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14 July 2019

Iraq: Rising from the ashes

Investors have a newfound interest in Iraq and the country’s recent contracts with major oil companies have the potential to greatly expand revenues.


A lack of stability and good governance has held Iraq back, however, there is still a chance for the oil-rich country to turn a page in the second half of 2019.

Iraq has the third-largest oil reserves in the Middle East and following the 2003 US invasion that damaged wells as well as refineries, the government began a long recovery and has more than doubled production since 2010 to a record 4.6 million barrels a day.

Security concerns

Iraq’s economic recovery has been chaotic, and the postwar oil industry has been difficult for investors to penetrate despite the ousting of Islamist militants.

The country is enjoying the restoration of stability, remaining less vulnerable to the on-going regional tensions and security concerns. This is due to its low debt costs and funding needs, which are met by domestic banks and concessional lending, a limited amount of short-term external liabilities and less reliance on foreign direct investment (FDI) financing.

Although signs of economic growth exist, security concerns remain a major issue for companies operating in the country. In May, ExxonMobil reacted to a perceived increased threat level by suspending operations at its Basra oil fields and flew its foreign staff to safety in Dubai due to the rising tensions in the Strait of Hormuz and the Gulf of Oman as well as Houthi attacks on oil operations in Saudi Arabia.

Additionally, in June, a rocket attack also struck a site operated by the stateowned Iraqi Drilling Company, but no production facilities were affected. Nonetheless, Iraq’s newfound stability means increased bullishness on investment into the country.

S&P said that Iraq’s position can be counterbalanced by a potential deterioration in its security situation, which has improved since the defeat of ISIS, potentially through the reported Iranian influence on Iraqi institutions.

Tensions in the Arabian Gulf intensified in May 2019 after exemptions from sanctions ended on countries buying oil from Iran, which is the country’s main source of revenue.

Lifeblood of Iraq

Volume and scale is key—Saudi Arabia is the world’s biggest exporter and has the capacity to pump about 12.5 million barrels a day, but Iraq’s ascent is posing an increasing threat to the Kingdom’s dominance of the Organisation of Oil Production Countries (OPEC), suggested PwC in a recent report.

Potential foreign investors now view Iraq with much more interest and the country’s recent contracts with major oil companies have the potential to greatly expand oil revenues, but the government will need to upgrade its refinery and export infrastructure to enable these deals to reach their potential.

According to Bloomberg, the former Iraqi oil minister, Hussain al-Shahristani laid the groundwork early this decade by boosting the country’s crude reserves assessments and cementing partnerships with ExxonMobil, Russia’s Lukoil as well as BP and other companies to develop long-neglected fields across Iraq.

Those efforts have paid off, with Iraq having increased production capacity to around five million barrels a day and plans to pump even more, targeting 7.5 million barrels per day in 2025.

The economic outlook has improved due to higher oil prices and improving the security situation—which has been met by the growth of Iraqi’s banking industry and reconstruction efforts— but constraints on capital spending will impede a recovery-driven growth acceleration.

Growth is expected to spike to 8.1 per cent in 2020 due mainly to higher oil output, despite the OPEC+ production cut agreement which Iraq has not fully committed to, says the IMF. Oil accounts for about 50 per cent of nominal GDP, nearly 100 per cent of exports, and around 90 per cent of government revenues.

However, because oil extraction is a capital-intensive industry it has done little to boost employment and spread the wealth among the citizens of Iraq—oil production accounts for only one per cent of total employment. According to the International Monetary Fund (IMF), Iraq’s real GDP is estimated to have grown by 0.6 per cent in 2018, thanks to a notable improvement in security conditions and higher oil prices, reversing the contraction of 1.7 per cent seen in 2017.

The recovery in oil prices and Iraq’s partial compliance to OPEC’s production curbs have been conducive to better outcomes on external balance. The country’s current account surplus is estimated to have widened to 4.9 per cent in 2018.

The World Bank stated that higher oil prices have supported a steady increase in international reserves from $49 billion in 2017 to $64 billion in 2018, rebuilding buffers to external shocks. Additionally, PwC said that Iraq possesses what could prove to be the largest oil reserves in the world and it is the only important oil and gas producer in the world with the potential and the intention to increase production by a factor of four or more times over the coming decade.

Iraq has more than doubled its oil production in the past decade  and it has finally given the country a voice in oil debates and prompted its inclusion in the most recent round of cuts, despite joining the committee that monitors compliance, third-party data suggest that the country is disobeying the production curbs.

Surging oil production is posing a challenge for Iraq. The country is under pressure in OPEC to sacrifice crucial income to help curb a global oil glut after years of pumping in all-out mode. The country still needs to sell more crude to rebuild damaged infrastructure, provide adequate services to stave off growing domestic unrest as well as keep the foreign companies running the fields happy.

In May Iraq oil minister announced the signing of a $53 billion energy deal with Exxon Mobil and PetroChina and the deal is expected to raise production at the country’s Southern oil fields of Nahr Bin Umar and Ar-Ratawi to 500 thousand barrels per day, generating $400 billion in additional revenue for the government over a 30-year time horizon, says Moody’s.

The end of the war with ISIS and a rebound in oil price is also believed to provide an opportunity to rebuild the country and address long-standing socioeconomic needs.

