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Chinese Reconstruction Investment in Iraq and How It Is Being Misunderstood. By Tang Tianbo

reviews the history of China’s economic engagement with Iraq and contributions to its post-invasion reconstruction by producing more oil and building cost-effective infrastructure, boosted by a recent “oil for reconstruction deal”. It will also try to debunk some popular myths about Chinese-Iraqi cooperation that refer to China filling a vacuum left behind by the West or being an economic hegemon in Iraq.

1958-2003: Historical review of Chinese-Iraqi economic relations

In retrospect, three stages can be identified in Iraq and China’s history of bilateral economic relations. From 1958 to 1978, the major driver was ideology and revolution. China and Iraq established diplomatic relations in 1958 after Iraq abolished its monarchy and became friendly with the Soviet Union. Among all the socialist countries, China once was the largest importer of Iraqi dates. By purchasing dates, Chinese people thought they were supporting the “Iraqi Revolution” and, regardless of its own economic difficulties, China undertook construction projects in Iraq as foreign aid to support a third-world comrade in the struggle against imperialism.

From 1979 to 1990, the bilateral relationship became more pragmatic and highly beneficial to China. After China launched its economic reform program in 1978, Iraq was the first country where Chinese companies won overseas construction contracts worth more than $30 million. In the 1980s, Iraq emerged as a vital market for Chinese international project contracting:

1979-1985: Iraq accounted for over 30% of total contract value won by China and became its single largest market.

  • In 1985, four in every ten Chinese workers dispatched overseas went to Iraq. Over 20,895 Chinese citizens were working in Iraq by the end of 1985 compared to only 10,331 in 2020.
  • 1979-1990, China had won construction contracts worth $1.9 billion in Iraq.

Considering China’s foreign reserve was below $20 billion and the country had a severe manpower surplus in the 1980s, Iraq’s economic significance is hard to overstate, providing China with valuable earnings, well-paid overseas jobs and a proving ground.

From 1990 to 2003, bilateral economic cooperation was conducted in line with international law. The Gulf War and the following sanctions ended the golden age of China-Iraq economic relations and China did not participate in Iraq’s reconstruction until the launch of the United Nation’s Oil-for-Food Program in 1996. Besides providing humanitarian aid, China resumed trade with Iraq and all the relevant contracts had to be reviewed by the UN in advance. In terms of value, only about half of the contracts were approved by the UN from 1996 to 2002. The tentative energy cooperation respected UN regulations too. In 1997, China National Petroleum Corporation (CNPC, one of China’s national oil companies), signed a contract worth $1.3 billion to develop the oil and gas field of Ahdab for Iraq’s Oil Ministry. Both sides agreed that the contract would not be implemented until “time is ripe”, referring to the lifting of the UN sanctions.

After 2003: Debt relief, oil development and the “oil for reconstruction” deal

China opposed the United States’ invasion of Iraq in 2003. However, it gradually began increasing support for and engagement in Iraq’s reconstruction. The efforts started with debt relief. Among UN-led efforts, China wrote off all Iraqi debts owed to the Chinese government in 2007 and 80% of the $8.5 billion to Chinese companies in 2010. Debt forgiveness was rare considering the large amount and China’s preference to renegotiate debts rather than cancel them. China did not link the debt relief to oil deals like Russia did.

After 2003, China was an early bird to Iraq’s oil sector. In 2008, Iraq and the CNPC re-signed the contract to develop the Ahdab oilfield, which was the first major oil deal honored by the new post-Saddam Iraqi government. Operated by CPNC, Ahdab reached production targets three years ahead of schedule and provided Iraq with an additional $10 billion to fund its reconstruction. Chinese companies then had won more contracts and purchased stakes to develop Iraq’s oil and gas fields. In 2019, China’s investment in Iraq had exceeded $20 billion according to the Chinese ambassador in Baghdad. Along with the growing footprint in oil upstream, Chinese companies won plenty of contracts in oilfield service and power generation. In 2018 alone, the value of contracts newly signed by China was more than $5 billion.

In 2019, Iraq and China agreed to upgrade and streamline the reconstruction cooperation by signing the so called “oil for reconstruction” agreement. In its original version, the revenue from 100,000 bpd of Iraq’s oil exports to China with concessional credits provided by China will fund reconstruction projects of roads, railways, schools and hospitals, with a duration of twenty years. The projects will be decided by two countries together and open to third-country corporations. The implementation of the agreement started in 2021. Two Chinese companies will build 1,000 schools nationwide, which will be costly for the Chinese but provide the reconstruction that Iraq is in urgent need of. In May 2022, the construction of 177 schools had been started.

Myths and misunderstandings

Recently, Chinese-Iraqi cooperation has gained increasing attention but it has been shrouded in controversy. It is worthwhile to clarify certain popular myths about it.

Myth #1: Chinese oil companies were filling the vacuum left behind by the West and became dominant in Iraq.

