French oil major Total and Iraq reached a preliminary agreement on a cluster of oil, gas, solar energy, and water projects that would deliver a host of advantages to the country as it grapples with a severe economic crisis, environmental degradation, and electricity shortages. The deal, signed in late March, lists four projects that Iraq’s oil minister has said are worth an estimated $7 billion that, if finalized, would represent the largest foreign investment in Iraq in recent years.

The proposed projects are all key to sustaining Iraq’s energy industry – the lifeblood of the country’s economy since oil exports account for nearly all the state’s foreign earnings. This revenue took a big hit from the collapse in oil prices and lower oil exports in 2020 due partly to the slump in global oil demand at the height of the coronavirus pandemic and OPEC output curbs.

Total has until now been a relatively small player in Iraq’s oil sector because of the poor contractual terms offered to foreign oil companies when Baghdad first invited bids for upstream technical service contracts in 2008. It has a minority stake in the 400,000 barrel per day Halfaya oil field development operated by PetroChina in Basra and little else. The other multinationals like BP and ExxonMobil operate larger oil projects, though China’s state oil companies have the largest presence in Iraq, having built up a portfolio of assets over the last decade.

The BP Statistical Review of World Energy 2020 puts Iraq’s total proven oil reserves at 145 billion barrels and gas reserves at 125 trillion cubic feet. Before 2008, full development of these reserves was hampered by conflict, sanctions, and underinvestment. The incursion by fighters from the Islamic State in Iraq and the Levant in 2014 led to damage to key energy facilities that has not been fully repaired.

In the years after the U.S.-led invasion of Iraq in 2003, Iraq’s Oil Ministry had plans to expand oil production capacity from around 2.5 million barrels per day to more than 12 mb/d with the help of foreign oil contractors. There was no provision for dealing with the associated gas produced alongside the oil, so flaring was the only option. Gathering and utilizing natural gas was an afterthought, and it took years to develop a network to process raw gas from three of the largest oil-producing fields in the south. Yet Iraq still flares large volumes of natural gas, a wasted resource that also poses an environmental hazard.

Over time, altered market conditions and infrastructure constraints prompted significant downward revisions by the Oil Ministry of its original 2008 oil production target. Current capacity stands at 5 mb/d, making Iraq the second-largest oil producer and exporter after Saudi Arabia in OPEC. It is now targeting capacity of 8 mb/d by 2029 and an end to gas flaring by 2025.

To attain its objectives, Iraq urgently needs to revive a delayed water injection project to maintain reservoir pressure at its producing fields in Basra. At the same time, it needs to treat larger volumes of natural gas produced in conjunction with oil for power generation and reduce flaring. The projects outlined by Total and the Iraqi Oil Ministry would enable stable oil output and growth by reviving the Common Seawater Supply Project to provide desalinated water for injection into producing fields as well as development of additional gas processing and treatment plants to reduce flaring, the Iraqi Oil Ministry said in a statement. A large solar project included in the package represents a big step in developing a renewables industry in Iraq and would help alleviate electricity shortages that have stoked public anger.

This combination of fossil fuel development alongside a renewables project fits in with Total’s strategy to transform itself into a lower carbon energy company through a higher weighting of renewables projects in its portfolio.

Iraqi Prime Minister Mustafa al-Kadhimi, in an April 6 interview with The National, bemoaned the shortage of natural gas that has forced Iraq to rely on imports of gas and electricity from Iran, which are contingent on the United States granting sanctions waivers. While technical service contracts did not include provisions for dealing with natural gas, there also wasn’t enough storage and pipeline capacity at the time to handle large oil and gas production increases.

