CNOOC, Sinochem Sign Up to Develop Iraq's Maysan Fields

Maysan Return

China’s two smaller state-owned oil and gas companies CNOOC and Sinochem—the latter mainly a petrochemicals company—have joined its two larger compatriots CNPC and Sinopec in investing in Iraq’s upstream assets, returning to their previously failed Maysan field bids and agreeing to meet the Iraqi Oil Ministry’s tight remuneration fee offer. Securing the three fields that make up the Maysan oilfield complex—Buzurgan, Abu Ghirab, and Fakka—the companies have ventured into an area that no other IOCs or NOCs were particularly interested in, given previous local political difficulties as well as their location close to the Iranian border.

CNOOC and Sinochem are reported to have agreed to the government’s maximum remuneration fee offer of US$2.30/incremental barrel produced (see Iraq: 5 March 2010: CNOOC, Sinochem Reported Near Final Deal for Iraq's Maysan Fields). The companies initially submitted a bid for US$21.40/incremental barrel remuneration to undertake the development and then lowered their bid to US$18.09 in the first licensing round last year, before abandoning their bid altogether. As ExxonMobil and Shell, as well as an Eni-led consortium, restarted talks with the Oil Ministry during the latter part of 2009 for the West Qurna-1 and Zubair mega-fields respectively, there was no news of the Chinese companies moving forward, with reports only surfacing in the last two months that the Maysan fields were again under serious discussion. According to reports by Dow Jones, CNOOC and Sinochem are still aiming to lift production at the complex to about 450,000 b/d, far more then the initial government target of 275,000 b/d. CNOOC will have a 60% stake in the project and SInochem 15%, with a state-owned Iraqi venture—most likely the Maysan Oil Company (MOC)—holding the mandated 25% state share.

Taking on the Risk

The Maysan field complex was not one of the Iraqi mega-fields tendered for long-term technical service contract (TSC)-based development in the first and second licensing rounds, but was rather included because of political pressure being placed on the government to get development underway in Iraq’s border areas in order to counter widely perceived incidents of Iraq’s neighbours—in this case, Iran—stealing from Iraqi reservoirs. This issue has become an inflamed topic in the Iraqi press and harks back to political propaganda against mainly Iran and Kuwait disseminated during the rule of former Iraqi dictator Saddam Hussein, providing him with some domestic legitimacy for his territorial claims—and wars—against the two neighbours. There is, however, scant evidence to suggest this happening now, especially given the lack of Iranian funds and technology to fully finance the exploration and development of its own more important reservoirs.

Still, areas on the outskirts of the Fakka field became the focal point for a border dispute late last year and in early 2010 as a disused well from a part of the Fakka reservoir, which has not been in production for several decades, was occupied by Iranian forces in December (see Iraq: 24 December 2009: Iran Calls for Border Demarcation Talks After Oil Well Row with Iraq). The incident followed Iraq’s second licensing round’s successful tendering of other border fields and indicated that Iran wanted to send a strong message to Iraq to involve it in all matters concerning the development of reservoirs along their long-disputed border.

Involving Chinese companies in the development of fields bordering Iran is, however, a relatively good solution for Iraq and poses an acceptable risk for the Chinese companies themselves, as Iran is increasingly dependent on China for the inflow of technology and investment to the energy and other sectors as well as on Chinese support in the UN to repel further sanctions. Hence, Iran is much less likely to disrupt a project in Iraq that is run by Chinese state companies, given wider geopolitical considerations.

Still, the Maysan fields became embroiled in the 1980-88 Iran-Iraq war, with there being significant fears that resulting damage to their reservoirs might have been extensive. This will likely have been investigated by the companies before they started bidding, but with CNOOC and Sinochem having relatively little experience from similar onshore fields in the Middle East, there are fears that the Iraqi side might not have secured the best possible partners for these fields from a technical point of view, although that will not become clear for a few years.

China Galore

CNOOC and Sinochem enter Iraq with a still relatively sizable project, after its larger compatriots CNPC and Sinopec have already established strong footholds in the country. Taken together, the Chinese state is now by far the largest single investor in the Iraqi upstream sector, with CNPC partnering BP on the massive Rumaila development (targeting a 2.85-million-b/d output) and on the Halfaya project, together with partners Total and Petronas (targeting a 535,000-b/d output). Sinopec has, for its part, entered the autonomous Iraqi Kurdistan region—disqualifying it from taking on projects in Iraq proper due to the dispute between Iraq and Kurdistan about control over its resources—through its acquisition of Addax Petroleum and its Taq Taq field. Taq Taq is one of Iraqi Kurdistan’s first fields to come onstream and could see a peak production of at least 150,000-200,000 b/d.

Outlook and Implications

The companies and the Iraqi Oil Ministry have agreed on the details, signing a contract that now has to be ratified by the cabinet before it can be fully and officially finalised. This might happen in the coming days as the official—and even the preliminary—general election result is awaited. If not, it might take until a new government coalition is formed, a process that might take quite some time given the fractured Iraqi political landscape.

Delays in signing the contract might be particularly damaging for the Chinese players, however, which are especially vulnerable to government and Oil Ministry holdups in organising and launching the expansion and repair programme of Iraq’s pipelines and export infrastructure given that the Maysan fields are located further away from the country’s export hubs and most of the pipeline networks in the south than the majority of the fields awarded in the two licensing rounds. Almost any incremental production will hence require government-led infrastructure expansion to have gotten underway, adding to the financial risks of the Maysan project