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Cablegate: China/Iraq: $3 Billion Oil Service Agreement

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBJ #3366 2450257
ZNR UUUUU ZZH
R 010257Z SEP 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9642
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS BEIJING 003366

SENSITIVE
SIPDIS

USDOE PASS PERSON
STATE PASS EEB

E.O. 12958: N/A
TAGS: PGOV ECON EPET EINV CH IZ
SUBJECT: CHINA/IRAQ: $3 BILLION OIL SERVICE AGREEMENT

REF: A. A) BEIJING 3342
B. B) BEIJING INTERNAL NOTE 8/25/08
C. C) BAGHDAD 2638

1. (SBU) Summary. The Chinese Government has confirmed that
a major Chinese state-owned oil company has agreed to a
contract to develop an oil field southeast of Baghdad. The
exact details of the as-yet-unfinalized agreement are
unclear, but appear to involve a fee-for-service arrangement,
with no guaranteed share of future production. Some analysts
criticized the Chinese for accepting less-profitable terms in
order to improve their chance of future access to Iraqi oil
fields. Neither Chinese government nor Iraqi embassy
contacts would comment on the deal. End Summary.

An "Agreement" in Beijing
---------------------------------

2. (U) At the Ministry of Foreign Affairs (MFA) regularly
scheduled press briefing, spokesperson Qin Gang confirmed
that the China National Petroleum Company (CNPC) had reached
an "agreement" with Iraq's central government to develop the
al-Ahdab oil field southeast of Baghdad (see ref A). Western
press reported that the deal will be worth US$3 billion.

3. (U) According to press reports, the agreement is a
renegotiation of a 1997 production-sharing contract with
CNPC. Under the new deal, CNPC reportedly agreed to a
fee-for-service arrangement. Iraqi Oil Minister Hussain
al-Shahristani said that under the revised contract the
al-Ahdab oil field will produce 110,000 barrels per day and
should pump for 20 years. The Chinese company will form a
joint venture with Iraqi partner Northern Oil Company to
complete the contract.

Details Unconfirmed
-----------------------

4. (SBU) Details of the actual terms of the agreement are
unconfirmed. The Chinese company has not verified Iraqi
statements on either the value of the deal or its contents.
Some oil industry insiders say that it will include
construction of an electricity station by a Chinese firm.
CNPC declined to comment, saying that the contract is not yet
finalized. The Iraqi Embassy said they have also been
instructed not to comment on the deal prior to government
approval.

5. (SBU) Some oil industry analysts have criticized the
Chinese deal, noting that most of the world's major oil firms
are holding out for production-sharing arrangements.
Likewise, they point out that the oil field in question is
located in an area near the Iranian border that could pose
security concerns.

Comment
------------

6. (SBU) A Chinese researcher at the Energy Research
Institute said that deal is "not a big thing for China,"
because of its low-profitability and relatively moderate
production volume. China's oil and commodity extraction
companies are often willing to accept smaller, less-favorable
deals than their Western counterparts in order to guarantee
access to raw materials. Industry analysts have told us that
throughout Africa China is signing contracts to develop
second- and third-rate mines and oil fields. In this case,
China apparently has pressed to complete an agreement,
accepting slightly less-profitable compensation in order to
establish themselves as good partners and open the door to
Chinese access to an important source of oil.
RANDT

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