Chinese oil companies have invested billions of dollars into Africa over the past decade, developing relationships with oil producing countries such as Angola, Congo and South Sudan. Now China is quietly developing another strong oil axis: Beijing-Baghdad.
Fatih Birol, chief economist at the International Energy Agency, calls it the "B&B" link, saying it involves both imports of crude oil and direct investments. In effect, China is replicating in Iraq what it has done in several African nations.
The "B&B" oil link would not only be key for the oil market, but could also force a bigger political and military involvement of China in Iraq and the broader Middle East. Chinese state-owned oil companies are extremely active in the rehabilitation of the Iraqi oil industry.
CNPC, PetroChina and Cnooc are either partners or operators of several oil contracts awarded by Baghdad to international oil companies between 2008 and 2010 to develop super giant oilfields including Rumaila and Halfaya.
In total, the Chinese oil companies are involved in projects that will produce 2m barrels a day by 2020, and almost 3m b/d by 2035, according to a new in-depth study released this week by the IEA. The watchdog estimates that Beijing would buy a growing share of its oil from Iraq as the country ramps up its production over the next two decades.
By 2035, the Paris-based IEA believes that Iraq would produce more than 8m b/d, and a quarter of that, or 2m b/d, would be exported to China. "Iraq's position as the major provider of additional barrels of oil to the world market means that it will naturally be drawn to the high-growth markets, notably China and India, where growth in global oil consumption will be concentrated," the IEA said.
The exports of Iraqi oil to Chinese refiners will have to cross the Strait of Hormuz, the narrow ship lane between Oman and Iran. The anticipated surge in Chinese buying of Iraq oil will mark a significant change with the status quo.
At the moment, Iraq is a relatively small supplier to China, accounting for 5 per cent of the country's imports last year, equal to about 275,000 b/d. In comparison, African countries today play a bigger role. Last year Angola was the second-largest exporter, supplying 620,000 b/d.
In addition, China bought about 260,000 b/d from Sudan, and another 130,000 b/d from Congo. For China, the surge in imports of Iraqi oil carries risks because of the danger that security, legal obstacles and lack of infrastructure could delay the increase in Iraq's forecasted production, forcing Beijing to look for alternative suppliers.
China has already experienced the problem this year, when imports from Sudan and South Sudan suddenly dried up because of a conflict between the two nations.
Taken from the Commodities Note, the daily online commentary on the industry from the Financial Times.