Shell's Chinese Connection

China's hunger for commodities, as well as its lack of squeamishness when investing in political hot potatoes, could make it the ideal partner for Royal Dutch Shell in Iraq. On Tuesday, Shell's outgoing chief executive Jeroen van der Veer was cited as saying that "Chinese companies" were part of the process when it came to finding partners to help bid for Iraqi oil contracts.

A spokesman from Royal Dutch Shell confirmed that the company had started looking for partners for the first round of production licenses offered by Iraq, which cover six of the country's largest-producing oil fields and two gas fields. Although the abundant reserves of Iraq present great possibilities, they also come with strings attached: The negotiated terms of the profit-sharing agreements are so far allegedly pretty weedy regarding profit margins, and the big upfront costs and sizable political risk would also necessitate a partner of China's caliber.

"International oil companies have very seriously questioned whether they will be able to make a profit in Iraq," said Samuel Ciszuk, an analyst with IHS Global Insight. "In the end, it's the bottom line."

Not only is China ready to take political risks when it comes to energy investment, but it is also a promising domestic market for the commodities themselves. Ciszuk told Forbes that deepening ties with China's state-owned oil companies Sinopec and the China National Petroleum Company would improve Shell's access to the Chinese market, either in upstream exploration or the downstream refining market.

Other firms bidding in the first round of licenses include Chevron, BP and Exxon Mobil.

China has also served as the partner of choice for Iraq's neighbor, Iran, which last month signed a $3.4 billion liquefied natural gas deal with an unidentified Chinese consortium. Russia's Gazprom is rumored to be a future partner on the deal, but any hopes for a quick ramp-up of investment in the controversial Islamic Republic may be dulled: International and American sanctions on Iran will likely keep the project on hold for the time being.

[Source: Forbes, China, 14Apr09]

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