An Iraqi worker at the Rumaila oil field Atef
Hassan/Reuters
By
<">Stanley Reed
and
<">Dexter
Roberts
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 (
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.
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.
