Chinese State Oil Scandal Has Links to Iraq

Chinese Equipment Shipped Through U.S. to Iraqi Company

A legal storm that started with China’s largest state-owned oil company has expanded to include Iraq and led to the detention of more people.

Mi Xiaodong, a former mid-level official at China National Offshore Oil Corporation (CNOOC) was detained by party discipline officials in early October, sources say. The source also said Mi was managing oil businesses for Zhou Bin, former Chairman of Beijing Zhongxu Yangguang Petroleum and Natural Gas Technology Ltd.

Mi, forty-three, was an official of state-owned CNOOC’s Shenzhen branch. Two companies under CNOOC are in charge of exploration and exploitation of China’s oil resources in the South China Sea. The one for the west half of the sea is based in Zhanjiang and the one for the east half in Shenzhen. Both are in the southern province of Guangdong.

Essam Al-Sudani—AFP/Getty Images
An Iraqi engineer walks along the Zubair oil field in Southern Iraq, January 21, 2010.

Mi’s father was the Deputy General Manager of CNOOC’s Shenzhen branch. He joined the company after graduating from Southwest Petroleum University in Sichuan Province.

While at school, Mi was a close friend of Zhou, who majored in English at the same university, said a source who was Mi’s supervisor at CNOOC’s Shenzhen company and another source who was a schoolmate of Zhou’s.

Known for his spoken English, Mi left CNOOC’s Shenzhen company as a mid-level official in 2005. He worked briefly in a foreign oil company in Shenzhen, and then came to Beijing to work with Zhou in 2006.

Multiple sources confirmed that in 2010 and 2011, Zhou sold assemblies for valves and spools used in oil and gas wells to Iraq’s state-owned Missan Oil. Mi handled the transactions for Zhou.

CNPC bought three technical service contracts (TSC) in Iraq in 2008, 2009, and 2010, with the last located in Halfaya. The field in Halfaya is owned by Missan Oil. In May 2010, CNOOC also nailed down a TSC with Missan Oil in Southeastern Iraq.

CNPC would run the construction, service, and equipment bidding for some of these Iraqi projects. The fee would be paid by CNPC, and the Iraqi owner would reimburse in oil after production started.

Sources said that Zhou and Mi purchased the equipment from various Chinese manufacturers, and wanted to make a profit by selling them to Iraq. Since the Iraqi company refused to purchase oil well equipment from China for quality reasons, Mi shipped some of the equipment to the United States first, then to Iraq.

The pieces of equipment were worth U.S.$20,000 to U.S.$100,000 each. Some were bought by Chinese companies in Iraq but not used yet.

Lucrative Oil Fields

The business was not limited to Iraq. In January 2007, Mi and Beijing-based Chen Gang set up Qiuhaijiqing Petroleum Technology Ltd. in Xi’an. The city in the northern province of Shaanxi is the headquarters of CNPC’s Changqing oil field.

Mi served as the legal representative of the company, which had registered capital of 5 million yuan. Mi contributed ten percent and Chen the rest. Registration records show the company focuses on petroleum business such as research, trade and consultation, and equipment manufacturing.

Six months later, Qiuhaijiqing opened its Beijing office, but then closed it in 2009. The Beijing office’s registration address was the same as Zhongxu Sunshine, the firm once chaired by Zhou, his wife, and his mother-in-law, Zhan Minli. Mi bought a home at the registered address on behalf of Zhan in 2007 for 1.155 million yuan.

Qiuhaijiqing had several changes of stock-holding structure between 2009 and 2012. The company reported high profit growth: 354,400 yuan, 83 million yuan, and 145 million yuan in the three years. However, it had relatively low operating income in the same period (830,000 yuan, 1.5 million yuan, and 4.8 million yuan), raising questions on the source of profit.

Caixin’s inquiries with Qiuhaijiqing went unanswered. The company’s current largest stockholder is Wang Letian.

Another oil company was registered under the same address of Qiuhaijiqing, Shaanxi Dejin Petroleum Technology Ltd. Some of Qiuhaijiqing’s later stakeholders were founders of Shaanxi Dejin.

The company that funded Dejin was a Beijing firm that used to be partly owned by Zhou’s mother-in-law. It was soon sold to Jilin Tianzhuo, a firm owned, again, by Wang.

Wang, fifty-nine, is a private businessman focusing on the oil sector. He founded Huahai Energy Group in 1999 in the northeastern province of Jilin. It has eight subsidiaries. Wang also holds stock in newspaper and education companies.

Recent recruitment ads published by Dejin boasted 800 employees and two business units in cooperation with CNPC’s Changqing oil field in two areas. The Changqing oil field is the country’s second-largest. The office shared by Shaanxi Dejin and Qiuhaijiqing is across the street from Changqing’s offices.

The two fields under Changqing that Dejin is exploiting were highly productive. A 2010 recruitment ad for Dejin said that together the fields produced a daily average of 300 tons of oil. Since the average price was U.S.$75 per barrel, the fields could generate a daily income of 1.1 million yuan, or 400 million yuan a year.

The official registration in 2011 showed that Dejin had annual profit of 109 million yuan and assets worth 1.2 billion yuan.

A source told Caixin that Wang told him in 2008 that Mi and Zhou got the operating rights for the fields from Changqing, sold them to him, and pocketed 500 million yuan. Caixin could not obtain a contract to find out how much Wang paid Changqing to operate the fields.

In late August, four top CNPC managers were detained. Two of them were heads of Changqing. Several days later, Jiang Jiemin, the leader of the State-owned Assets Supervision and Administration Commission and former head of CNPC, was also detained.

A source told Caixin that part of the cause of investigations into Jiang and other CNPC officials was the exploitation of Changqing in cooperation with other companies.

“Since Jiang became the group General Manager in November 2006, he approved giving two ‘different’ Changqing fields to outside cooperation,” the source said. “A relevant deputy manager signed this as well, but only under manager Jiang’s instructions.”