Chinese Firm Linked to CNPC Suspected of Fraud in Iraq

Investigators at Iraqi State-Owned Company Say Hermic Faked Documents to Win Bids

Just after the December 29 celebration of the Muslim holiday Ashura in southern Iraq, heads of the Iraqi subsidiary of China National Offshore Oil Corp. (CNOOC) received a letter titled “Suspending all activities of Hermic.”

The sender of the letter was Jameel Hussain, Vice General Manager of Missan Oil Co. (MOC) and Chairman of the joint management committee (JMC) of the Missan oil block.

“We would like to inform you that you should suspend all the activities of your company with Hermic especially the contract of water pipeline 24,” Hussain wrote, without giving any reason.

MOC is a state-owned Iraqi oil company. In May 2010, CNOOC signed a technical service contract (TSC) with the Missan oil block in southeastern Iraq. About four months earlier, another Chinese oil giant, China National Petroleum Corp. (CNPC) also won a TSC with Halfaya oilfield owned by MOC.

Caixin learned that an investigation team headed by Hussain was formed in Iraq with support from the Iraqi Ministry of Oil to probe contract activities related to MOC. Hermic, an oilfield service company controlled by former executives of CNPC, had won twelve engineering outsourcing contracts worth US$ 75 million from the CNPC Halfaya project since 2010. The total value of contracts outsourced by the CNPC’s Halfaya operation to Hermic and its affiliated companies is estimated to reach US$ 115 million, a figure that apparently prompted fraud suspicions.

Special Contributions

The Halfaya oilfield in Iraq’s Maysan Province is one of the seven largest oilfields in the country, with proven reserves of 16 billion barrels of oil.

In December 2009, a consortium formed by CNPC, Malaysia’s Petronas, and France’s Total SA won the right to extract nearly 4.1 billion barrels of oil in Halfaya in the second round of post-war oilfield bidding held by the Iraqi government. According to the contract signed in January 2012, over the next twenty years, CNPC, Total, Petronas, and Iraq’s South Oil Co. (SOC) would hold 37.5 percent, 18.75 percent, 18.75 percent, and 25 percent, respectively, of the Halfaya oilfield. CNPC was the operator. After bidding was completed, MOC replaced SOC as owner and supervisor of the field.
 
According to the contract, within the first three years, daily production of Halfaya was set to reach 70,000 barrels and increase to 535,000 over the next four years. A press release from CNPC in July 2012 said the first phase of the Halfaya project started operation on July 18 that year with annual capacity of 5 million barrels, meaning one target was reached fifteen months early.

In April, Iraqi Prime Minister Nouri al-Maliki honored Zhu Junfeng, Deputy General Manager of CNPC Iraq, for the company’s “special contribution in the development of Halfaya oilfield.”

“CNPC’s construction was done the fastest,” a subcontractor close to CNPC’s Halfaya operation said. “Other operators, including CNOOC, in other fields have failed to meet the production targets. That gives the Iraqi government a headache, and then they use the Halfaya project as an example.”

The Halfaya project is China’s largest overseas oil operation. As the project operator, CNPC leads the works of every section of the project, including construction, service, and equipment purchases.

Among the list of equipment and service suppliers for the Halfaya project, many are CNPC’s affiliated companies, such as CNPC BGP Inc., Daqing Oilfield Co., and CNPC Bohai Drilling Engineering Co. There are also international players such as Schlumberger Ltd. and Weatherford International. One of the subcontractors was Hermic, a company with a Western-style name but a Chinese management team.

Fake Documents

Company document shows that Hermic’s parent, Hermic Group, was established in 1986 in the U.S. state of Texas as a construction company. In 2007, the company expanded its business into oilfield infrastructure and engineering.

The company’s major deals include a US$ 4 million warehouse contract with Brazil’s Petrobras in 2006, an oil pipeline construction contract with Shell in Gabon in 2007, and a US$ 5 billion pipeline renovation contract from Chevron in Argentina. It has worked with many other big names in the international oil industry.

Hermic’s financial reports show that the company’s total assets increased from US$ 196 million to US$ 238 million from 2007 to 2009. Net profits rose from US$ 5.5 million in 2007 to US$ 9.5 million in 2009.

Since 2011, Hermic has become very active in Halfaya. Data found by Caixin found that from 2011 to 2013, Hermic won at least twelve contracts in Halfaya from CNPC.

