Risk-tolerant China investing heavily in Iraq as U.S. companies hold back
Friday, July 2, 2010
AL-AHDAB OIL FIELD, IRAQ -- China didn't take part in the U.S.-led invasion of Iraq or the bloody military battles that followed. It hasn't invested in reconstruction projects or efforts by the West to fortify the struggling democracy in the heart of the Middle East.
But as the U.S. military draws down and Iraq opens up to foreign investment, China and a handful of other countries that weren't part of the "coalition of the willing" are poised to cash in. These countries are expanding their foothold beyond Iraq's oil reserves -- the world's third largest -- to areas such as construction, government services and even tourism, while American companies show little interest in investing here.
"The U.S. really doesn't know what to do in Iraq," said Fawzi Hariri, Iraq's industry minister. "I have been personally, as the minister of industry, trying to woo U.S. companies into Iraq. There is nothing yet. Nothing tangible."
In the past two years, Chinese companies have walked away with stakes in three of the 11 contracts the Iraqi Oil Ministry has signed in its bid to increase crude output by about 450 percent over the next seven years. They also renegotiated a $3 billion deal that dates to when Saddam Hussein was in power.
Only two American firms won stakes in oil deals, an underwhelming showing that industry analysts and U.S. officials say reflects deep concerns about doing business in a country besieged by insecurity, corruption and political turmoil.
"They made a mistake and overestimated the risk," said Ruba Husari, an oil analyst in Baghdad who runs the Iraq Oil Forum, a trade Web site. "I think they did not realize on the spot that it was the biggest window of opportunity, and they missed out."
In an effort to meet the rising energy demands of its fast-growing economy, China has invested aggressively in oil-rich nations. Chinese companies have made notable inroads in the Middle East and Africa, in part because of a higher tolerance for risk and a savvy diplomatic corps that has laid the groundwork for advantageous deals.
Iraqi officials say they are heartened by their expanding ties with China but are still pursuing investment from other nations.
"They have gained a number of plum contracts for energy," Iraqi Foreign Minister Hoshyar Zebari said of the Chinese. "Wherever there is an oil well in the world, you'll see a Chinese flag next to it."
Working 'as partners'
At al-Ahdab oil field in Wasit province, roughly 100 miles south of Baghdad, about 200 Chinese laborers have begun work under a contract renegotiated in 2008 by a Chinese state-owned consortium, Al Waha Oil Co. Workers in red jumpsuits operate imported oil rigs alongside their Iraqi counterparts. Their workplaces are heavily protected by barricades and guards.
"People know they didn't participate in the invasion or the sanctions, and they have an old participation in Iraq that predates Saddam Hussein," said Ahmed Abdul-Redha al-Zanki, the senior engineer for Iraq's North Oil Co., which is working with the Chinese to develop the field. "They work with us as partners," in stark contrast to the condescending practices of Western companies, he said.
The French and Chinese have also made forays into the cement industry. The Chinese have started building a billion-dollar power plant in the south. The Chinese and the United Arab Emirates are in advanced talks to build residential complexes. The French automaker Renault and Germany's Mercedes-Benz are in advanced talks to make trucks for industrial transport, according to Iraqi officials. The South Koreans signed a memorandum of understanding to build a multimillion-dollar steel mill in the south and a power plant, and the Turks have scored a series of construction and government services contracts.
Except for a $3 billion General Electric contract to provide power-generating equipment and a Boeing deal, Iraqi and U.S. officials are hard pressed to point to any significant U.S. investment in Iraq. Outside of the two oil service contracts that American companies were awarded and U.S. government contracts, the United States "consistently ranks in the bottom" among investors, according to a 2009 study by Dunia Frontier Consultants, which tracks private investment in Iraq.
The United Arab Emirates is Iraq's top private investor, with plans to invest $70 billion across the country, followed by South Korea, a 2010 study by the same firm said. Turkey and Iran also are major trade partners with Iraq.
"We're coming off a financial crisis," a senior U.S. diplomat said, speaking on the condition of anonymity because of embassy rules. "You have to look at your bottom line. It's not the best time to be suddenly in the market as a new place to invest."
Worth the risk?
U.S. companies will probably continue to shy away, particularly after the State Department's latest Iraq investment climate assessment, issued in March.
"Potential investors should prepare themselves for significant security costs; cumbersome and confusing procedures for business visas or new business registrations; long payment delays on some Iraqi government contracts; and sometimes unreliable, non-transparent dispute resolution mechanisms," the assessment said. "Allegations of corruption are still endemic, and the legacy of central planning and inefficient state-owned enterprises continue to inhibit economic development."
But several countries have come to see Iraq as an incredibly promising market despite the risks.
The French government, which also did not participate in the war, recently set up a center in Baghdad to support French companies seeking to test the waters.
"This is a rich country," French Ambassador Boris Boillon said. "In this world of recession, in this period of global crisis, we need to get growth and expansion wherever you can find it."
Last fall, the French government helped arrange for 100 French businessmen to attend a five-day trade fair in Baghdad. Most other European and American delegations decided at the last minute that attending would be too risky.
The French chartered five buses and ferried the businessmen daily to the fairgrounds.
"I think Americans are fed up," Boillon said. "There is Iraq fatigue in the U.S. When you tell an American: 'You can go to Iraq and make business, because there are opportunities,' the guy thinks twice and says, 'Oh, Iraq -- that bloody country.' "