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Iraq Energy & Utilities Infrastructure Forecast
- 25 Jan 2022
Key View: Iraq's energy and utilities infrastructure exhibits significant investment opportunity, due to the continued need for modernisation aross the market. The market suffers a lack of domestic expertise and limited public investment capacity, which leaves the sector heavily reliant on foreign participation, particularly for large-scale new power capacity projects.
- Iraq has seen repeated power outages over 2021, with the southern governorates of Basra, Dhi Qar, Maysan and Muthanna badly affected, leading to the resignation of Electricity Minister Majed Mahdi Hantoush. Insufficient fuel supplies, failing equipment and sabotage of the national grid are all factors contributing to the frequent blackouts.
- The government has committed to improving the power network, hoping to avoid a repeat of the social unrest seen in 2019. Progress has been limited so far, but the project pipeline is substantial: power plants and transmission lines account for around 80% of projects in the broader sector, according to our Key Projects Data (KPD).
- In November 2021, a consortium of Scatec, Orascom Construction and Bilal signed agreements to develop two solar photovoltaic (PV) projects, with a combined capacity of 525MW in Iraq. The scheme, valued at USD500.0mn, includes the construction of the 225MW Iskandariya solar project in Babil province and the 300MW Karbala solar project in Karbala province. The projects will be carried out under a build-own-operate model.
- October 2021 saw the Abu Dhabi Future Energy (Masdar) sign an implementation agreement with the Government of Iraq to develop a portfolio of solar photovoltaic (PV) projects in the country with 1GW-combined capacity. The portfolio includes- a 450MW PV solar independent power producer (IPP) project in the Dhi Qar governorate; 100MW and 250MW PV IPPs in Ramadi; a 100MW PV IPP in Mosul and a 100MW project in Amarah. The projects form the first phase of an agreement signed between Iraq and Masdar during June 2021, to develop projects with a minimum total capacity of 2GW.
- September 2021 saw Pearl Petroleum, a consortium involving Dana Gas and Crescent Petroleum, secure a USD250mn from the US International Development Finance Corporation (DFC) for expansion works at the Khor Mor gas plant in the Kurdistan region of Iraq. The seven-year financing will support the USD630mn under-construction expansion project, which aims to increase gas production capacity by 50% to 19.5mn cubic metres (cu m) per day. The project, which has suffered delays due to the Covid-19 pandemic, is due to be completed by April 2023. A further stage will take the gas capacity to 28.3cu m per day
- Investment from China is also rising rapidly in Iraq. In July 2021, the Iraqi government awarded China National Chemical Engineering Company a contract for the construction of an oil refinery at the port of Fao in the southern part of the country, reports Reuters. The entirety of production from the new refinery will be used for export purposes. The 300,000 barrel per day refinery, which will also include a petrochemical plant, will be financed by the Chinese government.
Investment Needed Across All Sectors
After years of inadequate investment, as well as the destruction caused by conflict and civil unrest, Iraq's energy and utilities sector is in urgent need of investment, although the economic impact of the Covid-19 pandemic and simultaneous decline in global oil prices will weigh considerably on activity in the power sector through the short term and potentially beyond, increasing the risk of cancellations on pre-construction projects in the pipeline. Over the long term, Iraq's young and growing urban population will stoke demand for additional infrastructure investment. Accordingly, there are a variety of high-profile projects currently in the planning phase of the construction pipeline, as the government seeks to address long-term demand.
Iraq is a distinct Middle East and North Africa underperformer in terms of power and utilities network and infrastructure, which is underpinned by significant energy, water and telecommunications infrastructure gaps largely attributable to severe damage stemming from years of conflict. As a result, Iraq is largely reliant on natural gas, electricity and refined fuel imports from other countries, which increases the potential of shortages and costs. The November 2019 connection of Iran and Iraq's electricity grid will improve the quality of electricity for Iraqi consumers, but it will come at an increased cost that will drive up the cost of electricity for businesses. Recent power outages have been blamed on Iran suspending imports due to unpaid bills (according to reports from July 2021).
Water shortages are also acute, as the available water resources continue to dwindle and most of Iraq's water comes from the Tigris and Euphrates rivers. Water flowing from these rivers to Iraq has drastically decreased as Iran and Turkey have built dams that divert these rivers' natural flows. Southern Iraq has been experiencing severe water shortages throughout 2019 as a result, and most agricultural sector activity has been suspended.
