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Iraq’s investor outlook worsens

The investment environment in Iraq is being affected by continued turmoil in domestic politics and the country’s battle with Covid-19

The resignation of Iraqi prime minister designate Mohammed Tawfiq Allawi at the start of this month following his failure to form an administration shows the fractured state of politics in Iraq and leaves the country without a complete government.

New elections will be needed, and former prime minister Adil Abdul Mahdi has suggested they could be held towards the end of this year. This would entail the current government continuing without a prime minister until then.

Investment delay

No prime minister also means no permanent oil minister, which could prevent Iraq from passing legislation required for investment decisions on key projects.

“Security and coronavirus will continue to be a big disruptor for US companies for many months,” says Michael Knights, senior fellow at thinktank The Washington Institute. “Not having a functional government or an oil minister and it not being easy to award a project would be a big concern for developers [such as ExxonMobil and oil services firm Honeywell].”

And Iraq could do with being more nimble, rather than less, over the coming months, given the changed market environment following last week’s disintegration of the Opec+ accord. Iraq will now be competing with Saudi Arabia, the UAE and Russia for oil market share.

But it failed to build in incremental capacity beyond its output growth over the past few years—even while oil services prices were low. This means it has significantly less scope than other actors to protect its market share ahead of the Opec+ players getting back around the table and thrashing out a new deal.

“Security and coronavirus will continue to be a big disruptor for US companies for many months” – Knights, The Washington Institute

On the other hand, Iraq having to potentially wear a quota cut in a new deal could still be a lesser worry. “We have just one route to get majority of our oil exports out—through the Strait of Hormuz,” says Yesar Al Maleki, managing director at the London-based Iraq Energy Institute. “If in the future there are problems between Iran and US allies in the Gulf, Iraq is quite vulnerable.”

A key project that could help boost Iraqi oil exports is the southern integrated infrastructure project (SIIP)—although this has, admittedly, been under discussion since 2014 without investor commitment. ExxonMobil and China’s CNPC were first in line for the SIIP, which will focus on the repair and maintenance of Iraq’s southern fields and boosting gas capturing and processing capacity.

Administrative problems and insurgent attacks have retarded development and last year affected discussions with ExxonMobil. The US now advises against all but essential travel to Iraq.

Tangled web

Material progress on projects will also require Iraq to agree on a budget for 2020, which is again delayed by the political situation. A new budget could be negotiated by April, says Knights. But this may be the only political decision that progresses relatively swiftly.

One stumbling block is that Iraq’s so-called ‘muhasasa’ system reserves certain government positions for representatives from particular groups. Kurdish and Sunni politicians tend to favour the US, while Shia representatives tends to be more closely aligned with Iran. 

“Ideally, given Iraq’s geopolitical position, it should act neutrally and [sponsor] some sort of diplomatic effort to bring Iran and the US together to discuss the nuclear agreement, but this is quite a burdensome task,” says Maleki. “Iraq is weak internally and this is always reflected on its foreign policy in the region.”

Further clouding the picture, Iraq’s Shia politicians are currently engaged in a bout of intense in-fighting. This may make finding the political balance to form a government more difficult but, conversely, could improve the security situation.

“With the deaths of [Iranian general] Qassem Soleimani and [militia commander] Abu Mahdi Al Muhandis you have seen a jockeying for position,” says Knights. “We can see a lot of personality-based competition for Iranian attention. That makes [Shia militias] more splintered and less threatening.”

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