There is no such vacuum and transfers occur among Western companies themselves. Some Western oil companies like BP, ExxonMobil and Shell did try to sell their stakes in Iraq’s oil fields due to “unsuitable investment environment” in mid-2021. However, a May 2022 Reuters report said the Iraqi government managed to stop three such prospective sales whose potential buyers are Chinese companies. For the moment, BP has decided to stay, Shell is keeping its commitment to Iraq’s gas sector, and when ExxonMobil leaves Iraq, it will be partly replaced by TotalEnergies, which planned to invest an initial $10 billion after signing energy contracts worth $27 billion with Iraq.

Myth #2: Chinese companies can accept lower profits in Iraq because they are state-owned companies.

In 2013, a widely circulated New York Times article said this helped China in “Reaping Biggest Benefits of Iraq Oil Boom”. However, it is only a half-truth. On the one hand, Iraq awarded contracts for its mega oilfields to a group of foreign oil companies instead of a single one after 2003. Hence most contracts won by China were in cooperation with other oil giants like BP, Exxon Mobil and TotalEnergies. All the companies rather than China alone had to endure the harsh contract terms set by the Iraqis and the low profits that followed.

On the other hand, some international companies chose to leave Iraq because they have better choices, just like Exxon Mobil said it wanted to “focus on advanced assets with the lowest cost of supply” in Guyana, Brazil and the U.S. Permian Basin. Chinese companies, however, have few better alternatives than Iraq. An executive from CNPC once said, “(Producing oil in) Iraq is difficult, but nowhere near Sudan”. Staying in Iraq has little to do with the fact that Chinese companies are state-owned but has lots to do with them being latecomers to the global market. Their technological competitiveness is still inferior to that of Western giants, limiting Chinese companies’ ability to win contracts in developing gas or unconventional oil.

Myth #3: China has become a dominant economic power in Iraq and Iraq has become a Chinese client state.

China’s influence in Iraq is lower than people generally think. A closer look at Iraq’s upstream industry can tell us why. Among the largest oilfields (see the table below), Chinese companies’ stakes are equal or close to its foreign partners in Rumalia and West Qunar-1, but the Chinese are merely the contracting party who share the profits and not the operator who runs the oilfields and determines production. In mega oilfields like West Qunar-2, Zubair and Majnoon, China has neither stakes nor a role as an operator. All the oilfields operated by China have relatively moderate reserves and production. In contrast, out of Iraq’s total production of around 4 million b/d, the largest five oilfields, all operated by non-Chinese companies, take up 2.85 million b/d already. To sum up, China may be the largest investor by adding up all the stakes but when the oilfields are not operated by Chinese companies, China’s role cannot go much beyond the role of an investor and a passive recipient of revenues, yielding only limited influence.


* The production of the oilfields are lower than their capacity due to the OPEC production cuts.

** Iraq and foreign oil companies sign the technical service contracts (TSC) under which Iraq kept the ownership of the oilfields and the foreign companies get a fixed fee per barrel from the oil they produce when certain conditions are met, distributed according to their stakes in the contracts.

Source: The author’s work is based on annual books, press releases from the corporations, websites of Spglobal, MEES and Iraqoilreport.

Iraq is certainly not a Chinese client country. It is always the countries with military presence and political allies inside Iraq, like the U.S. and Iran, that have a strong say in Iraq’s volatile political environment. The Iraqi government has also tried to diversify its sources of investment by providing TotalEnergies with better contract terms to secure the $27 billion deal. It also canceled a $2 billion pre-paid oil deal with China after the oil price bounced. Nowadays, it is always the host country of the oil, not the foreign investor, that is calling the shots.

Myth #4: “Oil for Reconstruction” agreement means a debt trap for Iraq.

Iraq does not link any fixed asset to the deal and the 100,000 b/d involved was less than 10% of Iraq’s total oil exports to China, and even less significant in comparison to Iraq’s total exports—about 3.44 million b/d in 2021. With the moderate size of oil and money involved, it will hardly increase Iraq’s debt burden.

Myth #5: China teams up with Iran in Iraq to confront the US

As mentioned above, the partners of Chinese companies in Iraq were primarily Western. In 2019, the CNPC tried to cooperate with the US oil giant ExxonMobil in the latter’s unfulfilled $53 billion mega oil project in Iraq. China’s recent success in Iraq is partly due to its avoidance to be dragged into the US-Iran rivalry.

While the US is withdrawing from Iraq, China is holding and expanding its economic footprint in the country. This may increase the anxiety of those seeing China and the US as playing a zero-sum game in Iraq. However, the US and China have remarkable common interests. By increasing Iraq’s oil production, China helped supply more oil to the world market and contain the price of oil which is a priority for the US too at the moment. Moreover, by building and rebuilding infrastructure in Iraq, China is fixing a country at least partly broken by US actions in the past.

Source: Manara Magazine, July 2, 2022

CICIR-China Institutes of Contemporary International Relations


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