Iraq rethinks energy strategy with new oil industry contracts

Iraq has taken a significant step towards implementing its ambitious strategy to develop the oil and gas industry, seeking a comprehensive transformation in the perception of this vital sector and the country's economic development. 

Sources confirm that the country is making the biggest shift in decades in its approach to international oil companies, seeking to attract more investment in the hydrocarbon sector through profit-sharing contracts. 

Baghdad recently signed initial contracts for the development of 13 exploration blocks and oil and gas fields, following a bidding round in May. As Al Arab notes, these contracts, awarded to several companies, include more attractive terms than traditional technical services contracts, such as profit-sharing after deducting recovery costs and royalty rates. An oil ministry official, who attended the signing of the contracts, explained that "profit-sharing contracts provide a share of revenues after deducting royalty fees and cost recovery expenses". 

The official, who preferred to remain anonymous because he was not authorised to speak to the media, noted that Iraq adopted such contracts instead of service contracts for the May round, with the aim of encouraging and attracting more investment in the energy sector. Traditionally, technical services contracts involved a fixed payment for each barrel of oil produced, after accounting for costs, and tended to be less profitable for foreign investors. 

The contracts include major projects: China's ZEPC will develop the East Baghdad and Middle Euphrates fields, while Zhenhua Company will develop the Al-Qarnain block in Najaf and Anbar provinces, and Raf'at Abu Khaima in Muthanna province, near the Saudi border. 

In addition, the Iraqi Oil Ministry awarded a contract to Sinopec to develop the Sumer exploration block in Muthanna, and another to CNOOC for exploration block number 7, which spans the provinces of Diwaniyah, Najaf, Babylon, Wasit and Muthanna. UIG will develop the Faw block in Basra, and Anton Oil the Dhafra field in Wasit, while GeoJade will work on the Jabal Sanam exploration block in Basra. 

Last year's 27 billion dollar deal with France's TotalEnergies, which offers faster cost recovery and lower risk through higher revenue sharing, was seen as a model that Iraq could replicate to attract more foreign companies. 

Major oil producers have expressed dissatisfaction with the terms of traditional service contracts in Iraq, as they are unable to benefit from high oil prices and lose revenue when production costs rise. 

Iraq, the second largest producer in the Organisation of Petroleum Exporting Countries (OPEC) after Saudi Arabia, currently has the capacity to produce almost five million barrels per day. According to an OPEC report based on secondary sources, the country raised its output to 4.25 million barrels per day in July, although its production under the OPEC+ agreement is 4 million barrels per day. Foreign investment in the energy sector has declined since the wave of deals signed after the US invasion more than two decades ago, contributing to the country's stagnant oil production. 

Government plans to increase production face domestic problems, including limited export capacity due to old and deteriorating infrastructure and access to water. Disputes over control of production in the semi-autonomous Kurdistan region have also affected the country's oil output. The Kirkuk-Ceyhan pipeline was shut down in March 2023, prompting Iraq to increase production in other fields to compensate for lost production in the north. 

Despite these challenges, Oil Minister Hayan Abdul-Ghani stressed that one of the key objectives of this bidding round is to increase production of natural gas, a resource Iraq plans to use to fuel power plants that currently rely heavily on gas imported from Iran. "Increasing gas production could allow more flexibility in supplying gas to power plants," Abdul-Ghani said in a statement. 

Overall, these initiatives represent a strategic shift in Iraq's energy policy, aimed at revitalising its oil sector and securing a more reliable energy supply for its population as it prepares to increase its production capacity to about seven million barrels per day by 2027. China Petroleum & Chemical Corp. is the largest Chinese investor in Iraq, with stakes in the Ahdab, Halfaya, Rumaila and West Qurna 1 fields, and is responsible for producing around three million barrels per day of Iraqi oil. China remains the largest buyer of Iraqi crude, importing an average of 1.18 million barrels per day, accounting for 35% of Iraq's oil production. 

Iraq's strategy of adopting profit-sharing contracts and strengthening its relationship with non-OPEC countries, such as OPEC+, marks a clear shift towards greater integration and adaptation to the dynamics of the global oil market. 

This approach seeks not only to increase foreign investment and optimise its production capacity, but also to diversify and stabilise its economy, reducing its dependence on energy imports and securing a more sustainable energy supply for the future. The active involvement of China and other countries in the development of Iraq's energy resources illustrates Iraq's geopolitical importance in the global energy landscape.