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Robert Rapier

Robert Rapier

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Energy Majors Face Off To Get A Piece Of This $40 Billion Deal

With the sweltering summer heat advancing, Iraq’s electricity sector is in desperate need of an upgrade. Residents suffer significant daily power outages, which often makes life unbearable in the hottest months of the year. But help may be on the way, as Iraq has allocated more than $40 billion to rebuild its power network.

German-based Siemens and U.S. rival General Electric Co. have competed fiercely for Iraq’s business in recent years. The opportunity to upgrade Iraq’s electricity infrastructure would be a major boost for either company due to ongoing struggles in their respective power-generation businesses. Both companies have previously done multibillion dollar deals with Iraq, and the race between them has led to a flurry of activity by Germany and the U.S. on behalf of the respective companies.

But Siemens looks set to edge out GE in Iraq, despite pressure by U.S. President Donald Trump’s administration in favor of GE. Siemens recently announced that CEO Joe Kaeser and Iraq’s electricity minister Luay al-Khateeb have “signed an implementation agreement to kick off the actual execution of the roadmap.”

As part of this deal, Siemens secured contracts worth $785 million to build a 500 megawatt (MW) gas-fired power plant, upgrade 40 gas turbines, and install substations and transformers. Iraqi Prime Minister Adel Abdul-Mahdi said the roadmap includes around $14 billion of contracts in total that are still subject to competition, but he indicated that Siemens is well-positioned to win a large share of the overall business.

Aftermath of war

Iraq has still never fully recovered from the 1991 Gulf War, when most of the country’s major power stations were either totally destroyed or severely damaged. Prior to the war, Iraq had 9.3 gigawatts (GW) of installed generating capacity, well ahead of peak demand levels of 5.1 GW. According to the International Energy Agency (IEA), about 87% of the population had access to electricity. Related: The Top 50 Oil & Gas Companies Of 2019

The first Gulf War impacted 70% of the country’s electrical generating capacity. After the war, some of the damage was repaired, and in 1999, Iraq reorganized its power sector and formed the Ministry of Electricity.  

While significant power capacity has been added over the past 20 years, consumption growth has far outpaced new capacity. As a result, Iraqis suffer through daily power outages. In 2018, Iraq’s maximum grid supply was 16.4 gigawatts (GW). Demand, on the other hand, peaked at 27.3 GW. The situation has gotten considerably worse since 2014, when grid supply was 12.3 GW and peak demand was 18.7 GW. As a result, the country desperately needs to accelerate the upgrades to its power infrastructure.

Business risks in Iraq

However, corruption in Iraq, and particularly in the power sector, is an ongoing problem. The business climate in postwar Iraq remains extremely risky for foreign investors due to entrenched cronyism and powerful vested interests.

Belgian-based Credendo Group provides companies and banks insurance against political and commercial risks worldwide. The group rates over 170 countries according to the risk of expropriation on a scale of 1 (lowest risk) to 7 (highest risk). In each of the past five years Iraq has received a 7, on par with countries like Venezuela and Somalia.

A recent expropriation example illustrates the business risks in Iraq. In 2011, Orange SA, France’s largest telecommunications company, formed a joint venture with Kuwaiti logistics company Agility Public Warehousing. The JV bought a stake in Korek, an Iraqi mobile phone operator, and invested $810 million in the business.

Last year, Orange filed suit against Korek in the Southern District of New York over corruption among local shareholders, alleging “self-dealing, material misappropriation and mismanagement.” The lawsuit claims that Korek’s managing director, Sirwan Barzani, had profited from a $150 million loan taken out by Korek Telecom. This loan was arranged without the knowledge of the joint venture partners.

The lawsuit also alleges that Korek had bribed regulatory officials to block a takeover by Iraq Telecom. Among other details, the FT revealed that a house in London was bought for £830,000 cash in 2014 by Pierre Youssef, a “longtime business partner and nominee” of Raymond Rahmeh, Korek’s senior independent director. Yet it seems that neither man bought it to live in; instead, it was occupied by a high-ranking official from Iraq’s telecoms regulator, the CMC, until early 2018.

In response to Orange’s lawsuit, Korek went with the nuclear option. Bloomberg has reported that an Iraqi industry regulator stripped the JV of its stake in Korek and turned it over to a group of local investors, including Barzani. Related: Pompeo Makes Hard Claim: Strait Of Hormuz Will Remain Open

This expropriation highlights the risks of investing in companies located in Iraq. But the risk is also present for Western companies that invest in infrastructure in a country, as ConocoPhillips and ExxonMobil learned when Venezuela expropriated their heavy oil investments in 2007.

In March this year, the World Bank finally ruled that Venezuela must pay ConocoPhillips over $8 billion in compensation, but there are serious doubts over whether Caracas will pay up. Indeed, the government has previously hesitated or declined to pay in other arbitration cases and may end up challenging the World Bank’s decision.

Thus, power companies must keep these risks in mind as they jockey to upgrade Iraq’s power grid.

Although the business climate remains risky, Siemens may be able to navigate the expropriation risk. The company plans to build new generation capacity, upgrade existing power plants, and expand transmission grids. As long as it avoids taking ownership stakes in these projects and avoids building up its own significant infrastructure presence in the country (as ConocoPhillips and ExxonMobil did in Venezuela), Siemens may be able to keep the risk/reward profile in its favor.

A win for the Iraqi people

But GE isn’t totally out of the picture. Following news of Iraq’s agreement with Siemens, GE released a statement that indicated that it remains in talks with Baghdad on additional projects, and that they “expect to deliver a number of other key power projects, including 750MW of additional power by the end of the year.”

Regardless of which company wins out, there will be a big sigh of relief from the Iraqi people.

By Robert Rapier

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