Making friends with old enemies

Saudi Arabia and Iraq have been working on developing political relations, which had fallen by the wayside over the past 10 years for a multitude of reasons, including the country’s close ties to Iran. Iraq is stuck between a rock and a hard place by trying to maintain close ties to Saudi Arabia’s geo archrival, Iran, while seeking investments from the Kingdom and at the same time hosting US armed forces.

Saudi Arabia intends to invest $1 billion in development projects in Iraq and open a consulate in the capital, reversing a longstanding policy of disengagement there as it seeks to curb rival Iran’s growing influence in the Middle East.

In April, a Saudi ministerial and business delegation visited Iraq to discuss investments for some of the Kingdom’s biggest companies such as Saudi Aramco, SABIC and the Kingdom’s mining company, Maaden.

It is during the same visit that Majid Al-Qasabi, the Saudi Commerce and Investment Minister pledged that Riyadh will open a consulate in Iraq’s capital and three others in different provinces at a later time to facilitate visa procedures as well as facilitating the construction of a sports city as a gift to Iraqi people.

Reconstruction efforts

Iraq’s National Investment Commission is heavily seeking private investments in various infrastructure and housing projects.

Photo credit: Bloomberg

The signing of energy deals with international companies such as Exxon Mobil, Saudi Aramco and BP is believed to support economic growth and government finances as well as the country’s external position.

As part of the energy deals, ExxonMobil and PetroChina will build new storage tanks, pumps as well as pipelines and offshore terminals that will simultaneously increase Iraq’s oil export capacity—the key constraint on the country’s ability to increase production.

The project is also expected to boost non-oil growth and employment during the construction phase. Iraq is the second-biggest producer in OPEC, able to pump around five million barrels a day and with plans to reach 7.5 million barrels per day in 2025. Oil, which has more than doubled since 2016, is fueling the country’s recovery from decades of wars and sanctions, but Iraq still struggles with power outages and most economic indicators outside of energy still show little promise.

The country’s cost of production per barrel of oil, as well as field operating costs, are comparable to those of Kuwait and Saudi Arabia which are the lowest in the world. However, since the defeat of ISIS militias, the country has embarked on a reconstruction exercise to improve infrastructure development and encourage foreign direct investment.

In April, Iraq approved a plan to develop power stations in the country with help from Munich-based Siemens, for a deal worth as much as $15 billion. Boosting power production is an urgent priority for Iraq, where sporadic outages and unpredictable supplies of electricity have disturbed economic activities ever since the US-led invasion of 2003.

Additionally, the construction and engineering sectors are key to the reconstruction of houses, facilities, and infrastructure in Iraq but the pledges at the International Conference for Reconstruction of Iraq, last February in Kuwait, have fallen short of delivering the urban renewal of cities as existed prior to ISIS’s capture of Iraq’s second largest city.

According to PwC, Iraq’s National Investment Commission is also heavily seeking private investments in various infrastructure and housing projects, creating many opportunities for foreign investment.

The financial sector

Extra oil production from recent energy deals is projected to add around four per cent of GDP annually to government revenue and export receipts, strengthening the country’s foreign exchange reserves position.

Higher oil production will support the government’s finances and external accounts. Moody’s said that higher oil prices since mid-2017 subsequently led to a 50 per cent increase in the average export price for Iraqi crude to $73.3 per barrel in October 2018 from $48.7 at the end of 2017, leading to a recovery in export receipts and foreign- exchange reserves.  

In 2003, the Central Bank Iraq and the US-controlled Coalition Provisional Authority authorised the establishment of a Trade Bank of Iraq (TBI), to finance international trade. TBI recently opened its first international branch in Saudi Arabia and the lender’s presence in the Kingdom is expected to promote investment opportunities in Iraq as well as the establishment of strong ties with key banking institutions in the two countries.

TBI owes its robust links with regional and international partners to the improved security situation within the country and a strong partnership with the Iraq government as it moves ahead with vital infrastructure repair and development projects which are key factors in TBI’s optimistic outlook and positive forecast for the years ahead.

In 2018, the bank’s chairman announced that the TBI was in talks to acquire a Gulf bank with branches in the UAE and Qatar as part of a strategy to boost revenues outside its home market. Similarly, several Western banks such as Citigroup and Standard Charted Bank have been increasing their Iraqi footprint. In May, Standard Chartered Bank revived its stalled plans to open a third branch in the country in the wake of improved security in the OPEC nation.

The UK-based lender expects to open a branch for corporate customers in the Southern oil hub of Basra in the first half of 2020. The lender opened its Baghdad branch in November 2013 and another one in Erbil in March 2014. Standard Chartered seeks to finance projects to upgrade electricity, oil as well as other vital infrastructure and plans to sign about $500 million in deals by early next year.

Iraq’s exposure to the ongoing geopolitical tension, high dependency on oil economy without any proper structural reforms as well as lack of economic diversification efforts pose a threat to the country’s outlook.

The rising tensions between the US and Iran is threatening stability in Iraq as well as the rest of Middle East, having potentially disrupted the flow of oil due to the suspension of shipping activities in the Strait of Hormuz. However, as political stability deepens and turmoil abates within the country, Iraq’s business climate has improved dramatically.

Foreign investment is surging, investors from around the world are seeking ways to invest in Iraq endorsing the country’s positive outlook.





CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

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