International investors have begun revisiting the blueprints for developing energy projects in Iraq. For starters, the government is tackling the numerous impediments to doing business, including solving substantial governance challenges and taking steps to resolve investment impediments for the private sector. Second, fears over resource nationalism, political strife and insecurity have begun fading with the current administration and its commitment to getting major projects off the ground. And finally, financing for energy projects is heading in the right direction.
Crescent Petroleum may well be a trailblazer in the country, but it also offers an example of how to do business in Iraq, exemplified since it began operations there in 2007. The message is clear: develop a local mindset. Foreign investors taking a fresh look at Iraq will see there is a clear opportunity to meet in the middle as the government embraces a more international outlook.
Policymakers are focusing on a series of key reforms to the business environment. “Political stability is a key enabler of investment, and several reform measures need to be in place to enhance the business investment climate,” said Jessica Obeid, an energy specialist at consultancy Azure Strategy. “Chief among these measures are transparency, providing incentives, ensuring timely payments, streamlining licences and ensuring recovery of costs. Implementing anti-corruption measures to promote a transparent investment environment is the way forward, while addressing the structural issues of the sector and the business climate.”
While Iraq has brought in foreign companies for service-oriented projects within the power and hydrocarbons sector, according to thinktank the Atlantic Council, the engagement of foreign entities often translates into the outsourcing of specific services to global corporations such as GE and Siemens, as well as Chinese firms.
Traditional resource nationalism has proved another obstacle. “The current attempt to capture flared gas could have been started as far back as 2007–08, but the officials who were in charge were more ideological than practical, which meant they did not give oil companies what they needed to invest. They did not like the idea of multinational corporations coming into Iraq and influencing the government,” said the Atlantic Council’s Abbas Kadhim.
Given such entrenched attitudes, new entrants have had to adopt a more hands-on approach.
Crescent Petroleum’s operations in Iraq began in 2007, when the country was on a civil war footing.
According to Crescent CEO Majid Jafar, having a local mindset (reflecting the company’s Iraqi origins) with a can-do attitude meant the company was able to drill wells and install seismic processing facilities and a pipeline within the space of 15 months, working in conjunction with the Kurdistan Regional Government.
“Matching investor expectation with that of the government is key to success. Iraq should focus on maximising the value of oil efficiently, rather than interpreting contracts as a zero-sum game with investors,” said Jafar.
Sometimes, there is misalignment of expectations between the government and the foreign investors. “When it comes to natural gas, the priority is power generation in Iraq. But the large international majors, their priority is putting the gas in a ship and sending it to the international market,” said Jafar.
The sense now is that the attitude in Baghdad is changing. The Sudani government is focused on delivery of major projects, with substantial budget resources allocated. It has made it clear it wants new partners to come in and invest in energy infrastructure to enable Iraq’s energy security and support Iraq’s role in the evolving regional energy complex.
Reform focus
The government has also instituted broader reforms to the executive branch, including evaluation processes to measure government performance and tackle corruption. With more budget available for capital projects, said Jafar, the economic impact is palpable. “There is now a lot of liquidity in the Iraqi system, and the stock market is up by 100%. You can see the impact in the cranes across Baghdad’s skyline and in the new housing developments.”
While bureaucracy, corruption and lack of electricity continue to challenge doing business, the general direction is positive and the desire of the government to attract investment and solve industry problems is very visible, said Jafar.
Private investment is impacting across sectors. For example, in 2023, the International Finance Corporation (IFC), the World Bank’s private sector-focused development institution, signed an agreement on a public-private partnership (PPP) to rehabilitate, expand and maintain Baghdad International Airport—creating the country’s first genuine PPP project.
One of the biggest challenges facing investors is the lack of capacity of the local banking sector. Local lenders, which comprise around 70 private and six state-owned banks, are not well placed to support energy sector financing.
“Until now it has been mainly Western and Chinese energy companies who have committed to investing in Iraq,” said Neeraj Agrawal, Crescent’s CFO. “And Western companies finance their investment through their own balance sheet, as do the Chinese, with the latter seeing some assistance being provided by their government.”
One area where Iraq has made strides is in attracting finance from development finance institutions (DFI) and export credit agencies (ECAs) principally for the power sector. Much of the financing for power projects in Iraq has come from the IFC and other similar bodies.
For example, UK Export Finance, an ECA, provided a $117m package to support the early-stage construction of two gas-fired, 750MW power plants in Dhi Qar and Samawha in the south of Iraq.
In late 2023, Iraq’s Ministry of Finance closed a $242.7m US EXIM-backed buyer credit to finance the upgrade and rehabilitation of various existing power plants in Iraq. The financing was the 12th ECA-covered deal sealed by Iraq since 2018.
That appetite for financing power projects is not evident in the upstream oil and gas sector. “We have worked very closely with many DFIs, and we have seen no appetite for providing any financing. ECAs have been affected by it as well. Nobody touches upstream, the only exception being the IFC if gas is being currently flared, in which case they can actually provide financing to turn it into power generation,” said Agrawal.
Crescent’s securing of financing in 2021 for an expansion project at the Khor Mor gas plant in the north of Iraq provides a potential template for other energy companies to follow.
“We were able to mobilise close to $1b in financing for our expansion project, and we secured $250m financing from the US International Development Finance Corporation (DFC),”
The $250m financing with the DFC was signed in September 2021 and followed a series of financial innovations that showed solid projects can still secure funding in Iraq.
“We were also able to put in place a contract with an EPC contractor who agreed to take a certain percentage of the contract value during construction, but the majority of the contract value is from cash flow from the project,” said Agrawal. “And we also mobilised a local bank in the UAE, with whom we have a corporate banking relationship, which provided a substantial sum of money. So, through these sources, we were able to mobilise funding.”
Iraq’s energy sector could prove a good fit for regional financial institutions such as The Arab Energy Fund (formerly Apicorp), the leading multilateral financial institution promoting investments in the MENA region’s energy sector.
“We see them being a leader, and they could work with a large bank like Trade Bank of Iraq to create a financing base. But it is a gradual process,” said Agrawal.
One area of reform would be to see a combination of knowledge and indirect risk instruments introduced. “Through a partnership between the governments and institutions like the World Bank, the IFC and the European Bank for Reconstruction and Development, we could create a version of the World Bank’s Multilateral Investment Guarantee Agency, which would enable commercial capital to be unlocked,” said Agrawal.
Another area where new financing could be secured is through the use of capital markets. Some oil and gas companies have issued bonds in the Kurdistan Region of Iraq, including Pearl Petroleum, Genel Energy and Norway’s DNO.
“That has been a successful model in providing capital. The bond market was an important tool to unlock foreign capital for good solid projects run by good companies. And there is no reason why that cannot be created for federal Iraq as well,” said Agrawal.
The view in Baghdad is that, with a bit of encouragement and support and a bit more stability, the pieces of the financing jigsaw will work together to help Iraq’s energy sector reach its true potential.
This article forms part of our recent Energising Iraq report, produced in conjunction with Crescent Petroleum. Click here to download your free copy.
Comments