Data compiled by the Global Gas Flaring Reduction Partnership suggests that Russia, Iraq, Iran, the United States, and Algeria accounted for more than 50% of the estimated 145 billion cubic meters of gas flared globally in 2018. Iraq flared an estimated 18 billion cubic meters in 2019, putting it second only to Russia and slightly above the United States. The situation has been somewhat improved with more gas being processed by the Basrah Gas Company (a joint venture including Shell, Mitsubishi, and the Iraqi South Gas Company). The Basrah Gas Company receives associated gas from three of the biggest producing fields in southern Iraq – Rumaila, West Qurna 1, and Zubair. Of the 26.6 billion cubic meters of raw gas produced by Iraq in 2019, roughly half was flared, and the other half was processed by the Basrah Gas Company and used to generate electricity. Iraq relies almost entirely on gas and oil products for electricity generation, but the grid is in need of upgrades to limit transmission losses.

Natural Gas Production and Flaring in Iraq, 2000-2030

Of the “giant projects” listed by Iraqi Oil Minister Ihsan Ismaael after he signed the agreement with Total CEO Patrick Pouyanné, those dealing with gas and water are long overdue. The Common Seawater Supply Project that was to have been led by ExxonMobil has been in limbo since the U.S. major dropped out in 2011. Subsequent efforts to revive the project with new investors fell through. The original design of the troubled multibillion project was for production of 12 mb/d of treated seawater for reinjection into six main southern oil producing fields, including the BP-operated Rumaila oil field. Rumaila, Iraq’s largest producer, is producing around 1.4 mb/d of crude oil but needs injection of an equal volume of water to sustain that level of output and ramp up production. Operators of the Iraqi oil developments cannot increase production to plateau, or target, levels set out in the technical service contracts if the Common Seawater Supply Project does not move forward.

The International Energy Agency, in an April 2020 special report on Iraq’s energy sector, estimates that Iraq has the potential to become the world’s second-largest oil exporter after Saudi Arabia by 2030. But to do so would require some 8 mb/d of water to sustain oil production. Under revised plans, Total would develop a smaller facility than originally proposed with production at 2.5 mb/d, not enough to cover all six fields that provide the bulk of Iraq’s oil production but a first step to ensuring the continued stability of oil reservoirs.

The oil and gas portions of the Total deal cover development of the Ratawi oil field and building a central gas facility to process associated gas from five oil fields in the south. This would complement the Basrah Gas Company’s existing gas processing and treatment facilities and a planned expansion, which would help to cover Iraq’s gas deficit. Final agreement on the deal with Total will hinge on commercial terms, an important consideration in a tight fiscal environment for both Baghdad and the international oil companies. Ratawi has production capacity of 60,000 b/d and the preliminary agreement with Total would raise output capacity to 200,000 b/d, the ministry said.

The gas shortage is a double blow in that there is insufficient sales gas for power generation, forcing Iraq to rely on costly imports, while also preventing development of petrochemicals and other industries that use gas as a feedstock. An $8 billion petrochemical project with Shell was held up for years pending availability of surplus gas but appears to be moving forward. Still up to be awarded or developed are nonassociated gas fields that if developed would also provide much-needed gas for power generation as demand for electricity rises. Iraq has agreed to join the Gulf Cooperation Council electricity interconnection network, a move that would strengthen economic and, indirectly, political ties with the Gulf Arab states, particularly Saudi Arabia and the United Arab Emirates, both of which want to weaken Iran’s influence in Iraq.

France, meanwhile, has been seemingly also courting Iraq with a visit by President Emmanuel Macron in October 2020. It is therefore no surprise that Total has emerged as a suitor. Inclusion of a 1-gigawatt solar power plant in the agreement sits well with the French company’s lower carbon strategy while providing a solid foundation for Iraq’s ambition to increase renewable energy. Iraq is looking to generate 20% of its electricity from solar by 2030.

Once the details are hammered out and a final agreement is reached between the French oil giant and Iraq, contracts would have to go to the Iraqi Cabinet for approval. With a change in government likely to follow October elections, there’s a risk that contract approvals will fall prey to Iraq’s notoriously sluggish and bureaucratic political apparatus. Iraq’s fragile economy cannot afford to lose a $7 billion lifeline.