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Mining & Energy

China: Iraq oil production booming, Venezuela lagging


China Iraq Graph

Iraq Petroleum Production and Consumtion

The New York Times had an interesting article: ”China is reaping biggest benefits of Iraqi oil boom” on June 2, 2013.  The question that comes to mind is …

Why is Chinese production in Iraq booming, and in Venezuela lagging?

As late as 2007 and 2008, China clearly intended its investments in Venezuela to be its largest anywhere, to ramp up development of Venezuela’s huge Faja Orinoco extra-heavy oil reserves.  In those years, Iraq was still mired in sectarian war.  Yet, here we are in 2013, with Chinese production in Iraq surging and its companies’ production in Venezuela lagging.  Why?  Let’s first look at the Chinese relationship and logic in Iraq, then in Venezuela.

Geostrategic interests behind profit issue

The NYT article says that Chinese success in Iraq is largely because their oil companies aren’t especially interested in profits because they don’t have to answer to investors demanding higher returns; they just want to secure oil to bring home.

Yes, but one should see that this is also strongly a geostrategic imperative for Beijing. It is true Chinese firms can get along with lower profits, and they also have much more cash than others, which also helps them get in now at small profits for the long run.  However, unlike other firms, they are under specific instructions by Beijing to persist at getting into countries with huge reserves like Iraq and Venezuela because it is in the geostrategic energy interests of Beijing to do so.

Chinese geostrategic motivations to stick in Iraq (and Venezuela)

Before examining the better situation, on the ground, for Chinese firms dealing with Baghdad as verses Caracas, it is important to recognise Beijing won’t ever give up on either state. Beijing is the one power having serious reservations about too much reliance on the US/Saudi-dominated “global barrel” market-and-security system.  It is the only major power (aside from Russia) with aspirations to project power against the USA and its naval carrier fleets, at least in its near-home waters.

For any such confrontation of any duration, it needs  to have a certain significant percentage of oil brought directly home independent of the USA and the global market the USA dominates.  So, China’s energy firms tend to blend their deepening integration into global oil-market processes with old-fashioned bi-lateral mercantilist relationships with producing states like Iraq and Venezuela. (See also the Addenda below.)

Different contractual and working relationships in Iraq and Venezuela

China Venezuela Graph

Venezuelan Oil Production and Consumption

Chinese firms are clearly more willing to work with the difficult  resource-nationalistic conditions imposed by the Iraqi and Venezuelan states.  However, in many ways Iraq’s are more difficult, yet Chinese–and many others–do better getting production going in Iraqi than Venezuela.  Why?Iraq mostly limits foreign firms to service contracts, making it difficult for them to  book assets – again here Chinese goals are different from the private majors who need to book reserves.

In contrast, Bolivarian Venezuela’s conditions seem much less nationalistic, allowing foreign firms (at least de facto) to book reserves, with up to 40% participation in oil projects. Although contractually more restrictive, the Iraqi’s conceptually simple service contract mileu may actually allow Chinese (and other firms) to better advance on the ground than in Venezuela with its more complex, partnering relationship.

This is not just more complex negotiations and contracting processes; the fact that Venezuela has such a weakened managerial and technical capacity, ever since the failed oil strike of 2002 against Hugo Chavez’ presidency, also makes closely coordinated partnering difficult. In contrast to PDVSA’s chaotic managerial situation, as soon as foreign firms began returning to Iraq, many remarked at the competence and humility of Iraqi engineers and managers–who had maintained Iraqi production through years of sanctions–relative to working with national oil company personnel in most other states in the Gulf Region.

Note too, in spite of strict terms on contracts, the Chinese have been allowed to bring significant numbers of Chinese workers to Iraq, which is something that would be impossible on the same level in Venezuela and most of Latin America where it would provoke significant and justified local worker opposition.  Although Iraqi unions were quite active, especially around Basara and some other regions during the US occupation in defending workers’ interests, Chinese firms now seem to de facto have a freer hand on the ground in Iraq than in Venezuela.

