Investors back Iraq’s long-term potential
- Iran war has ‘concentrated minds’
- New government must enact reforms
- Investors sticking to plans with caution
Iraq has been dragged into the Iran conflict and had its economic lifeline threatened by the disruption of oil exports through the Strait of Hormuz.
But foreign companies with an appetite for frontier markets are largely treating the conflict as a temporary setback and speculating that Washington and Tehran will soon strike a deal, oil executives and analysts have said.
Majid Jafar, CEO of Sharjah-based Crescent Petroleum, said the conflict, which began on February 28, had concentrated minds on the structural changes Baghdad needs to make.
“Iraq is at a critical inflection point,” he said. “This war has very much exposed the vulnerabilities across different areas, but also clarified some of the reforms and investments needed.”
Challenges include Baghdad’s inability to control Iran-aligned militias, continued disputes with the autonomous Kurdistan region over the sharing of oil revenues, bureaucratic inefficiencies and corruption and a bloated public sector.
Many of these weaknesses predate the war and were highlighted by the International Monetary Fund last year.
Hostilities have exacerbated the threat posed by Iran-aligned militias, which launched attacks across Iraq and Gulf states in retaliation to the US and Israeli operation against Tehran.
Iran’s closure of the strait has also deprived Iraq of its main source of revenue by locking in crude exports and forcing production shut-ins. This threatens to upend government finances.
Oil exports through Hormuz fell from 93 million barrels a month on average to 10 million in April, according to Iraq’s new oil minister Basim Mohammed.
The Kirkuk-Ceyhan overland pipeline to Turkey is carrying 200,000 barrels a day, with plans to raise that to 500,000.
This revamped interest in building out bypasses to Hormuz is a silver lining of the conflict, said Majd Shafiq, a capital markets consultant based in Amman, Jordan.
“You do need a plan B and a plan C, and there is a cost involved, but the cost of not having these plans fully ready and functioning is higher,” Shafiq told AGBI.
Negotiations to end the war and reopen Hormuz are another hopeful sign, Shafiq said, as is the progress Iraqi officials have made on the “steep learning curve” of fostering a better business climate.
Appetite for risk
Some foreign companies have paused their Iraq plans for six to 12 months because of the conflict, but those with a greater appetite for risk are moving ahead with caution, Shafiq said.
“They view this as something that you have to deal with in the short term and just keep cracking on,” he said.
Shafiq highlighted opportunities in banking, oil and gas. Iraq has the world’s fifth-largest proven crude reserves and the second-lowest production costs after Saudi Arabia.
It urgently needs to bolster its electricity grid after Iran cut gas provisions during the war, compounding long-running flaws and raising the spectre of power blackouts in the summer.
“The government has already stated there’s going to be a clear deficit,” Jafar said at an Atlantic Council conference on May 13.
“This adds to the urgency.”
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Jafar said he remains optimistic about Iraq and that he hopes the new government of prime minister Ali Al-Zaidi will follow through on energy investments and reforms.
“This is a country of enormous resources with a young and capable population and a geographic positioning that should give it options,” he said.
“But it’s all going to come down to turning that political consensus into implementation and, as always, management.”
France’s TotalEnergies is advancing a $10 billion Gas Growth Integrated Project (GGIP) in Basra spanning oil, gas, solar power and seawater treatment.
Dunia Chalabi, the company’s managing director for Iraq, described negotiating the project with Iraqi officials and the Basrah Oil Company as “not a walk in the park” but ultimately a positive experience.
QatarEnergy is the third partner in the GGIP.
“The feedback I get from the ministry, and I see the ministry literally every day, is very much open to investment, very much,” Chalabi said at the Atlantic Council conference.