Red Star Over IraqDexter Roberts and Stanley Reed
It may be the start of the biggest oil job in the world. Each day, 20 workers from BP and China National Petroleum Corp. (CNPC) buckle down to the task of prepping the Rumaila oil field in southern Iraq for rapid development. In industry lingo, Rumaila is a "supergiant"—a 50-mile-long deposit of sweet crude with estimated reserves of 16 billion barrels, whose output may someday rank second only to Saudi Arabia's vast Ghawar field. The Saudis, though, have carefully managed their oil assets for decades. In contrast, Rumaila, a lightly inhabited expanse of date groves and Bedouin encampments, has not had a proper upgrade since the 1970s. The Iraqis contracted with BP and CNPC last year (BP) to juice Rumaila's production from 1.06 million barrels a day to 2.85 million, all in seven years. No one has ever tried such a ramp-up at a field as huge as this one. Putting Rumaila back in full working order will take tens of thousands of workers, 1,000 new wells, and billions in investment.
BP is the largest partner in the venture, but only by a dipstick: It has a 38% stake, while the Chinese hold 37% (the rest is owned by an Iraqi company). The media focus has been on BP's decision to take up the Rumaila challenge for a low fee of only $2 for every barrel the venture produces. But the more important story could be China's role. "CNPC's involvement brings together the country with the most rapid growth in energy demand in history with the country that plans the greatest buildup of production capacity ever," says Alex Munton, an Iraq specialist at Edinburgh-based oil consultants Wood Mackenzie.
China has moved fast. In a little over a year, CNPC, China's main oil producer with revenues of more than $188 billion and a 1.5 million-worker payroll, has won large stakes in three Iraqi oil fields. The total production target for those fields is around 3.5 million barrels per day—close to China's domestic output. In two of the ventures, China is the controlling partner. Over two decades or so, CNPC may spend some $20 billion on the fields, the most of any oil company in Iraq since Saddam Hussein fell. For China's oil industry, "Iraq is a game-changer," says Wenrang Jiang, an authority on the country's energy thirst who teaches at Canada's University of Alberta.
TIED TO THE LEADERSHIP
Carved out of China's oil ministry in 1988, state-controlled CNPC managed the oil and gas fields of north China before expanding to Peru, Sudan (where it has been criticized for working with the regime), and Venezuela. It has a reputation as insular and bureaucratic, especially compared with China National Offshore Oil Corp. CNOOC, founded in 1982 with a mandate to drill in offshore locales with foreign companies, has executives who speak English as a matter of course and travel widely. "CNPC always viewed itself as a direct successor of the oil ministry," says Victor Gao, CNOOC's former general counsel and currently a private equity investor. "So it's more orthodox; it considers itself a government entity."
Jiang Jiemin, 54, who has run CNPC since 2004, is a man of few words. In Iraq, though, Jiang and his team played their hand well. Months before the Rumaila deal, CNPC got the rights to develop Ahdab, a medium-sized field. That means CNPC is one of a few outside oil companies with operating experience in Iraq. Jiang has also forged a good relationship with BP CEO Tony Hayward, who sees CNPC as the gateway to China. BP "wants to have them as a partner wherever they can," says Bob Maguire, head of oil and gas investment banking at Perella Weinberg Partners in London. "They are the largest NOC [national oil company] in Hayward's mind." CNPC declined to comment for this story.
BP and CNPC bring different strengths. BP has been studying the field by agreement with the Iraqis and already has worked out a development plan. And the Chinese? Beijing-based CNPC has access to affordable credit from China Development Bank and China Exim Bank. In an industry where supplies are tight, "they have spare capacity, rigs, and other equipment available that you could mobilize and put on the ground," says Andy McAuslan, BP's Iraq commercial director. (He adds that contracts for oil services in Iraq will be awarded competitively.) Fast deployment in Iraq is key. According to their contract, BP and CNPC won't start getting paid until they have boosted production 10%. The Chinese know how to manage thousands of workers in distant, often hostile locales such as Central Asia and the Sudan. It also knows how to develop onshore fields: In China, it pumps the equivalent of 3.3 million barrels a day. Besides the role in drilling wells and pumping oil, Chinese companies are good candidates to build the oil terminals, refineries, and pipelines Iraq will need to get its crude to global markets.
China is the low-cost provider in the industry. "As a general rule of thumb, Chinese management and labor costs are about one-third if not one-fourth of Western costs," says Gao, the ex-CNOOC executive. Nine colleges and universities focus exclusively on oil studies in China: "The Chinese treat the industry as a life-and-death issue," says Gao. The Western oil industry's workforce is aging rapidly. "Analysts always mention that the oil majors face personnel shortages," says Xu Xiaojie, an independent oil and gas adviser in Beijing. "In China we have a surplus."
The Iraq ventures still face formidable obstacles—sectarian strife, corruption, and government instability, among them. The Iraqis also may not welcome large numbers of Chinese to their fields. "Yes, bringing in low-cost engineers is China's advantage," says Trevor Houser, a partner at the Rhodium Group, a New York-based research firm that studies India and China. "But that has created tensions [elsewhere]. Look at Zambia, where an election was pretty much fought over China."
China and CNPC, though, have no choice. The Chinese are hungry for crude and for a position among the world's top oil companies. Iraq may prove the best place to satisfy both desires.