Venezuela has long insisted, since before nationalisation in 1976, on using its own workers and engineers, and generally, as today, being the operator of its fields.  These are of course laudable aspirations.  However, Venezuela’s Bolivarian PDVSA has chronically failed to competently use its domestic labour force and to re-build the managerial and technical capacity destroyed in the 2002 oil strike.  In this situation, Venezuela’s more stringent limitations on labour and against foreign operation of projects, unfortunately, only means that little progress is made whenever money is invested.

Chinese goals are no different in Iraq from in Venezuela

There is no reason to think that the goals and motivations of Chinese companies and the Chinese state in Iraq are significantly different from those it has vis-a-vis Venezuela. So, why else might Chinese companies show significant production growth in, of all places, Iraq but not in Venezuela?

One may be as simple as infrastructure-in-place in Iraq that is not in place in the remote Venezuelan Faja.  Iraq, even with the devastation of the US invasion and war, has infrastructure it could restore.

So too, Iraqi contracts have been bid on in competitive rounds.  However, in Venezuela, under Hugo Chavez, while there was a Faja bidding round, a process of parallel, bi-lateral negotiations has also been ongoing, where negotiations for Chinese and others generally drag on interminably and non-transparently.

So, perhaps the explanation for China’s Venezuelan-production decline while China’s Iraq production has increased is not so much Venezuela’s resource-nationalistic high state-take as much as differences in the way PDVSA projects are mismanaged and investments tend not to find their way to projects, as well as due to  infrastructure limitations and (understandable) limitations on large-scale importation of Chinese workers.

Venezuela loses out to Iraq

A few years ago, I gave some talks in Venezuela warning against then-prevalent notions there of “peak oil”.  I maintained that Iraqi oil is very cheap to develop and plentiful, and Iraq’s return to the market could sink future investments in Venezuela’s much more expensive-to-develop Faj.  If PDVSA didn’t get projects going before Iraq came back online, Venezuela could miss out.

I even quoted Venezuela’s founding-father-of-OPEC, Dr. Perez Alfonso, who said that one of the main reasons Venezuela needed to be in OPEC together with the Middle East countries is that otherwise it could not compete against their vast, and much-cheaper-to-develop oil that could flood the market.

A Chinese official, about the same time, remarked to me: “Don’t worry, there is plenty of oil coming online in Iraq and Angola, and there we don’t have to deal with that man.” (i.e. Hugo Chavez). Now, here we are in 2012; Iraq is booming and Venezuela is in a yet-deeper production crisis.

China won’t give up on Venezuela in the long run, especially considering their energy geostrategy. But they are not going to throw away their money any more, like they effectively did in the early days of the relationship with Caracas, and for which they feel they have gotten too few opportunities for their companies to produce Venezuelan oil.

ADDENDA: The non-issue of Chinese companies out-competing US companies in Iraq.  Correctly understanding US oil motivations for the Iraq invasion.

When China’s success in Iraq has been discussed in the energy-sector and international affairs circles, the focus has mainly been to show that in a market-centred oil system (what this blog calls the “Global Barrel”) the fact that Chinese companies are getting the lion’s share of new Iraqi production is no threat to the USA’s energy security.

What should be added is that Chinese success in Iraq also does not mean that Washington’s oil-based motivations for its painful and mostly incompetently persecuted war to remove Saddam Hussein were geostrategically “unsuccessful.”

The oil motivations of the US (and Britain and other allies) in invading Iraq were never “colonial” or “mercantile” in nature.  The idea was never to “grab” Iraqi oil and “give it to US oil companies.”  That was the logic of the late-19th and early-20th century oil geopolitics.

Today, when most oil circulates through a relatively unified world market traded in US dollars, maintaining confidence in an open oil market is key. All the old conflicts between consuming powers, all the geopolitical competing for “concessions” managed by private majors, are nowadays avoided by a collective market-centred security system.

