VZCZCXYZ0008
OO RUEHWEB

DE RUEHBJ #3575/01 2560901
ZNY CCCCC ZZH
O 120901Z SEP 08
FM AMEMBASSY BEIJING
TO RUEKJCS/SECDEF WASHINGTON DC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEHGB/AMEMBASSY BAGHDAD IMMEDIATE 0193
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 003575 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CN JHABJAN 
STATE FOR EEB/ESC/IEC/ENR 
STATE FOR INR/EC 
STATE FOR INR/EAP 
STATE FOR INR/NESA 
STATE FOR NEA/I 
 
E.O. 12958: DECL: 09/10/2023 
TAGS: ECON EFIN ENIV ENRG IZ CN
SUBJECT: CHINA-IRAQ OIL CONTRACT HIGHLIGHTS PRESSURES ON 
CNPC 
 
REF: A. BAGHDAD 02951 
     ¶B. BEIJING 03366 
     ¶C. BEIJING 01374 
 
BEIJING 00003575  001.2 OF 002 
 
 
Classified By: Minister-Counselor Robert Luke for Reasons 1.4 (b) and ( 
d) 
 
¶1. (C) Summary. Iraq drove the terms of the oil service 
contract with China signed in August 2008, and China will 
probably move slowly in implementing the terms of the 
agreement, according to Chinese energy experts. CNPC signed a 
USD 3 billion oil service contract to develop the Al Ahdab 
oil field southeast of Baghdad (see reftel 03366). The 
experts said that CNPC was under tremendous pressure from the 
central government to ensure a stable supply of oil and 
signed the contract because of growing international energy 
competition, rising domestic demand for oil, and its interest 
in getting into the Iraqi oil market. The deal is probably 
linked to China's decision to forgive USD 8 billion in Iraqi 
debt in 2007 and while the terms of the contract are not 
particularly favorable, China may see the contract as a way 
to win future preferential treatment from Iraq. End Summary. 
 
Deal Less than Favorable 
------------------------ 
 
¶2. (C) The decision to structure a deal as a service contract 
instead of a production-sharing contract was driven by Iraq 
(see reftel 02951), according to Peking University Professor 
Zha Daojiong. He speculated that Iraq pushed the deal with 
China to signal to other countries, such as the United States 
and Great Britain, that Baghdad would take a tough 
negotiating position in signing future oil contracts. Given 
the less than favorable terms of the deal for China, Zha 
expected China National Petroleum Company (CNPC) to move 
slowly in implementing the agreement, saying China would 
probably not send oil workers anytime soon and it was 
unlikely that we would see oil from the field for at least 
two years. (Note: According to press reports, Iraq announced 
that if work did not start on the Al Ahdab field within two 
months, China would risk losing the contract. End note.) 
 
¶3. (C) Zha said CNPC agreed to the contract because it was 
managing three "squeezes". CNPC was being squeezed by global 
energy competition, which increased the negotiating leverage 
of oil exporting nations, growing domestic demand for oil, 
and what Zha described as the tenuous nature of energy 
contracts, which are often renegotiated. Zha emphasized that 
as a major oil importer, China benefited from bringing 
additional oil supplies onto the market, even if CNPC would 
not enjoy a share of the profits. Energy Foundation Chairman 
Yang Fuqiang added that CNPC aimed to get its foot in the 
door in the Iraqi oil market and further diversify its energy 
sources. 
 
Business and Political Considerations 
------------------------------------- 
 
¶4. (C) Zha and Yang said the deal was driven by both business 
and political considerations. CNPC has a history of 
engagement in Iraq going back to the oil for food program and 
is actively seeking replacement reserves abroad to supplement 
stagnant domestic production. Additionally, the cost of 
domestic oil exploration for CNPC is high. At the same time, 
CNPC is under tremendous pressure from the government to 
ensure China has a sufficient supply of oil and the deal 
would not have gone through without the central government's 
approval. 
 
Indirect Link to Debt 
--------------------- 
 
¶5. (C) The oil service contract is probably indirectly linked 
to debt forgiveness (Note: According to reftel 01374, an 
official at the Iraqi embassy in Beijing said a deal to 
forgive Iraqi debt owed to Chinese state-owned entreprises 
was contingent on an Iraqi decision to uphold Saddam-era 
 
BEIJING 00003575  002.2 OF 002 
 
 
contracts for oil exploration by Chinese firms. End note.) 
Zha said that Iraq repeatedly pressured China to forgive its 
debt and hinted that it would link energy deals to China's 
willingness to comply, but added that the USD 3 billion 
service contract was not a sufficient return for the debt 
forgiveness. Yang added that China was adopting a long-term 
perspective on the issue and probably viewed debt forgiveness 
as a way to win preferential treatment from Iraq as the Bush 
administration neared the end of its second term. 
RANDT