese investments are of crucial importance. The country urgently needs to fund its infrastructure projects. China is interested in the country because of its key location (as Iraq is located in the Western end of the Belt and Road Initiative) and the valuable commodity it produces so vastly: oil.

The words of the former Electricity Minister of Iraq, Luay al-Khateeb, quoted by Energy Intelligence, summarize Iraq and China's partnership quite well: "We do not just need power turbines. We need roads, schools, hospitals, airports, mega ports. We would like to see multibillion-dollar companies come and demonstrate interest. So far, it is China that has demonstrated that interest." This partnership has been continuing without major problems so far, but both parties (especially Iraq) must be aware of the future problems that might emerge.

For the reasons that were explained above, both Iraq and China were eager to further their cooperation. In this relationship, China has a rather safe position as long as its investments are backed with oil (and given that oil preserves its value and does not nosedive as it did in 2020). On the other hand, Iraq may face difficulties if the country's economic situation worsens.

In other countries such as Djibouti, Angola, Venezuela, where China invested heavily, huge problems of repaying China's debts occurred. For example, in Djibouti, the public and publicly guaranteed debt is astonishing 104 percent of countries GDP, mostly due to the inability to repay mega infrastructure projects completed by China (Figures from The Globe and Mail). In another example, Reuters notes that as early as 2016, Angolan debt to China was at $25 billion. Venezuela and many other countries that China invested in suffer from the same problem of repaying the Chinese debts.

Currently, Iraq is not dangerously indebted to China like the countries mentioned above. For now, China has mostly the role of the buyer of products of the Iraqi energy sector. Nevertheless, the Iraqi government should always keep in mind that both Angola and Venezuela are major oil producers, but they are now overwhelmed by their debt to China. Of course, the money to be generated from the Chinese investments in the Iraqi energy sector will be very useful in building the much-needed infrastructure in Iraq. Still, if the Iraqi government acts impatiently and engages with Chinese firms without due planning, the consequences may be dire. The Iraqi government shall take into account both countries' needs and also its financial capabilities.


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