The USA has set itself up as the protector of this global market-and-security system.  Saddam Hussein was a threat to this market system, especially after he had seized Kuwait and threatened Saudi Arabia in 1991.

It was fundamentally to protect this MARKET, and the global-energy pax-Americana based on this market—and NOT for a neo-colonial oil grab for its own multinational oil companies–that the USA preemptively removed Saddam (and did so, by the way, in the most inhumane and incompetent manner imaginable for the Iraqi people).

So, the fact that Chinese, or for that matter French or Russian oil companies might do well in Iraq, with US companies falling into second or third place, is not a fundamental problem for the USA.

Source: The Global Barrel – Why is Chinese production in Iraq booming, and in Venezuela lagging?
 
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About Tom ODonnell

[This bio with hotlinks is at: http://www.umich.edu/~twod/bio/ ] Dr. Thomas Wilfred O’Donnell is an international academic, expert analyst and writer working on energy and international affairs, particularly the global oil and gas systems. Regions of interest include the USA, EU (especially Germany), Russia, China and the OPEC states of the Middle-East and Latin-American (especially Venezuela, Iran and Saudi Arabia). He teaches graduate seminars in Berlin at Hertie School of Governance and undergrads at Freie Universitӓt’s FU-BEST (European Studies Program). He previously taught at The University of Michigan (Ann Arbor) and The New School University (NYC). O’Donnell blogs at GlobalBarrel.com and has recently written for Berlin Policy Journal (Berlin), King’s College European Centre for Energy and Resource Security (London), Americas Quarterly (NYC/DC),Petroguía (Caracas & Latin America), AICGS (DC); reprinted in Natural Gas World, and is often interviewed by the international press. In Spring of 2015, Dr. O’Donnell was a fellow of The American Institute of Contemporary German Studies (AICGS) & The German Academic Exchange Service (DAAD) in Washington, DC interviewing US energy experts on German and EU energy vulnerabilities. He spent two full years, 2008-09, as a US Fulbright Scholar and Visiting Professor in Caracas at the Center for the Study of Development of the Central University of Venezuela (CENDES/UCV), returning several times since. He consults on energy, geopolitical and market/tech matters and is Senior Energy Desk Analyst at Wikistrat, O'Donnell's award-winning PhD thesis is in experimental nuclear physics (U. Michigan, Ann Arbor, 2000), which included research in several national and university laboratories. He is author or co-author of about 40 peer-reviewed physics papers. While doing post-doctoral physics and complex-systems research at U. Michigan, he taught social-science-focused courses in Science Technology & Society (STS) on historical technological change drawing on his industrial/scientific experience and also taught on issues of oil and geopolitics in Middle East and North African (MENA) Studies, as well as courses on the “Information Era” and “Energy and Environment,” and spent several semesters teaching in the Physics Department’s “Advanced Physics Laboratories” encompassing several subtopics. After his university studies, he spent 10+ years during the mid-1970’s to mid-1980’s working in U.S. automobile manufacturing, railways, and energy engineering, while writing and gaining a reputation in the US Midwest as an analyst and organizer of labor and social-political movements, developing extensive ties with activists and others in minority and immigrant working-class communities. This followed his initial (undergraduate) university years focused on political science and China Studies, where he had been an activist and organizer within political protest movements of the day. O’Donnell speaks English (native), Spanish (fluent) and functional German; he is fluent in various programming languages and computing environments. He resides in Berlin, accompanied by family; and maintains close professional and other ties to the USA.

Discussion

7 thoughts on “China: Iraq oil production booming, Venezuela lagging

  1. Reblogged this on CHINDIA ALERT: You'll be living in their world, very soon and commented:
    After all that effort it seems that the US is helping China with Iraqi oil. Thank goodness it has fracking to bolster its own supplies.

    Like

    Posted by keeper @ chindia-alert | June 18, 2013, 10:00 pm

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