A series of power projects is expected to drive value creation in Iraq's energy and utilities sector in the short term, while high-valued water projects in the planning phase offer long-term upside. The full potential for project activity in Iraq's energy and utilities space will however remain constrained for the foreseeable future by security concerns, government mismanagement and a difficult financing environment.
A 2015-2020 electricity plan laid out the government's intention to focus on improving existing infrastructure, such as increasing productivity at power plants by transforming open cycle generators to closed cycle generators and rural electrification programmes to connect more of the population to the grid. In addition, it was seeking to address some of the more fundamental issues facing the subsector, such as improving technical skill levels of employees through training courses. It was also planning for renewables, with USD200mn allocated in the 2013 budget to get projects off the ground - targeting an initial 50MW of renewable capacity. Within three years, the government was targeting 400MW. Eventually, it was hoped that renewables would account for 2% of total electricity generation by 2020 (a new target of 5% has been set for 2030).
All the above plans and strategies were virtually paralysed by the security situation over 2015 and 2017, as well as falling oil prices severely denting government revenues and, therefore, its ability to finance projects. Positively, the battle with IS has ended and oil prices are expected to see modest gains over coming years. While this has freed up government resources to support rejuvenated investment, we do not expect current public spending levels to be maintained in the medium term.
Foreign Participation In Power Infrastructure
The pressure to rebuild the country’s damaged power infrastructure is acute, as installed power capacity remains well short of peak demand. Nearly two decades of war, unrest and underinvestment, most recently caused by the activities of IS, has resulted in Iraq’s power infrastructure being unfit to meet demand. In a report released in April 2019, the International Energy Agency estimated that Iraq’s total available power generation capacity stood at 17GW in 2018, well below peak demand of 27GW. This shortfall resulted in widespread blackouts in the summer of 2018, crippling economic activity and leading to social unrest.
This highlights the large-scale investment required to boost the country’s power capacity, which is already under way, with more than 20GW of capacity logged in our KPD as either under construction or in the pre-construction phases. As a result, opportunities for investment in Iraq’s power infrastructure are plentiful, particularly in the gas-fired sector. Iraq's gas power potential is considerable, as the country is a major producer of the fuel, but much of it is currently wasted through flaring and is therefore prime to be captured for use in power generation. Our KPD shows that 80% of new power plant projects in the pipeline are gas-fired, offering investment opportunities for companies such as GE and Siemens, which specialise in the provision of gas-fired power equipment.
Much investment will also be focused on transmission and distribution (T&D) infrastructure, which is in need of upgrading and expanding in order to reduce capacity losses. Damage to T&D networks since 2003 has resulted in transmission losses rising to 50.6% of output in 2014, up from just 6.1% in 2004. It is likely that the situation has worsened since the latest data were released due to the disruption caused by IS over the four years from 2014-2018. These figures show that Iraq’s power network has among the highest T&D losses of any country globally, ranking alongside markets such as Haiti and the Republic of Congo. T&D losses contribute to Iraq’s pressing power deficits, and upgrading this infrastructure is a relatively quick and low-cost way of boosting capacity. Substantial investment is needed to upgrade and make efficiency improvements, this has been reflected in the recently announced deal with Siemens, with investment in substation and transformer infrastructure a key part of the agreement. We expect to see further deals announced with multinational power companies to upgrade Iraq’s T&D networks over coming months and years. This plays into our expectation that T&D infrastructure will be a major focus of investment worldwide in order to reduce wastage, expand capacity and ease power bottlenecks.
The reconstruction of Iraq’s power sector is set to benefit from competition between US and European companies for contracts being tendered for new power stations, refurbishment of existing infrastructure and upgrades of T&D networks. This will help to address the country’s pressing power deficit, which is hindering economic growth. Recently announced deals with Germany’s Siemens indicate that the company is seeking to expand its presence in Iraq, competing with the well-established US firm GE. This is a good sign that the power sector will attract much needed foreign investment, despite considerable operating risks still present in the market. This investment inflow will benefit gas-fired power plants and T&D infrastructure in particular, with the latter in a parlous state as huge losses contribute to the country’s significant power deficit.
