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Iraq’s much-delayed new oil law aims to boost coffers

The budget allocated by the UN to rehabilitate the Kuwaiti environment was about $3bn Reuters
Goldman Sachs expects Brent to average at $81/$80 in 2024/2025
  • Law lets foreign companies share oil output
  • Under debate for 15 years
  • Aiming for 8m bpd by 2028

Iraq’s passing of a long-awaited oil and gas law is expected to help the country attract more international investments into the hydrocarbon industry and boost government revenues. 

The key innovation of the law is to allow foreign companies to have a share of oil output in Iraq, in partnership with the government, and the transition from fee-per-barrel contracts to production-sharing agreements and service contracts.

For now, the Iraqi state usually pays a flat rate to oil companies for every barrel of oil produced, using technical service contracts.

Approval of the oil law “as soon as possible” will “establish a stable national road map for investment and production” said Mazhar Mohammed Saleh, a financial adviser to Iraq’s prime minister Mohammed Shia’ al Sudani, in a statement on Thursday, according to a report by the Alforat News agency.

The legislation has been under debate for the past 15 years and mired in delays as a result of political opposition and regional disputes. A new draft was presented to the Iraqi parliament and could be voted on after the December elections.

Ali Metwally, an economist focused on the Middle East based in London, told AGBI the revision of the regulatory framework has the potential to make Iraq a more appealing investment destination for international oil companies. 

“By offering improved terms and contract structures, Iraq appears to be seeking to create a more investor-friendly environment,” he said.

Investment disincentive

Douglas Silliman, former American ambassador in Iraq and Kuwait and president at The Arab Gulf States Institute in Washington said the lack of production-sharing agreements has been the biggest disincentive for investment from international companies. 

Western oil companies, both American and European, have been pushing for production-sharing for a long time, as Iraq is seen as a big political and economic risk by their boards, Silliman said. 

“For any significant investment, a board and shareholders expect a return on investment,” he explained. “You can do that with technical service agreements, but you have no control over the ability to turn up or down the amount of profit.

“That’s really in control of the Iraqi government and there has been a very deep political feeling in the parliament and among many in the Iraqi government that Western oil companies should not profit excessively.” 

Silliman said the attitude among the political class in Iraq was that the country’s hydrocarbon resources should belong to the Iraqi people.

As a result, there is no real financial incentive for foreign companies to invest greater capital in the fields or to manage the fields more efficiently. 

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International oil companies (IOCs) are also under shareholder pressure to have greener operations, according to analysts.

With 145 billion barrels, Iraq holds the world’s fifth-largest proven crude oil reserves.

As the nation aims to lift its crude oil production capacity to 8 million barrels per day by 2028, according to data from the US Energy Information Administration, it needs increased investment. 

Several IOCs unhappy with Iraq’s energy policies, political instability, security considerations, corruption levels and administrative burdens have pulled out of the market. They include Texas-based ExxonMobile, which sold its 32 percent stake in the Baeshiqa licence to Norway’s DNO in 2021.

“The new terms (of the law) align the interests of IOCs with the success of production operations,” Metwally noted.

The recent $27 billion deal signed by TotalEnergies with the Iraqi government may lead to improved confidence in Iraq’s capacity to adopt reforms.

Silliman predicted that investments from international oil companies will reduce costs and speed up development. 

Budget needs

The new law is particularly crucial in light of the recent passage of the budget, which had been delayed for three years.

“This is a significant development that underscores the urgency of generating revenue and stabilising the country’s finances,” Metwally said. 

Hydrocarbons contribute to about 50 percent of the country’s GDP and account for around 85 percent of total economic activity, according to Saleh.

Foreign investment could free up money to be reallocated to other core ministries and to improve public services such as schools, Silliman said. 

“Iraq has done a very poor job of providing public services, clean water, electricity, sewage, education, and healthcare. All of these things need investment right now in Iraq.” 

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