IMG.gif
Corporate Strategy

Total's $27 Billion Iraqi Megadeal

Copyright © 2021 Energy Intelligence Group
companies/ss228870223-(1)-companies-total.jpg

• TotalEnergies’ integrated energy deal with Iraq, signed Sep. 5, could herald a bold new breed of projects, leveraging its suite of low-carbon technologies to access low-cost oil and gas.

• This is Total’s first major win of the post-rebrand era and exemplifies its focus on the energy transition.

• With partner selection for Qatar’s giant LNG expansion looming, the next few weeks is set be transformational for Total in the Middle East’s oil and gas heartlands.

The Issue

Total’s strategy to navigate the energy transition successfully is to embrace renewables and hydrogen, while aggressively going for low-cost and low-carbon oil and gas opportunities. As such, the Iraq deal, bringing together both renewables and low-cost hydrocarbons, represents a proof of concept: That the new corporate philosophy can work. Contract details are scanty, but this will be a significantly more profitable deal than what Iraq’s usual upstream contracts offer. Implementation will be critical, but Total appears to have stolen a march on its rivals, all of whom have struggled to improve terms. Exxon Mobil, for instance, spent years trying to clinch a similar integrated deal before talks collapsed in 2019. And with Baghdad planning more awards Total’s deal could prove a turning point for Iraq’s ailing oil sector, triggering a more dynamic and attractive investment climate.

Carbon Cruncher

Born during the post-World War I scramble for Iraq’s oil wealth, Total has, over the years, made considerable efforts into building up a significant Iraqi business . But up to now, a combination of poor geology in Kurdistan and unattractive contractual terms in the federal south have deterred any major move. And to make this deal happen, strong support has been needed from the company’s top management, with CEO Patrick Pouyanne actively engaging in the project. At Total’s second-quarter results, he flagged it as an opportunity to "get some access to good resources in the framework of a very profitable contract."

The deal signed Sunday includes:

• an expansion of the Ratawi oil field from 85,000 barrels per day to 210,000 b/d;

• the 600 million cubic foot Ratawi gas project, capturing associated gas from the Ratawi, Majnoon, West Qurna-2, Suba, Tuba and Luhais fields;

• a 1 gigawatt solar project, which also power the oil and gas projects;

• and a 5 million b/d water injection project to maintain reservoir pressure.

Total is yet to provide details about the deal but, notes one source, unlike previous Iraqi upstream contracts it will give exposure to the oil price. It is clear the deal should massively slash Iraqi emissions, given the relatively small oil component, solarization of oil operations and the planned extinguishing of flaring across a whole range of Iraqi projects. And in doing so, the deal will also make a big contribution toward Total’s new corporate target to reduce Scope 1 and 2 (i.e. operational) emissions by 40% by 2030 (from 2015 levels).

Initial capital spending on the deal is pegged at $10 billion, with Reuters reporting the water injection and the gas capture projects making up $3 billion and $2 billion of that respectively. Capex and operational expenditure for the next 25 years is projected at $27 billion, with gross profits estimated at $95 billion at a $50 per barrel oil price, according to Iraq’s oil ministry. Oil revenues will fund the solar part of the project, according to the source.

This deal transforms Total’s regional upstream business into a triumvirate of core operations, with Qatar and the United Arab Emirates forming the other two legs of the Total Gulf tripod (see table). The deal comes with a completely different risk profile to projects elsewhere in Total’s portfolio. If successfully implemented, the gas capture project will make Iraq less reliant on Iranian gas imports and, as such, the initiative threatens the entrenched political interests of Iraq’s powerful neighbor.

Total's Net Middle East and North Africa Output
('000 boe/d)201820192020

%Chg.

2020 vs. 2019

%Chg.

2020 vs. 2010

Algeria475945-24%10%
Iraq19202420NA
Libya638043-46-22
Oman383839315
Qatar211210203-324
UAE288295270-822
Total Mena666702624-110
Total Mideast556563536-52
Oil vs. Gas Ratio (%)7878780%23%
Source: Total 2020 Annual Report

Flipping the Narrative

It is hard to overstate the potential transformational impact of the deal on Iraq’s oil investment environment. The water injection project is key. Put simply, the project enables a growth narrative for Iraqi oil output. Without water for the reservoir, production will inevitably start slipping in the next couple of years. Without the ability to grow production, investor interest will stagnate.

Killing two birds with one stone, the project addresses both the politically sensitive issues of rampant gas flaring and the shortage of fuel supply for power generation. The never-ending power crisis has triggered annual protests against the lack of air conditioning to alleviate the roasting summer temperatures.

Until very recently, there was very little real evidence that Baghdad had even begun thinking in a serious way about the energy transition. Now, at least as far as the Ratawi gas and oil projects are concerned, Baghdad can claim to be a pioneer in large scale low-carbon hydrocarbon production.

Iraq has seen foreign oil companies head for the exits of late, with Exxon starting arbitration procedures, and Petronas, Lukoil, Eni and BP all at some point over the past three years linked with potential divestments . But this deal, if nothing else, changes the conversation about Iraq, and it should give those looking at quitting cause to rethink previous assumptions.

Prior to the deal, the focus among Iraq oil watchers was all about whether there was anything Baghdad could do to pause the seemingly inexorable spread of Chinese upstream hegemony in the country. Now, gas capture and solar appear to be priorities, with a 1 GW project by the UAE’s Masdar believed to be next on Baghdad’s to-do list. A 300,000 b/d development of the Nasiriyah field being negotiated by Chevron could also see some progress, sources say.

Last Chance Saloon

Total must avoid the fate of the Royal Dutch Shell-led Basrah Gas Co. where slow decision-making and stakeholder misalignment has sucked the momentum out of gas capture efforts. Challenges are daunting. But there does seem to be a growing seriousness among this Iraqi government’s top leadership and the realization that if Iraq doesn’t get serious it risks being an early victim of the energy transition. One potential obstacle for Iraq’s oil sector is that elections due next month could well presage an uncertain transition period and bring in a new and less investment-friendly government.

Western Oil Companies' 2020 Net Iraq Output

Oil

(b/d)

Gas

(MMcf/d)

Combined

(boe/d)

BP1000100
Eni112817
Exxon Mobil26026
TotalEnergies23324
Total16031167
Notes: Shell does have some Iraqi gas and LPG production via its stake in Basrah Gas Co., but not disclosed.
Source: Company Annual Reports
Adnoc continues to move swiftly to diversify its income sources and monetize assets, planning to sell a minority stake in its drilling unit.
Tue, Sep 14, 2021
Most Read
Production of hydrocarbon liquids outside the Opec-plus alliance will peak in 2025, our medium-term outlook shows, the inevitable result of lower investments upstream.
Thu, Sep 16, 2021