With this in mind, the Ministry of Electricity of Iraq and Siemens signed a roadmap implementation agreement, which covers short-, mid- and long-term development of new power generation capacity in Iraq. In awarding projects to Siemens, Iraq’s prime minister has said that the German company is well placed to win the bulk of future deals, putting pressure on US companies to compete. New capacity will be added by rehabilitation and modernisation of existing plants as well as expansion of T&D networks. Siemens has been awarded contracts worth EUR700mn (USD784.5mn) for Phase 1 of the roadmap, include building a 500MW gas-fired power plant in Zubaidiya on engineering, procurement and construction basis; modernisaton of 40 gas turbines with upstream cooling systems; and installation of 13 units of 132kV substations along with 34 transformers across the country. Siemens has also committed to donate a smart health clinic and a USD60mn software grant for Iraqi universities.
In August 2020, GE signed two agreements totalling USD1.27bn with the Iraqi Ministry of Electricity for works related to power generation and transmission. GE Gas Power will carry out the upgrade and maintenance of power plants totalling 6GW for USD500mn. GE Grid Solutions, under a USD727mn agreement, will strengthen Iraq's transmission network and interconnection with Jordan's electricity grid. The firm will be responsible for the design, supply, installation, testing and commissioning of high-voltage substations and various overhead transmission lines. GE is also working with various export credit agencies to facilitate the funding of more than USD1bn for the projects. This is not the first round of major contract agreements GE has been party to in Iraq. In H116 the company signed an agreement with the Ministry of Electricity of Iraq for critical electricity generation and maintenance projects throughout the country. The power plan involved implementing a set of technological solutions and upgrade projects to strengthen productivity and efficiency levels of the ministry's power plants and adding 700MW to the national grid. GE signed contracts worth more than USD1bn and secured financing for the initial stage of the projects, valued at USD328mn. In January 2017, GE won further deals worth more than USD1.4bn. GE will provide engineering, procurement and construction services to build the Samawa and Dhi Qar power plants, which will add 1.5GW to the grid.
Despite the interest by multinational power companies, foreign investment in infrastructure will remain subdued due to prevailing operating risks in the Iraqi market. While Islamic State has been defeated and government control nominally restored over the whole of the country, Iraq remains highly unstable and at severe risk of terrorist activity. Low-level insurgent attacks continue to occur, largely targeting security forces in the north of the country, and foreign firms and their staff will be exposed to these threats. Power infrastructure is a potential target for terrorist attacks as taking it offline can have a disproportionately large impact on the wider economy and society. Aside from security threats, foreign firms will also be deterred by Iraq’s dense bureaucracy, which makes investment in the country an arduous prospect, as well as entrenched corruption. With US and British firms accountable for bribery offences committed abroad under domestic anti-corruption legislation, investing in countries such as Iraq where graft is pervasive is fraught with risk. These factors, combined with other operating risks present across the country, will dampen interest in Iraq’s infrastructure from foreign firms with a low risk appetite.
Below we highlight a variety of power projects moving through the pipeline:
- In September 2020, the Iraqi Ministry of Electricity awarded Siemens Energy a turn-key contract to build a 400kV substation. To be located around 20km from Ramadi city, the Al Hamudhia station will connect up to 750MVA to the national grid, providing power to Ramadi, Fallujah, Saqlawyah, Khalediyah and surrounding areas. The scope of works for the Japan International Cooperation Agency-backed project includes design, construction, equipment supply, erection, testing and commissioning.
- In July 2020, Linxon, a joint venture between SNC-Lavalin and ABB, won an USD80mn contract from the Iraqi electricity ministry to deliver four turn-key 132/33kV gas insulated substations (GISs). The engineering, procurement and construction contract forms part of the financed by Japan International Cooperation Agency (JICA)-backed Electricity Sector Reconstruction Project (Phase 2). The scope of work for Linxon includes a high-voltage 132kV GIS, 132/33kV power transformers, a 33kV switchgear, a control and protection system, a communication system, design, civil construction works, installation, and commissioning. Work was due to start in July, with delivery in 18 months.
- In June 2020 the Iraqi electricity ministry signed a contract with Siemens Energy for a new power substation in the Al Hamudhia region. Siemens Energy will be responsible for the design, construction, equipment supply, erection, testing and commissioning of the 400kV substation, which will provide power to Ramadi, Fallujah, Saqlawyah, Khalediyah and the surrounding areas in the Al Anbar governorate. The project is financed by JICA. The substation will supply power from the Al Anbar plant and connect up to 750MVA to the national grid. The project will be executed in collaboration with local sub-contractors. Construction was scheduled to start in July, with completion planned for July 2022.
