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Iraq has signed a quartet of contracts worth $27 billion with French multinational TotalEnergies covering oil, natural gas, solar energy, and water projects in Iraq’s southern Basra governorate. The deal is a shot in the arm for the Baghdad government just weeks before October parliamentary elections.
The contracts include hydrocarbon developments and a solar power project. The four projects as outlined in an official Iraq statements are:
- Raising oil production capacity from the Ratawi oil and gas field in Basra province from 85,000 barrels per day of crude oil, to 210,000 b/d at a cost of $3 billion
- The Gas Growth Integrated Project to develop the Ratawi gas hub to process 600 million cubic feet per day of raw associated gas from five southern oil fields, cut flaring, and generate 3 gigawatts of electricity at a cost of $2 billion
- Building a water injection facility with capacity to process 7.5 million barrels per day of seawater for reinjection into oil reservoirs, initially at a rate of 5 mb/d of water, at a cost of $3 billion.
- A 1,000 megawatt solar energy facility for power generation at a cost of $1 billion
For Iraq, the benefit is clear: It will help to boost oil production, the country’s main foreign revenue earner, and reduce flaring by collecting natural gas rather than burning it and releasing emissions into the atmosphere. It will also set Iraq on track to move forward with a clean energy project by tapping into its solar energy potential, an area where it has lagged its Gulf Arab peers.
For TotalEngergies, the projects align with the restructured portfolio, clear from its recent name change from Total, of the French energy major as it transitions to a carbon-neutral business. The press release issued a day after CEO Patrick Pouyanne signed the final contracts on September 5, appeared to downplay the part of the contract covering development of the Ratawi oil and gas field. This may be because it could be viewed as going against the grain of the company’s transition away from hydrocarbons.
It isn’t clear why TotalEnergies rushed to finalize so close to the Iraqi elections and at a time when other multinational energy companies have withdrawn or are in the process of relinquishing stakes in Iraq’s oil projects, citing poor financial returns and a difficult work environment. Shell withdrew from the Majnoon oil field technical service contract in 2018, and the Anglo-Dutch company has reportedly launched arbitration proceedings against Iraq’s Basra Oil Company in a bid to retrieve more than $200 million in relation to its interest in the field. ExxonMobil, operator of the giant West Qurna 1 development, is in the process of negotiating the sale of its share in the joint venture and has resorted to arbitration to speed up the process. Russian Lukoil threatened to leave but agreed to stay on as operator of the West Qurna 2 oil field development while it negotiates more favorable terms.
The signing ceremony in Baghdad was a relatively low-key affair considering the size of the proposed investment, which might be interpreted as trepidation by the French multinational in committing to what is essentially an investment in a country entangled in legal disputes with other foreign investors and where corruption and poor management are main triggers of public discontent.
While Iraq’s oil minister, Ihsan Abdul-Jabbar Ismail, spoke of a $27 billion investment outlay over the life of the projects, it appears that he was referring to both capital and operating expenditures. “The French oil company Total will build four giant energy projects, worth $27 billion,” Ismail said, speaking at a joint press conference broadcast on Iraqi television, adding that this was the largest investment for the Iraqi Oil Ministry by a Western company in several decades and the first of its kind for Iraq. “This is one of the most important infrastructure projects to have been concluded by the Oil Ministry in the last 20 years,” he said. Pouyanne explained that the capital outlay would be $10 billion to cover the award of engineering, procurement, and construction contracts for the package.
The full financial terms of the agreement with TotalEnergies have not been disclosed by either party though Iraq’s net earnings during the 25-year duration of the contracts would amount to $95 billion, calculated at an average oil price of $50 per barrel, according to the Iraqi statement.
TotalEnergies provided very little information leading up to or after the contract signings, and there was no mention of Iraq when the company presented results for the first half of 2021 at the end of July. But Pouyanne alluded to the Iraqi deal saying TotalEnergies was working with Middle Eastern countries, “where everybody exits, we come in and we look to see if we can get some access to good resources in the framework of a very profitable contract.” Just how profitable those contracts will be remains unknown, but there is little profit to be made from developing gas for the domestic market, where prices are heavily subsidized, so it will likely be the oil portion of the Ratawi project that generates the most returns.
Pouyanne also said during the earnings call that the company would no longer go after high-cost oil barrels but look for low-cost oil with a low-carbon intensity and a break-even cost typically below $20 per barrel. Iraq is a low-cost producer of oil, but it does not meet the environmental standards espoused by the new incarnation of the French company. Iraq is one of the highest gas flaring countries in the world after Russia and the United States, according to the World Bank. The Ratawi gas processing hub to be developed by TotalEnergies is designed to alleviate the gas shortage in Iraq and put an end to the wasteful practice of flaring gas.
In moving forward with the investment in Iraq, TotalEnergies will be growing its presence in Iraq. Its only asset until now is a minority stake in the 400,000 barrel per day Halfaya oil field operated by PetroChina, a contract it was awarded more than a decade ago during the first and second Iraqi oil bidding rounds when the likes of BP, ExxonMobil, and Shell went after supermajor fields.
