Iraq Hangs Fading Hopes on Total Deal

As some of Iraq’s top foreign operators lose interest, the risks are growing that it will fall far short of its 7 million barrel per day production capacity target and get left behind in the energy transition. With no time to lose, Baghdad is putting greater emphasis on cleaner energy. It's hoping TotalEnergies will sign up to a megaproject covering gas capture, solar, oil and infrastructure before elections in October. But this would run counter to prevailing trends. Indeed, the Total deal may be Iraq’s last throw of the dice in securing fresh Western investment in its oil sector. Exxon Mobil is pursuing arbitration against Iraq for blocking the sale of its operated stake in the West Qurna-1 (PIW Jul.30'21). BP has put its Rumaila operations “outside the fence,” as one industry source puts it, by creating a new stand-alone joint venture to manage the field, and Lukoil has admitted it wants to sell part of its operating stake in West Qurna-2. Like BP, Eni has set ambitious emissions targets that sit uneasily with its expansion plans at Zubair. This does not necessarily mean these international oil companies (IOCs) are poised to follow Exxon and exit Iraq. But they are becoming more selective about upstream investments, making it harder for them to accept Iraq’s tough conditions, which range from harsh contractual terms, stifling red tape and payment delays to its high-carbon oil. Total appears to be forging a unique path in Iraq. The proposed Iraqi project would capture and process 600 million cubic feet per day of associated gas that is currently flared, install 1 gigawatt of solar power capacity, build critical seawater injection infrastructure to maintain pressure at Iraq’s southern oil fields, and raise output at the Ratawi oil field by 150,000 b/d (PIW Mar.5'21). It would cost $27 billion and be funded by Total, according to law firm Clearly Gottlieb, which is representing Iraq, with the firm being partly remunerated from the oil it produces. “Total’s strategy appears to value significant volumes of low-cost oil from major resource holders in the Middle East ... [to help fund] energy transition opportunities in the region. In that context, Iraq could be an interesting portfolio option,” says the industry source. Last weekend's regional summit in Baghdad was a timely opportunity for Iraq to kick-start stalled investment. French President Emmanuel Macron attended and Total CEO Patrick Pouyanne was in town, raising expectations that the deal, which the Iraqi cabinet has approved, could be imminent. Iraqi Oil Minister Ihsan Ismael has pushed hard to clinch it and attain better terms for the IOCs generally, telling a parliamentary committee recently that “all investors” were either looking to leave or seeking partners. Whether it is possible to conclude such a massive deal in the run-up to an election in Iraq is another matter. One obstacle is powerful political opposition to gas projects that would slash imports from -- and the flow of dollars to -- Iran. The joint-venture spinoff created by BP and PetroChina, its partner at Rumaila, to manage Iraq’s largest field points to a key challenge facing the country in the years ahead, namely access to international finance as the energy transition gathers pace. The new Basrah Energy Co., which will be wholly owned by BP and PetroChina, is seen as a way of limiting their exposure to the rising cost of developing a high emissions project like Rumaila. For Iraq to raise its production capacity from 5 million b/d to 7 million b/d by 2025 could require at least $30 billion in capital expenditure and projects with production life spans of more than 25 years, experts note. “[That] would take you well beyond peak oil demand, and firmly into an era of progressive greenhouse gas pricing in all consumer markets,” says independent oil consultant Martin Jagger (PIW Aug.6'21). Total’s upstream expansion would support the government’s efforts to limit Iraq’s greenhouse gases and decarbonize its oil production, supplementing the Royal Dutch Shell-led project to capture gas flared at the main Basrah oil fields. China could fill some of the void left by departing IOCs, but even cash-rich Chinese majors now appear to be reining in their overseas spending, under pressure from Beijing to advance their decarbonization plans.