China has head start over West for Iraq oil

By Simon Webb - Analysis

DUBAI (Reuters) - China crossed the line first in the race for big oil contracts in post-Saddam Iraq and has gained a head start over Western oil majors in the competition for future energy deals.

China's biggest oil company, state-run CNPC, agreed a $3 billion service contract with Iraq on Wednesday.

The deal could set a precedent for terms that fall far short of the lucrative contracts the oil majors had hoped for as they jostled for access to the world's third largest oil reserves.

Starved of investment since the Gulf War of 1990-1991 and the subsequent U.S.-led invasion of 2003 that removed former President Saddam Hussein, Iraq holds some of the world's last large, cheap, untapped oil reservoirs.

"The biggest significance of this deal is that CNPC will benefit as the first international oil company to be developing one of the giant discovered oil fields in Iraq in the new era," said Alex Munton, analyst at global consultancy Wood Mackenzie.

"They will be the first with people on the ground and the first to develop a working relationship with Iraq's oil ministry."

Now CNPC and China's other state-supported oil firms are likely to face off with Western oil companies in a bid round for other long-term contracts to enhance giant fields already in production. Iraq aims to sign those deals in mid-2009.

Baghdad needs billions of dollars of investment to overhaul and expand its energy sector after years of sanctions and war.

Energy-hungry China has already provided tough competition for Western oil majors in Africa. Chinese state oil companies can take on more risk than big oil firms as securing future energy supplies is a matter of strategy rather than profit.

"Given traditional markets have been dominated by well-established international oil companies, new entrants such as CNPC have to focus on new markets," said Gong Jinshuang, a researcher with a think tank run by CNPC.

The revised deal could prove to be on worse terms than the original signed with Saddam but that would be a pragmatic choice, he added.

TOUGH TERMS

CNPC faced no competition for Adhab, a renegotiated contract first signed under Saddam in 1997. Full details have yet to emerge, but it is know that the new service contract is for a set fee, a change from the initial production sharing agreement

(PSA).

Production sharing contracts were common in the 1980s and 1990s in the days before oil prices shot up, when the oil majors held the whip hand over producer countries who competed with each other for investor capital by offering generous terms.