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22 March 2010 (Upstreamonline.com )

PetroChina will be targeting Iraq and Iran and is looking to focus on five projects — the Ahdab, Rumaila and Halfaya oilfields in Iraq, and the North Azadegan and Masjed-i-Suleiman fields in Iran.

Company chairman Jiang Jiemin said entering the Middle East market had been the ambition of several generations of Chinese oilmen, given the region’s importance in the oil and gas industry.

PetroChina and Iraqi officials met in Abu Dhabi in January to discuss the development of three Iraqi oil and gas fields, which have given PetroChina access to total estimated reserves of more than 20 billion barrels.

Jiang said the development of Halfaya will start in the second of half of this year. The company now owns a 37.5% stake, with French giant Total and Malaysia’s Petronas each holding a 18.75% stake and the 25% balance held by Iraq’s South Oil Company.

Meanwhile, PetroChina has started drilling at Iran’s South Pars gas project to evaluate the reserves for the field’s Phase 11 development, though limited access to key liquefying gas technologies due to US sanctions is proving problematic.

The new initiative is part of the company’s long-term strategy to triple its foreign hydrocarbon production to 200 million tonnes of oil and gas equivalent by 2015 or beyond. A similar volume will be also produced from PetroChina’s domestic fields.

Last year, Chinese companies produced a total of 110 million tonnes of oil and gas equivalent, 50% of which was equity oil from increased acquisitions of foreign upstream assets.

Last year, China concluded 11 foreign acquisition deals out of 13 proposed, worth a total of $16 billion, according to PetroChina deputy chief economist Li Jianzhong.

PetroChina’s production hit a record 69.6 million tonnes of oil and 8.2 billion cubic metres of natural gas last year — an increase from 2008 of 12% and 22%, respectively.

However, the company has seen production from its major fields such as Daqing and Liaohe fall in recent years after reaching a production plateau a few years ago.

A consortium led by CNOOC Ltd, the Hong Kong-listed unit of China National Offshore Oil Corp., has signed an initial agreement with Iraq to develop the 2.5 billion-barrel Missan oil field complex in southern Iraq, a senior Iraqi oil ministry official said Monday. Sabah Abdul Kadhem Al Saadi, director of the legal and commercial office at the Oil Ministry & apposes Petroleum Contracts and Licensing Directorate, told Dow Jones Newswires that a final deal could be signed within days, pending approval by the Iraqi cabinet.

CNOOC and its partner, Sinochem International Corp, last week agreed to the Iraqi oil ministry's proposals to develop the three Missan fields - Fakka, Buzurgan and Abu Ghirab. The CNOOC/Sinochem alliance made an unsuccessful bid for the complex in the country's first licensing auction in June. The two Chinese state-run firms initially offered a remuneration fee of $21.40 for each extra barrel of oil produced and suggested raising production from the fields to 450,000 barrels a day. They subsequently lowered the fee to $18.09 a barrel, but that was still much higher than Baghdad's proposed fee of $2.30 a barrel. CNOOC will hold a 60% stake in the venture; Sinochem will own 15% with an Iraqi state company holding the remaining 25%, according to the Iraqi oil ministry.

Awarding Missan brought to 11 the number of deals signed with international companies from the first and second bidding rounds held last year. Iraq aims to boost its production from these oil fields to 12 million barrels a day in six to seven years from current 2.5 million barrels a day, officials said. It would also make the Chinese oil companies the dominant foreign players in Iraq's promising oil sector, following four big development deals they signed in 2009 and 2010, including the one for the supergiant Rumaila oil field in partnership with BP and Ahdab field.

The Chinese were the only companies that bid last year for Missan oil fields after other companies were discouraged from bidding for the fields because some of them are in a disputed area near the border with Iran. In December, Iranian troops occupied an Iraqi well in the Fakka field bordering Iran and caused a political and diplomatic row. Last month, the Iraqi government said Iran withdrew its troops from the field but wanted negotiations to demarcate the borders.

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 the 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 worlds top oil companies. Iraq may prove the best place to satisfy both desires.