- Also in June 2020, operations began on the second phase of the 3GW Rumaila independent power project near Basra in southern Iraq. The project is being developed by Shamara Group, which has a 15- to 17-year power purchase agreement (PPA) with the Iraqi electricity ministry. Mapna Group won a USD2.5bn engineering, procurement and construction contract for the combined-cycle power plant, which will have 12 gas and six steam turbines. The development aims to complete the remaining third and fourth phases, totalling 1.5GW, by 2022.
- In March 2020, China Petroleum Engineering and Construction Corporation (CPECC) won a USD203.5mn contract to treat sour gas at the Majnoon oil field. The project will be completed within 29 months and provide a sour gas treatment facility with a daily capacity of 4.39mn cubic metres.
- In November 2019, CPECC secured a USD121mn engineering contract to modernise gas extraction facilities at the West Qurna-1 oil field in Iraq. The facilities are used to extract gas during crude oil production at the oil field, which is majority-owned by ExxonMobil. The project is likely to increase crude oil production capacity of the oil field, which is 480,000 barrels per day (b/d). The project is scheduled to be completed within 27 months.
- In September 2019, Mass Energy Group Holding (MGH) and GE Power signed an agreement to establish phase three of the Besmaya Power Plant, already Iraq's largest, taking total capacity to 4.5GW (an addition of 1.5 GW by 2021). GE will supply MGH with four 9F gas turbines and four generators to equip Besmaya Phase 3. The project has already been approved by Iraq’s Council of Ministers, and MGH will supply electricity from the new extension of the plant to the Iraqi Ministry of Electricity under a 20-year PPA.
- In September 2019, Siemens and Orascom Construction signed an agreement with the Iraqi government to rebuild two power plants in the north of the country, adding a combined capacity of 1.6GW. Work at the Baiji facility, 250km north of Baghdad, will commence once Iraq’s Council of Ministers approves the deal and a financial agreement is reached with the finance ministry.
- In July 2019, Siemens won a contract from CITIC Construction and Maisan Power to supply components and provide long-term power generation services for the 840MW Maisan combined-cycle power plant. Under the contract, valued at more than EUR280mn (USD313.8mn), Siemens will supply two SGT5-4000F gas turbines, one SST5-4000 steam turbine and three SGen5-2000H generators. The firm will also supply SPPA-T3000 control systems, transformers and related electrical equipment, and a fuel gas system. Siemens will also supervise implementation of the project, which is likely to start power generation by March 2021 and enter full combined-cycle mode by early 2022.
Power Market Set For Gradual Expansion
Iraq - Electricity Capacity MW & % y-o-y (2022-2031)
f = Fitch Solutions forecast. Source: EIA, IRENA, Fitch Solutions
Our Oil & Gas team believes that Iraq needs to diversify its oil export routes away from the Persian Gulf in order to reduce export disruption risk and achieve long-term oil growth ambitions. To this end, Saudi Arabia holds the most attractive proposition to transit large volumes of Iraqi oil to the Red Sea. Iraq's southern fields have the most production upside compared with other areas of the country and will require a new outlet if they are to produce at potential. There is already a 1.6mn b/d pipeline connecting Basra with Yanbu on the Red Sea, though it will likely need substantial renovation given that the Iraqi part has not operated since 1990. Yanbu is already equipped with substantial storage capacity and is well served with jetty space. The Red Sea port also provides a more direct route to European markets.
As Turkey seeks to diversify away from a reliance on Russian energy supply, a plan has been proposed between the country and Iraq for a 181km gas pipeline between Turkey and the Kurdish Regional Government, with a pumping capacity of 10bn cu m of gas a year. The government of Iraq plans to build a pipeline to transport oil from Kirkuk's oilfields to the Ceyhan Port in Turkey. The pipeline will start from Baiji city and extend to the Fish-Khabur border area with Turkey. The pipeline will substitute an aged and damaged section of the Kirkuk-Ceyhan pipeline.
