Total, Baghdad Sign Energy Mega-Deal

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TotalEnergies and Iraq’s government on Sunday signed a multi-billion dollar integrated energy deal that could prove to be a pivotal project for both the country's struggling oil sector and the French major’s regional energy transition strategy.

The project's initial capex is estimated at $10 billion-$11 billion while total spend, covering both opex and capex over the next 25 years, is pegged at $27 billion, one source told Energy Intelligence. At a $50 per barrel oil price, total profits over the project's lifetime is projected at $95 billion, according to an Iraqi oil ministry press release.

The deal involves gas capture, covering a 600 million cubic feet per day project at Ratawi; the expansion of oil output at Ratawi from 85,000 barrels per day to 210,000 b/d; a 1 gigawatt solar project; and a 5 million b/d water injection project to provide treated sea water needed to maintain reservoir pressure at key southern oil fields.

Total is mobilizing to fast-track the project, with engineering work due to start "immediately", Reuters reported Total CEO Patrick Pouyanne as saying at a post-signing press conference in Baghdad. In addition to providing vital gas for power generation, the gas capture project will produce some 12,000 b/d of condensate and 3,000 tons per day of LPG.

A New Narrative

For Iraq, the deal, if successfully implemented, will be seismic on several fronts.

Firstly, without the water injection project, any real expansion of Iraqi production capacity is simply not feasible. Indeed, without provision of more water injection, output levels at several important fields would start to slip within several years. Against this backdrop, flexibility is being built into the project to allow for fast-track expansion of the water injection project to 7.5 million b/d should the need arise, the ministry said.

Secondly, after years of criticism for being one of Opec’s top gas flarers and of the group's dirtiest producers, Iraq now has a response. The solar project will help power oil and gas operations, in turn enabling Baghdad to claim low green house gas emissions on the scheme.

Thirdly, this signing has the potential to change the conversation on Iraq. Of late, existing investors have grown increasingly exasperated with the country's poor investment climate, citing low commerciality, patchy honoring of contracts, in addition to a less than-ideal security environment and slow decision making. Both Exxon Mobil's arbitration case against Iraq's oil ministry and BP and Lukoil investigating quitting the country are cases in point.

Sunday's deal shows that Baghdad can still attract top tier investors. Furthermore, with this deal, Baghdad has paused the seemingly inexorable expansion of China's upstream investment footprint in Iraq -- a mounting concern of the country's oil leadership.

Date With Destiny

With Qatar also poised to select partners for its LNG mega expansion scheme soon, this could be a watershed few weeks for Total in the region. But the Iraq deal alone is vindication enough for Total’s new corporate strategy, which has been to stick to oil and gas, albeit with a focus on low-cost and low-emission reservoirs, and to offer host countries energy transition solutions via integrated solar and hydrogen projects.

The Total deal is born of failed Iraqi efforts to strike a similar integrated deal with Exxon Mobil. Having succeed where its bigger US rival failed should make victory taste all the sweeter for the French firm and further underline the value of its new low-carbon focus, with Exxon’s lack of a solar component being a key difference between the two projects.

No figure for greenhouse gas mitigation has been given, but given the volumes involved it is likely to be significant. The gas capture project involves two phases: first, output of 300 MMcf/d from Majnoon, West Qurna-2 and Ratawi; and a second phase targeting some 300 MMcf/d from the Suba, Luhais and Tuba fields.

Project Timelines in Focus

In Iraq, progress on gas capture and oil infrastructure has been painfully slow, as the records of the Royal Dutch Shell-led Basrah Gas Co. joint venture and the Fao storage expansion scheme underline. It therefore remains to be seen whether Total’s targeted fast-track approach is feasible.

Certainly, both sides need a success, and some high-level Iraqi support for implementation can be expected. However, the experience of earlier projects would point to delays on at least some key components of the mega deal.

More details are needed to make a full assessment. However, it is clear that the scheme is envisaged as a significantly more profitable project than Iraq's standard contracts. Nor has a breakdown of capital allocation within the various components of the project been provided. Reuters reported capex investment of $2 billion for the gas capture and $3 billion for the water injection project.

Topics:
Fiscal Terms, Opec/Opec-Plus, Corporate Strategy , Majors, Resource Access, EOR, Conventional Oil and Gas
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