Iraq's $53bn energy deal to boost finances and support economic growth, Moody's says

The deal signed earlier this month will ramp up the country's oil production

FILE - in this Thursday, Jan. 12, 2017 file photo, laborers walk in the Nihran Bin Omar field north near Basra, Iraq. Prime Minister Adel Abdul-Mahdi said Tuesday, May 7, 2019 that he has instructed Iraq's Oil Ministry to finalize an agreement with global energy giants ExxonMobil and PetroChina to lead a $53 billion megaproject to boost oil production. (AP Photo/Nabil al-Jurani, File)
Beta V.1.0 - Powered by automated translation

Iraq's $53 billion (Dh194.5bn) energy deal to boost the oil production of Opec's second-biggest producer will strengthen the Iraqi government's fiscal position as it looks to revive the economy in the aftermath of a devastating war against militants, Moody's Investors Service said.

Earlier this month, Iraq's oil minister said an agreement was reached with global energy major Exxon Mobil and PetroChina to raise production at southern oilfields of Nahr Bin Umar and Ar-Ratawi to 500,000 barrels per day (bpd) from the current 125,000 bpd. The agreement will generate $400bn in additional revenue for the government over a 30-year time horizon, according to Iraqi officials.

“We expect the deal to support economic growth and government finances,” Moody’s said in its latest note on Iraq. “When the extra oil production is fully online, it will add around 4 per cent of GDP annually to government revenue and export receipts, strengthening the country's foreign-exchange reserves position.”

During the construction phase, the project will "also boost non-oil growth and employment in the country", which needs to create more jobs to contain social discontent, Moody's said.

As part of the deal, Exxon Mobil and PetroChina will also build storage tanks, pumps, pipelines and offshore terminals that will simultaneously increase Iraq's oil export capacity, which is currently limited to around 3.8 million bpd and is the key constraint on the country's ability to increase production. The companies also plan to capture and process 100 million cubic feet of associated natural gas per day (cfpd), a 10 per cent increase over the present production level and a step towards the government's target of 3 billion cfpd by 2022, according to Moody’s.

Iraq has the world's fifth-largest stock of oil reserves with its hydrocarbon wealth concentrated in the southern Basra province and in the north of the country near Kirkuk and Mosul. However, little investment and infrastructure constraints following decades of armed conflict and security challenges have left a significant portion of the country's hydrocarbon potential unexploited.

Large fiscal and current account imbalances since the three-year oil price decline in 2014 and the costly military conflict with ISIS nearly doubled Iraq's government debt burden to 66 per cent of GDP by 2016, from 32 per cent in 2013. The country's foreign-exchange reserves nearly halved to $42bn from $74bn. However, higher oil prices since mid-2017 subsequently have improved its finances and Moody's estimated the government posted a budget surplus of around 6.5 per cent of GDP in 2018.

“In an environment of moderate oil prices, averaging $60 to $65 per barrel over the next two years, we expect Iraq's fiscal balance to return to deficit in 2019 and 2020, and government debt to increase again to around 55 per cent of GDP in 2020 from 51.5 per cent in 2018,” the rating agency said.

“We also expect foreign-exchange reserves to decline over the next two years from a peak of around $60bn at the end of 2018.”

Beyond 2020, Moody's estimated the signed deal could accelerate Iraq's oil production, pushing the budget and the current account closer to balance, even in a moderate oil price environment.