TotalEnergies’ $27bn bet on Iraq boosts ailing oil industry

Reuters/Thaier Al-Sudani

• Investment shows confidence in Iraq’s new prime minister
• Other oil giants including Exxon and BP have exited deals with Iraq
• Some analysts sceptical deal will trigger renewed foreign investment

TotalEnergies’ signing of a long-stalled $27 billion deal to develop several energy-related projects in Iraq is a significant vote of confidence in the country’s fraught oil and gas industry, according to analysts. 

The agreement represents the biggest single foreign investment in Iraq in modern times and suggests the government of newly-installed prime minister Mohammed Shia al-Sudani is proving more adept at wooing foreign investors than its recent predecessors.

But the French giant is running risks. Its huge commitment contrasts with the unhappy experience of several other international oil companies which have quit or reduced their operations in Opec’s number two crude producer.

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“It shows Iraq is still able to agree to major long-term deals and it could potentially open the way for investment from other international oil companies (IOCs),” said Bill Farren-Price, an independent Middle East oil analyst. 

“However, the caveats are that Iraq’s politics remain fragile and IOCs are examining their international portfolios and making very difficult decisions about where to divest.

“While this deal is really positive news for Iraq, I doubt it will open the door to a gush of new upstream investment. There will be some – but it will be targeted and specific.”

Iraq first outlined a deal with TotalEnergies in September 2021 to increase oil and electricity production, and build renewable energy facilities and a water desalination plant.

It took nearly two years to conclude a final agreement – largely due to disagreements over the size of Iraq’s stake in the so-called Gas Growth Integrated Project (GGIP).

Iraqi Prime Minister Media Office/via Reuters

Unlike many other Gulf oil producers, Iraq does not have a national oil company, but several regional businesses which depend on Iraq’s oil ministry.

The ministry in turn is under continual pressure from Iraq’s parliament to channel revenues to state coffers rather than into investment.

Crucially, the regional firms cannot make capital expenditure decisions, unless the budget is approved by parliament.

Such limitations made TotalEnergies reluctant to agree to Basrah Oil Co, one of the regional oil companies, taking the 45 percent stake it wanted in the project, especially due to Baghdad’s notoriously slow decision-making process.

Oil production licences awarded in 2018 only received approval from Baghdad to proceed this year, for example.

“It would be too much of a liability for TotalEnergies to have a partner who potentially wouldn’t be able fund its share of the capital expenditure,” said Alexandre Araman, head of Middle East Upstream research at Wood Mackenzie, the consultants.

That led TotalEnergies to convince longstanding partner QatarEnergy, an oil and gas company owned by one of the richest countries in the world, to also get involved in the project.

This duo will own 45 and 25 percent respectively and Basrah Oil Company the remainder.

The first phase of the project requires the partners to invest $10 billion over four years, while the overall value is $27 billion, Araman said.

Reuters/Essam Al-Sudani

Western exodus

TotalEnergies’ commitment to Iraq contrasts with many Western IOCs, which have sought to leave the country over the past decade.

Iraq’s oil production was 4.1 million barrels per day (bpd) in May, down from 2022’s average of 4.4 million bpd and far from a long-lapsed target of reaching 12 million bpd. 

“We have demonstrated in the last 20 months that the continuity of the voice of the state of Iraq on this development and production contract has been a reality,” Patrick Pouyanne, TotalEnergies chairman and CEO, said at Monday’s signing ceremony.

“It’s a very strong signal, not only to TotalEnergies to invest, but also to other foreign investors.”

His remarks come after Royal Dutch Shell sold or forfeited its Iraqi assets, Exxon cut its holdings and is trying to sell the remainder, and BP spun out its Iraqi activities to an affiliate company.

Italy’s Eni, one of the few Western oil companies remaining in Iraq, according to Iraq Business News, reported a one-third decline in its 2022 annual Iraqi oil production.

“A lot of the IOCs that entered Iraq in 2008-9 as part of the country’s first licensing round found that they ultimately couldn’t make interesting returns there due to the extremely tough contract terms,” Araman said, noting many firms were being paid just $1-2 on each barrel of oil they produced.

“Eventually the companies asked themselves whether this was the best use of their capital and many decided it wasn’t.”

In 2018, Iraq introduced better contract terms than those of the much-maligned technical service contracts under which IOCs generated such low returns.

As such, the conditions of TotalEnergies’ new deal are “more interesting”, said Araman, who praised al-Sudani’s administration.

The former civil servant became prime minister last October following a prolonged parliamentary stalemate.

“Iraq’s government today is the strongest we’ve seen in a long time. It has the political will and power to pass things and to make things work,” said Araman.

Nevertheless, he and Farren-Price remain sceptical over whether TotalEnergies’ landmark deal will help entice more IOCs to Iraq, even if the French firm makes a success of the various projects to which it is now committed.

“The experience of IOCs over the years has been tough when trying to operate there – importing equipment, mobilising workers and all the politics and security around that,” added Farren-Price.

“Although Iraq has probably some of the cheapest oil to recover in the world, it’s still a challenging place to do business.”