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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Federal Court Decision Creates New Opportunities In Iraqi Oil

  • Iraq’s Federal Supreme Court has invalidated the decision of Iraq’s government to establish the Iraqi National Oil Company.
  • The FSC has reopened the way for new investment from international oil companies (IOCs) into Iraq.
  • New investment from IOCs into the Iraqi oil sector could bring the country a step closer to its long term production goals.

Iraq’s Federal Supreme Court (FSC) has invalidated the decision of Iraq’s government to establish the Iraqi National Oil Company (INOC) on the basis that several of its founding clauses are in breach of the constitution, according to local news sources. Previous iterations of INOC have been focal points for the corruption that permeates Iraq’s oil sector and there was every sign that this latest version would be the same. In cancelling this toxic idea, the FSC has reopened the way for new investment from international oil companies (IOCs) into Iraq, most notably the US$27 billion four-pronged deal from TotalEnergies. Back in February, before the idea for the new iteration of INOC had truly gathered momentum, TotalEnergies had stated that it was ready to move into the ‘execution phase’ of the US$27 billion deal that it had agreed with Iraq’s Ministry of Oil (MoO) within the following three months. At around the same time, though – cynics might say precisely because of the massive opportunity for self-enrichment for those connected to INOC from a fresh US$27 billion floating around in the oil and gas sector – the push to get INOC up and running began in earnest. It quickly became clear that one does not get to become a senior figure in France’s leading oil and gas company by being as stupid as seems to be the minimum requirement to secure a senior position in INOC, with TotalEnergies refusing to partner with INOC due to the lack of clarity on the legal status of the company. In layman’s terms, the French oil and gas behemoth did not trust INOC as far as it could throw it. 

Related: U.S. Shale Won’t Fill Gap If OPEC+ Cuts Oil Production

This view is well-founded, given the actions of previous versions of INOC, with the first iteration appearing in 1966, before it was incorporated into the MoO in 1987, after which its omni-toxic legacy seeped into much of Iraq’s state-led oil and gas organisational infrastructure, making it one of the most corrupt oil and gas sectors in the world. The sheer scale of theft of public money that resulted is mind-boggling, evidenced partly in a statement made in 2015 by then Minister of Oil – and later Prime Minister of Iraq – Adil Abdul Mahdi, that Iraq “lost US$14,448,146,000” from the beginning of 2011 up to the end of 2014 as cash “compensation” payments to various state and corporate entities. If this amount in single dollar bills was laid end to end, then it would stretch from Earth to the Moon nearly six times over. 

The precise way in which such a staggering sum was ‘lost’ is fully analysed by OilPrice.com here, but in basic terms it related to the way in which gross remuneration fees, income tax and the share of the state partner was deducted and accounted for in the compensation paid out relating to reduced oil production levels. This ‘accounting factor used in calculations’ solely related to ‘expenses of various kinds’ that have never been disclosed or in any way clarified by the MoO but is key to the merging of public funds with private ones. It saw its true genesis in 2009 when IOCs in many cases were asked to make large upfront payments as part of their bid, which would supposedly be repaid at some unspecified later date.

Despite all this, by 2018 moves were afoot to re-establish the official INOC entity, with the legislation required to do so voted into the statute books on 5 March that year until a legal challenge derailed the plan. The key reason for that legal challenge was the wide-ranging powers of the proposed INOC and the moral ambiguity encouraged in the wording of the law that brought it into being. The powers under the law relating to the creation of the new INOC in 2018 – identical to those underpinning this latest version – included: controlling all hydrocarbon revenues and determining what is passed to the national treasury; owning all upstream, midstream, downstream, marketing and tanker interests and the associated pipeline and export infrastructure; and being the only authority allowed to sign contracts with international companies investing in oil and gas and other parts of the energy sector. 

Related: Oil Prices Jump As OPEC+ Considers 2 Million Bpd Production Cut

As highlighted back in 2018 by former senior economist with Iraq’s MoO, and now head of the Oslo-based Development Consultancy & Research, Ahmed Mousa Jiyad, Article 12 of the law relating to the establishment of INOC contained: “The most ridiculous, disintegrative, destructive and unconstitutional aspects of this law […providing] the legal cover for formalised corruption and kleptocracy by assigning the three funds [‘Citizens Fund’, ‘Generations Fund’, ‘Reconstruction Fund’] at least 10 per cent of the revenues of the oil exports at the discretion of the INOC’s board of directors.” 

The power of the INOC board of directors, though, could be extended further, he added at the time, as under the 2018 version of the law (and the latest version relating to INOC), revenues generated from the export and sale of oil and gas will be considered as financial revenues for INOC. “This is a flagrant violation of the Constitution, which states that oil and gas belong to the Iraqi people and not a financial return to one public company,” said Jiyad. Again, the full scope of the powers of the new iteration of the INOC was not formalised, which means in Iraq, that no constraints on what it could do were in place.

Provided that Iraq takes the very clear hint from TotalEnergies – and from the mass exodus of Western companies from Iraq in the past few years – the country might finally be able to make the leap into the oil and gas superpower that it could be. TotalEnergies’ four-project deal is a solid stepping-stone to this, with the first of the projects being crucial to enabling Iraq to reach its longer-term crude oil production targets of 7 million barrels per day (bpd), and then even 9 million bpd and perhaps 12 million bpd, as also analysed in depth in my new book on the global oil markets. This first stage comprises the completion of the Common Seawater Supply Project (CSSP), which will see an initial investment of US$3 billion in its first phase and involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities to maintain pressure in oil reservoirs to optimise the longevity and output of fields. The long-delayed plan for the CSSP is that it will be used initially to supply around 6 million bpd of water to at least five southern Basra fields and one in Maysan Province, and then built out for use in other fields. 

The second of the projects is also a matter of high importance and urgent necessity: to collect and refine associated natural gas that is currently burned off at the five southern Iraq oilfields of West Qurna 2, Majnoon, Tuba, Luhais, and Artawi. TotalEnergies is to provide US$2 billion in the first phase of the project for the building of the processing plant to do this, with initial comments from Iraq’s Ministry of Oil last year highlighting that the plant is expected to produce 300 million cubic feet of gas per day (mcf/d) and double that after a second phase of development. 

Iraqi Oil Minister, Ihsan Abdul Jabbar, stated last year that the gas produced from this second TotalEnergies project in the south will also help Iraq to cut its gas imports from Iran, with the domestically produced gas also cheaper than the Iranian gas, which would open the way for major reinvestment by U.S. oil and gas giants. Successfully capturing associated gas rather than flaring it will also allow Iraq to revive the also long-stalled US$11-billion Nebras petrochemicals project with Royal Dutch Shell, which if it went ahead in a correct linear fashion could be completed within five years and would generate estimated profits of up to US$100 billion for Iraq within its 35-year initial contract period.

The third part of TotalEnergies’ four-pronged US$27 billion deal is aimed at boosting crude oil output from Iraq’s Artawi oil field to 210,000 barrels per day (bpd) of crude oil, up from the current circa-85,000 bpd. This project may lead TotalEnergies to engage in similar crude oil production boosting projects across the country, as it already has a 22.5 percent stake in the Halfaya oil field in Missan province in the south and an 18 percent stake in the Sarsang exploration block in the semi-autonomous region of Kurdistan in the north. The last of the four projects to be undertaken by the French company will be the construction and operation of a 1,000-megawatt solar energy plant.

By Simon Watkins for Oilprice.com

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