A Chinese Lesson in Iraqi Oil Exploration

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Muhannad Fala'ah / Getty

The Tawke oil field near the town of Zacho, Iraq.

Iraq is preparing to open its doors to foreign oil companies in a big way. Petroleum experts believe the war-torn country is underexplored and could potentially rival Saudi Arabia in oil reserves. And so the biggest names in the industry will put in bids for 20-year contracts on six of Iraq's largest oil fields and two of its largest gas fields, with the Iraqi Oil Ministry scheduled to announce the winning bidders on June 29 and 30. In the running are Exxon Mobil, Shell and BP as well as smaller Chinese, Russian and other state companies. Winners will have a 75% stake in the project — with 25% to the partnering Iraqi oil company — and will be compensated for their costs plus a profit based on increasing a field's oil production.

But the winners have a cautionary tale to consider. The first foreign firm awarded a post-Saddam Hussein contract was the Chinese National Petroleum Corp. Oil began to flow six months after CNPC began work on the Ahdad field, located 90 miles south of Baghdad in Wasit province. But it involved learning to work with locals — with the community relations continuing to be volatile. (See a video of Iraq's domestic oil supply problems.)

In CNPC's deal with Baghdad, locals would be given work doing security for the facility alongside local police. But the jobs did not seem to satisfy the expectations of the residents. "We did not get a job and our house is suffering from unemployment," says Umm Mohammed, 65, who lives in nearby Alsabah village. "This is what disgusts me and my children." She and her neighbors say local investment and jobs were promised but not delivered and farmland was damaged by oilfield equipment and compensation was never provided. (See pictures of President Obama's visit to Iraq.)

Politicians back up the complaints. Says Ali Belo, chairman of the oil and gas committee of the Iraqi parliament: "Work on the field is negatively affecting their land and homes as well as the environment. The company has to either satisfy the residents by offering them jobs in, specially, guarding the facility and things like that, or expect that they won't be able to work safely."

If that sounded ominous, it was. In April, just a couple of months into CNPC's operations in Ahdab, power lines and equipment were sabotaged and stolen. Ministry and government officials downplay the April upheaval. Provincial authorities claim they have arrested a handful of vandals, who apologized and were released. Mahmoud Abdul Ridha, the head of the province council, chalked it up to a misunderstanding and said a committee has been formed for jobs and compensation. But some locals are still angry. Says Abu Koraichi, 58, a farmer in Alsabah village, "The sons and people of our villages will not stop attacks until we get our rights and I see that as very legitimate rights."

Now, Ahmad Abd al-Rida al-Asadi, the head of the Ahdab field project for the North Oil Co., the Iraqi state firm in charge, calls Wasit province "very quiet." But he wants the Iraqi government to "send additional security forces because this project is very important for the Iraqi people and all eyes fall on this project because there is a foreign company for the first time working inside Iraq."

Despite or perhaps because of this experience, China, which is known for making deals in unstable conditions and world pariah governments, may now have a leg up on Western oil firms. It has learned an important lesson: keep the locals happy. Says Kamel Al-Rafii, 64, a former economics professor at the University of Wasit: "I imagine that the Chinese company will succeed in the courageous step in the exploration of Ahdab and this will encourage other foreign companies to follow their example." Indeed, none of the companies on tap for the bids at the end of the month show any signs of backing away. With reporting by Nizar Latif/Wasit and Alaa Majeed/New York