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

Iraqi oil production has surged. Source: EIA

[Updated/edited 5 June] 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 recognize 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

Venezuelan oil production has lagged. EIA 2012

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 nationalization 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 labor 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 labor 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

Credit: freevenezuela.org

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 anymore, 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-centered 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-centered 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.