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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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TotalEnergies Pushes Ahead With Iraq Megadeal Despite Huge Risks

  • European oil majors have balanced the benefits of working in Iraq against the huge legal, financial and security risks involved.
  • The closing of the deal has been delayed since the initial agreement was signed in September 2021.
  • TotalEnergies’ four-pronged megadeal and the key reason why the deal is going ahead from Iraq’s side is that China does not have the technical capabilities to do it.
Iraq oil

The on-off-on-off US$27 billion four-pronged megadeal between TotalEnergies and the Federal Government of Iraq appears to be back on again, although it is not quite the deal that the French oil and gas supermajor first had in mind. Since Russia’s invasion of Ukraine in February 2022, TotalEnergies, along with Italy’s Eni and the UK’s BP and Shell, have been key to Europe’s attempts to secure new energy supplies to substitute for those lost from Russia as a result of new sanctions against it. Balanced against this need to act for the greater good, TotalEnergies will be all too aware of the risks inherent in doing business in Iraq’s oil and gas sector. 

This awareness of the risks may be the reason for the yo-yoing on the final terms of the megadeal, which has caused its delay since the initial agreement was signed in September 2021. The key risk for Western energy companies working in Iraq is that they become caught up in the endemic corruption that pervades the country oil and gas sectors, leading to extreme reputational damage for them and the country they represent, not to mention financial and legislative risks as well. This has been repeatedly attested to by the independent Transparency International (TI) in its ‘Corruption Perceptions Index’ publications, in which Iraq perennially features in the worst 10 out of 180 countries for its scale and scope of corruption. “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery,” TI states. “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption,” it concludes.  Related: Drilling Activity Continues To Fall In The U.S.

It is these risks connected to Iraq’s oil and gas sectors – which still account for more than 99 percent of the country’s exports, 85 percent of the government’s budget, and 42 percent of its gross domestic product – that have led to a slew of major Western energy companies leaving Iraq in recent years. This includes Shell leaving the supergiant Majnoon oil field in 2017 and the supergiant West Qurna 1 oil field in 2018, and the U.S.’s ExxonMobil announcing that it too wants to get out of West Qurna 1 and its withdrawal from the crucial Common Seawater Supply Project (CSSP) some time ago. This CSSP is one of the four projects included in TotalEnergies’ four-pronged megadeal and the key reason why the deal is going ahead from Iraq’s side is because China does not have the technical capabilities to do it.

Very shortly after this massive fresh investment in Iraq by a cash-rich Western energy firm had been announced in September 2021, it was also announced by Iraq that the omni-toxic idea of re-establishing the Iraqi National Oil Company (INOC) was to be resuscitated. As highlighted back in 2018 by former senior economist with Iraq’s Oil Ministry, 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 legal cover for formalised corruption and kleptocracy by assigning the three funds [‘Citizens Fund’, ‘Generations Fund’, ‘Reconstruction Fund’] at least 10 percent of the revenues of the oil exports at the discretion of the INOC’s board of directors.” He added that the power of the INOC board of directors could be extended even further, as under the 2018 version of the law (and the 2021 version relating to INOC), revenues generated from the export and sale of oil and gas would be considered as financial revenues for INOC. 

Unfortunately for Iraq, 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 whichever department of the Oil Ministry it was that thought bringing back the INOC was a good idea. Almost as quickly as the idea was announced, TotalEnergies refused point blank to partner with the 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. In October 2022, then, Iraq’s Federal Supreme Court invalidated the decision to re-establish the Iraqi National Oil Company on the basis that several of its founding clauses were in breach of the constitution.

Since then, the thrust of the toing and froing between TotalEnergies and the Oil Ministry appears aimed, at least on the French side, to keep everything as clean from a legal perspective as one would expect from such a company, which is also so evidently a corporate representative of its country. Based on previous experiences of Western energy companies in Iraq, there appear to be two keys to emerging from the risk/reward matrix of Iraq’s oil sector with a corporate reputation intact. The first is to nail down the precise practical ramification of every single word in every single sentence in every contract with the best legal and accountancy minds available from the West, which is what TotalEnergies has done. And the second is to minimise the stake in a proposed project held by any entity directly or indirectly connected to the Iraq government. This latter point may or may not be connected to why TotalEnergies only agreed to go ahead with the megadeal when the Iraq government dropped its demand that its stake in the four-pronged project be increased from the originally agreed upon 25 percent to 40 percent. As it stands, the current agreement is now for the Iraq government (through the Basrah Oil Company) to hold a 30 percent stake in the megadeal. TotalEnergies will hold 45 percent of it, with QatarEnergy holding the remaining 25 percent stake. There is evidence that Qatar has become much more accommodative of Western energy requirements – in the broadest sense of the phrase – in recent months, having previously been seen exclusively on the side of China.

If the four-pronged deal does go ahead as planned then it could be game-changing for Iraq. The first of these projects - the completion of the CSSP - is crucial to enabling Iraq to reach its longer-term crude oil production targets of 7 million barrels per day (bpd), and then 9 million bpd and then perhaps 12 million bpd, as analysed in depth in my latest book on the global oil markets. The project 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 initially supplies around 6 million bpd of water to at least five southern Basra fields and one in Maysan Province, and is then expanded for use in other fields. 

The second of the projects is also a matter of 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. Initial comments from Iraq’s Oil Ministry last year highlighted that the plant involved in this process 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, also stated last year that the gas produced from this second TotalEnergies project in the south will help Iraq to cut its gas imports from Iran. 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 Shell, which 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.

TotalEnergies already has ongoing experience of working across Iraq, holding 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. This gives it very specific operational experience of working on the ground in Iraq, which would also enable it to increase crude oil output from the Artawi oil field, which is the third of the four projects to which it is committed. According to earlier comments from Iraq’s Oil Ministry, TotalEnergies would help to boost output from the Artawi oilfield to 210,000 bpd of crude oil, up from the current circa-85,000 bpd. The last of the four projects that were to have been undertaken by the French company would be the construction and operation of a 1,000-megawatt solar energy plant in Iraq.

By Simon Watkins for Oilprice.com

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