September 2021 saw Iraqi state-run firm North Refineries sign an initial agreement with SEAB and Turkey-based Limak Holdings for the construction of an oil refinery in northern Iraq. The 70,000 barrels per day refinery is planned to be built in Qayara in the Nineveh province. The refinery is expected to process heavy oil into Euro V-compliant clean products. SEAB and Limak are expected to present the financial and technical plans for the project by the end of 2021.
Jordan, Egypt and Iraq have discussed reviving an oil pipeline project that could eventually link the three countries. Iraq and Egypt signed several MoUs in October 2020, including relating to oil transportation and the alliance with Jordan. Jordan and Iraq signed an agreement in 2013 to build a pipeline from Basra to Aqaba, passing through Jordan’s only refinery in Zarqa near Amman. The proposed pipeline had an initial capacity of 150,000b/d and an attached cost of USD18bn. However, due for completion in 2017, the project went unrealised. The two countries have since revived the project, as diplomatic relations between them improved, and the pipeline scheme was expanded to include Egypt. Iraq's Ministry of Oil is inviting bids from pre-qualified firms for a USD5bn pipeline between oil fields in Rumaila and Aqaba. Phase one of the project involves the installation of a 700km pipeline, with a capacity of 2.25mn barrels (bbl) on the Iraqi side. The pipeline would be built under an engineering, procurement, construction and financing contract. The second phase envisages construction of a 900km pipeline, with a capacity of 1mn bbl, in Jordan. The Jordanian section would be delivered on a build-own-operate-transfer model. Bids were due by May 2020; however, the Covid-19 crisis has set all deadlines back until both countries overcome the pandemic. While the benefits of such a project will vary for each country, enhanced trade will be a shared theme. However, headwinds are considerable - investor uncertainties due to the volatile oil price, elevated political risk, the security situation and weak fiscal situations.
The Common Seawater Supply Project will be a network of pipelines providing 5mn bbl of seawater daily to the country's southern oil fields. The seawater will be injected into the deposits at the oil fields as a secondary extraction measure to enhance overall oil recovery. Under the original plans, the project was valued at USD13bn and would deliver 12.5mn b/d of seawater through 426km of pipeline, including eight interconnecting stations and 10 delivery stations. The huge scheme was designed to supply southern oil field operators with an ample supply of water for injection into ageing inland oil fields in order to help maintain pressure and production rates. The Ministry of Oil and state-run South Oil Company own the project. ExxonMobil had originally been contracted to deliver the project, but the company ;eft the project in 2018 amid deteriorating relations with Baghdad. It was believed that Exxon was one of the only firms capable of executing such a large project. However, the project has since been scaled back, providing procurement and construction companies the chance of taking on the project, and it looks to be making progress. Hyundai Engineering & Construction will now carry out the water treatment facility package, and more than five companies have been pre-qualified for the pipeline package. Project management consultant CH2M has ensured the design allows for later phases to upgrade the project’s capacity. While the long-planned and troubled project has apparently become a priority for Baghdad since 2018, civil unrest, low oil prices, output and demand, high political risk and a constrained fiscal position, not to mention the coronavirus crisis, have the potential to cause setbacks.
Water In Need Of Investment
Growing populations and limited water resources in Iraq will increase the demand for better water and utilities infrastructure in order to manage scarce resources. While the Covid-19 pandemic is placing further pressure on a society already battling waterborne diseases. Agriculture accounts for 85% of the water consumed in Iraq, and with water becoming more scarce, farmers are favouring systems that provide short-term returns over sustainability, while others have sought to find alternative employment. In 2019 more than 20,000 Iraqis were internally displaced due to water shortages, especially in the central and southern parts of the country. Transnational water usage and climate change have made reducing water insecurity in Iraq even more complex. To meet this rising demand, we expect desalination projects to continue to proliferate in the region and believe that international companies offering new technology and innovation in delivering these projects will play a key role.
Through five-year strategic water plans, the Iraqi government hopes to improve access to water and better manage its consumption and quality. Iraq's water currently fails both national and international water quality standards, and consumption stands at 392 litres per capita per day, which is far above the international standard of 200 litres.
The US Department of State estimates that 21.2mn people in Iraq have access to potable water. This is a substantial increase on the 5mn estimated in 2003. The country's once abundant water supply has fallen by around 40% since the mid-1970s. Turkey's extensive damming of the Tigris and Euphrates rivers and its hydropower aspirations are responsible for much of the fall in river flows to Iraq. Iran building more than 600 dams