But since the summer of 2013, its Iraqi partners have started investigating Hermic, and preliminary results found that “during our tender evaluation investigation into some recent engineering service projects, we have found that a tender (Hermic) had serious commercial fraudulence suspicion.”

Hussain and other MOC executives refused to say why Hermic was investigated. But Hussain confirmed that MOC found that an ISO certificate issued by the International Organization for Standardization to prove the quality of company management provided by Hermic was forged.

According to the investigation report provided by MOC, “at first, we found out the ISO certificate submitted by this company has several marks showing it was altered manually. Even the date was changed manually.”

During the following check, MOC found “the ISO certificates in Hermic’s recent bidding materials are all fake materials.”

“Knowing that ISO certificate from Hermic Co. was faked, we began to doubt whether other bidding materials of this company are real,” the report said.

The investigation team further verified the information about Hermic’s parent company and its profile, and found that “the company is suspected of providing fake company documents in all its bidding, including ISO certificates and financial reports.”

The investigation report said the apparently Texas-based parent company, Hermic Group, does not exist. In fact, Hermic Group is a shell company registered in Las Vegas, in the U.S. state of Nevada, by two Chinese people, Xu Ming and Li Wei. The registration date is May 2010, about when CNPC entered Halfaya.

Documents show that Hermic was also registered in Hong Kong in July 2010 by Xu and Li, with registered capital of HK$ 180 million. But Xu later withdrew and the company profile in 2013 shows that Li holds a 100 percent stake.

The MOC report said it is basically confirmed that “Hermic has always provided faked bidding documents to get contracts. We need to further review all its bidding documents and contracts with CNPC and CNOOC.”

Winning Contracts

Hermic won six contracts in Halfaya in 2013, including three valued between US$ 8 million and US$ 9 million. The contents of the three contracts are quite similar, including engineering, procurement, and construction for field surface facilities of phase two of the project.

A source familiar with the situation said that “the three contracts are actually one contract. It was split into three smaller contracts in order to avoid regulations.”

The subcontractor quoted earlier said that according to an agreement between Iraq and China, bids of more than US$ 20 million require the Iraqi field owner (in the case of Halfaya that would be MOC) and the oil ministry to participate in the assessment. But those smaller than US$ 20 million can be decided by the operator and reported to the JMC and ministry for approval.

He added that due to the strict review procedures in Iraq, there is little chance for misconduct in the approved contracts.

But clearly, the Iraqis hold a different opinion now. In the report, MOC said that in the “Halfaya project, CNPC has unregulated bidding management and may even have colluded. Otherwise we cannot explain how this company can bid successfully with such documents.”

Who Is Li Wei?

Caixin found that the sole shareholder of Hermic, Li Wei, was a mid-level manager of CNPC who once worked as a subordinate of Zhu’s in CNPC’s Sudan operation. That project started in 1996 as the company’s first overseas operation.

Zhu, 53, was a veteran of CNPC’s activity overseas. He has worked in CNPC’s Shengli Oilfield in the coastal province of Shandong with former CNPC head Jiang Jiemin. Jiang headed the country’s regulator of state-owned assets until September, when the Communist Party said he was being investigation for “serious discipline violations.” Zhu was the head of the Sudan branch until he was sent to Iraq with many of his team members.

Several sources close to the situation who declined to be named said some employees of Hermic are friends or relatives of former members of CNPC’s Halfaya management.

Among Halfaya suppliers, Hermic is not the only one with links to Li. Caixin found that Li is also the chairman of Hong Kong-registered DRK Energy, which has a US$ 20 million contract in Halfaya.

DRK Energy said on its website that it has had business operations in Central Asia, the Middle East, and North America for more than twenty years. However, business registration documents in Hong Kong show that the company was registered in July 2011. The company also registered the same office address in Dubai as Hermic.

The other company related to Li is Hong Kong-registered Power Petroleum Int., a company that has won more than US$ 20 million in service contracts in Halfaya.

Altogether, the three highly connected companies have received about US$ 115 million worth contracts in Halfaya. 

The Halfaya project comprises three phases with total investment of US$ 10 billion. The ongoing second phase project includes a 272 kilometer oil pipeline, a 5 million ton oil and gas processing center, and sixty drilling wells. After completion in the second quarter of 2014, it will raise the field’s daily production to 200,000 barrels.

The final phase is expected to be finished by the end of 2016, which will further expand the daily capacity to 600,000 barrels.