Beyond economic aspects of the deal, there may also be a political dimension that would explain the French foray into Iraq. The final contracts, first initialed at the end of March, came shortly after French President Emmanuel Macron made his second official visit to Iraq in less than a year. Though French officials said Macron would not discuss the specific deals of French businesses, the fact that the signing took place within days of the visit would suggest that diplomacy may have played a part.
“These agreements signal our return through the front door to Iraq, the country where our Company was born in 1924,” TotalEnergies said in the press release, referring to the origins of the company as part of what was then known as Iraq Petroleum. “Our ambition is to assist Iraq in building a more sustainable future by developing access to electricity for its people through a more sustainable use of the country’s natural resources such as: reduction of gas flaring that generates air pollution and greenhouse gas emissions, water resource management and development of solar energy,” Pouyanne said in the statement.
“This project perfectly illustrates the new sustainable development model of TotalEnergies, a multi-energy Company which supports producing countries in their energy transition by combining the production of natural gas and solar energy to meet the growing demand for electricity. It also demonstrates how TotalEnergies can leverage its unique position in the Middle East, a region where the lowest-cost hydrocarbons are produced, to gain access to large-scale renewable projects,” he added, playing up the clean energy aspects of the deal.
Although the gas development has been touted as a means of weaning Iraq off Iranian gas supplies, Ismail said the gas to be developed by TotalEnergies would initially replace crude oil and heavy fuel oil that are burned in power stations to produce electricity. He said an estimated 200,000 b/d of oil and liquid fuel is used in electricity generation, costing the government $5 billion in lost revenue. “Initially it will replace the liquids, not imported gas. The final goal is to stop importing,” he said. Imports of Iranian gas are subject to U.S. sanctions, and Iraq has had to secure waivers to continue importing Iranian product, though these exemptions are not open ended, leaving Iraq vulnerable to a change in U.S. policy.
Iraq has suffered from frequent power outages this summer as Iran sharply reduced supplies of natural gas and electricity to Iraq, citing high domestic demand in Iran and nonpayment of debt by Baghdad for energy supplied. Iraq Oil Report quoted the Iraqi Ministry of Electricity as saying that, as of the morning of September 1, Iranian natural gas supplies had been cut by 80%, potentially disrupting around 25% of Iraq’s power generation.
Iraq can expect both environmental and financial dividends in utilizing its own gas. Ismail said Iraq pays $8 per million British thermal units for gas imported from Iran under a long-term contract, while TotalEnergies will produce Iraqi gas at between $1.50 and $2 per million Btu or an average $1.50 per million Btu during the life of the contract. The Gas Growth Integrated Project will also help Iraq get nearer to its goal of eliminating gas flaring. Of the 26.6 billion cubic meters of raw gas produced in 2019, roughly half was flared, and the other half was processed by the Basrah Gas Company and used to generate electricity. The Ratawi gas hub, with capacity to process 600 million cubic feet per day of associated gas, will be Iraq’s largest facility and will add significantly to Iraq’s ability to boost its gas-fired electricity generation.
TotalEnergies said that gas recovered from three oil fields will provide feedstock to generate 1.5 gigawatts of electricity in a first phase, growing to 3 GW. A further 1 GW will come from a solar power plant to supply the Basra electricity grid.
Although the clean energy aspects of the deal are a step in the right direction for Iraq to develop a more sustainable economy, the focus is still on oil and gas. Iraq plans to raise oil production capacity from a current 5 mb/d to 8 mb/d, but it cannot achieve its target without water for reinjection into reservoirs to enhance oil recovery, a project that Baghdad has tried to get off the ground previously without success. Reviving the Common Seawater Supply Project, even if at a smaller scale than one previously negotiated with ExxonMobil, would help to stabilize oil production from fields where decline rates are high and allow for a further expansion. Iraq needs around 7 mb/d of water to maintain oil production from its largest southern oil fields.
The coronavirus pandemic was a wake-up call for Iraq, which saw a sharp slump in its revenue, as oil prices collapsed in 2020. Iraqi Finance Minister Ali Allawi described it as a “near death experience” for Iraq, which he said relies on oil exports for 90% of its budget. The country has a very narrow window to restructure its economy and prepare for the transition away from oil. “The next three to five years are critical for a country like Iraq,” he said at a webinar organized by the International Energy Agency and the Omani Oil Ministry.
“If we have not taken the right steps, then I think the oil producing countries with large populations and limited financial reserves will face a very severe crisis,” he said. “It has to do with economic resilience. Many countries have buffers that countries like Iraq may not have … for us, it is an existential issue.”
Kate Dourian is a non-resident fellow at the Arab Gulf States Institute in Washington, the regional manager for the Middle East and Gulf states at the World Energy Council, and a fellow at the Energy Institute. كيت دوريان هي باحثة غير مقيمة في معهد دول الخليج العربية في واشنطن، والمديرة الاقليمية لمنطقة الشرق الأوسط ودول الخليج في المجلس العالمي للطاقة (World Energy Council)، وباحثة في معهد الطاقة (Energy Institute).
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