China Outbids Oil Majors in Iraq

NEW YORK (TheStreet) -- Chinese national oil companies are now the biggest beneficiary of Iraq's oil resources, beating the oil majors, according to analysts.

"Chinese companies backed up by the Chinese government enjoy serious advantages over the international oil companies (IOC) and also have better bargaining power," according to Gal Luft, the executive editor at the Institute for the Analysis of Global Security. "One should not forget that those companies are less risk-averse and therefore can take on projects that the IOCs wouldn't want to touch."

Adds Cameron Hanover analyst Peter Beutel: "China has the money and is clearly a rising power. It can offer political help, technological help in some cases, military aid -- which none of the majors can."

"So, take Libya for example. China can offer guns and weapons and can offer political protection to the new government. So can France, but the majors can't. That's the biggest difference right there," Beutel continues.

A.T. Kearney's partner in the Energy Practice, Neal Walters, agrees that China's ability to aggressively pursue oil and gas investments in developing nations at a higher rate than Western super major competitors lies in the country's ability to offer incentives beyond cash. This also includes economic cooperation and training agreements in return for secure access to oil in Iraq.

The Chinese and Iraqi governments signed two agreements on economic cooperation and training in July 2011.

China is willing to make significant investments in infrastructure -- in Iraq's case, pipelines -- to procure the oil, says Walters. PetroChina(PTR), for instance, is in the early stages of studying a plan to build two oil and gas pipelines to move oil from Iraq and eventually gas from Iran to China, he said.

"Exxon(XOM), on the other hand, has shareholders to answer to and can't simply bid up resources without regard to return on investment," says Morningstar analyst Allen Good.

The other advantage for the Chinese companies: "they have a wolf pack strategy in which three or four of their companies -- all state-owned -- bid at the auction," says Luft of the Institute for the Analysis of Global Security. "When you have a few companies all working under the same umbrella, bidding simultaneously, that gives a huge advantage. I wouldn't be surprised if the bids are coordinated."

"As for Iraq-to now, China is the biggest beneficiary of Iraq's oil treasure," Luft sums up.

Walters of A.T. Kearney says China's ultimate objective is to repatriate the oil to support its growing energy needs. Because of this, Chinese-backed oil companies and their subsidiaries are willing to accept the tight financial terms of operating in Iraq.

Dragan Trajkov, an oil and gas analyst at Renaissance Capital, says the fiscal terms in Iraq are among "the most stringent ones in the world," with the government taking between 90% to 95% of the profits. On the bigger fields, the companies only make $1.50 to $2 a barrel, and the rest of the profit goes to Iraqi government.

The other thing, says Trajkov, is all the oil produced is put in a federally-owned pipeline and sold by an entity that's owned by Iraqi government. Therefore, it's difficult to split the production and say where the "Chinese-produced" barrels are going and where the rest are going.