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Iraq's oil sector progress, IOC deals hinge on outcome of parliamentary elections


TotalEnergies' $27 billion deal, among others, need to be finalized

Delayed government formation could jeopardize IOC deals

Iraq to remain reliant on Iranian energy, regardless of poll outcome

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Any progress in Iraq's oil sector and the finalization of numerous key deals with international oil companies signed during the one-and-a-half year tenure of Mustafa al-Kadhimi's government will hinge on the outcome of the parliamentary elections that took place Oct. 10.

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While the low turnout amid for the elections is indicative of widespread dissatisfaction with the ruling parties, the faces at key ministries such as finance and oil will be instrumental in deciding the fate of the energy sector.

The Kadhimi government, which took over on an interim basis in May 2020 amid widespread protests against the previous cabinet, has failed to implement several economic reforms amid political opposition to such changes.

"These elections will be disruptive to business for several months, as major government decision making and administration will likely slow significantly," said Patrick Osgood, senior Iraq analyst at Control Risks. "This disruption is likely to last for several months, as the post-election government formation process is likely to do the same – whether or not Prime Minister Mustafa al-Kadhimi and parts of his cabinet are reappointed."

Oil Minister Ihsan Ismaael has seemingly managed to ink several deals with international oil, gas and power companies, but most of these agreements are not final and their implementation will depend on the next government.

$27 billion deal

The most high profile agreement was a $27 billion deal with TotalEnergies signed in September that includes four projects, but few details have been revealed about the type of agreements signed, initial investments and timelines for implementation.

"The government has signed several energy deals this year – including those on solar generation, new field development and related gas capture and water injection projects – which remain in precontract stages of negotiation, despite various memorandums and framework agreements being signed," said Osgood. "That so many initial deals were signed before the elections was an attempt to create facts on the ground by the government, and therefore a tacit acknowledgement of the risk that these deals may not survive a shift in power after the elections, should that occur."

The new government is also likely to inherit the problems Kadhimi's team faced with some IOCs, notably ExxonMobil, which is seeking an arbitration case against state-owned Basrah Oil Co for delays in selling the US company's stake in the giant West Qurna 1 oil field.

"The investment climate could be challenged, with several IOCs already reducing exposure," said Nareeka Ahir, a geopolitical analyst with S&P Global Platts. "Risks would rise for our already modest crude supply growth forecast from 4.0 million b/d in 2021 to 4.6 million b/d by 2026 (back to 2019 levels)."

Oil capacity boost

IOC help is needed if Iraq is to fulfill its plans to boost its oil production capacity beyond the estimated 5 million b/d. Ismaael said Oct. 7 that OPEC's second biggest producer wants to reach an oil production capacity of 8 million b/d by 2027, a feat that is unlikely to materialize.

Although Iraq, which has busted its quota previously, has complied with its OPEC+ production ceiling for the most part of 2021, it is unlikely that it will be able to meet the higher baseline for its quota from May 2022 onwards due to an inability to boost exports significantly, especially from the southern terminals.

"The next big challenge for Iraq's oil sector will be the need to ensure greater infrastructure flexibility," said Ahmed Medhi, visiting fellow at the Oxford Institute for Energy Studies. "Delays to upgrading oil export infrastructure have an impact on how Iraq optimizes its export grades."

Besides its oil dilemmas, Iraq faces major gas and power problems that have plagued the country for years.

Gas dilemma

The majority of Iraq's gas is pumped with oil, and the gas that is produced is mostly burned, leaving little feedstock for power generation.

The Kadhimi government signed a number of gas and renewable deals with companies, in the hope of remedying the gas and power shortage.

"The key goal is to displace liquids from the power sector and increase dry gas supply to the power sector," said Mehdi. "The next stage will be to fast-track the development of non-associated gas production. This is a national priority regardless of political background, so this agenda is expected to accelerate over the coming years."

Iraq, which also is politically tied to Iran, has to import gas and electricity from Tehran, which has proved to be unreliable for Baghdad. The fact that Iran's energy sector is under US sanctions does not make it easy for Iraq, which receives regular waivers from Washington to continue importing from its neighbor.

"Gas imports from Iran are unreliable and the major issue over US sanctions constraints on Iraq's payments for them will continue," said Osgood. "But those very issues and Iraq's continuing shortfalls in domestic supply will sustain these import arrangements."