Iraq’s Oil and Gas Industry: A Strategic Shift Towards Profit-Sharing Contracts
Iraq has recently taken a significant step towards implementing its ambitious strategy to develop the oil and gas industry, seeking a comprehensive transformation in the perception of this vital sector and the country’s economic development. Sources confirm that the country is making the biggest shift in decades in its approach to international oil companies, seeking to attract more investment in the hydrocarbon sector through profit-sharing contracts.
Baghdad recently signed initial contracts for the development of 13 exploration blocks and oil and gas fields, following a bidding round in May. These contracts, awarded to several companies, include more attractive terms than traditional technical services contracts, such as profit-sharing after deducting recovery costs and royalty rates. An oil ministry official explained that „profit-sharing contracts provide a share of revenues after deducting royalty fees and cost recovery expenses“.
The shift towards profit-sharing contracts instead of service contracts aims to encourage and attract more investment in the energy sector. Traditionally, technical services contracts involved a fixed payment for each barrel of oil produced, after accounting for costs, and tended to be less profitable for foreign investors. The contracts awarded to companies such as China’s ZEPC, Zhenhua Company, Sinopec, CNOOC, UIG, Anton Oil, and GeoJade cover major projects in various provinces of Iraq.
Last year’s $27 billion deal with France’s TotalEnergies, which offers faster cost recovery and lower risk through higher revenue sharing, was seen as a model that Iraq could replicate to attract more foreign companies. Major oil producers have expressed dissatisfaction with the terms of traditional service contracts in Iraq, as they are unable to benefit from high oil prices and lose revenue when production costs rise.
Iraq, the second largest producer in OPEC after Saudi Arabia, currently has the capacity to produce almost five million barrels per day. Foreign investment in the energy sector has declined since the wave of deals signed after the US invasion more than two decades ago, contributing to the country’s stagnant oil production.
Government plans to increase production face domestic problems, including limited export capacity due to old and deteriorating infrastructure and access to water. Disputes over control of production in the semi-autonomous Kurdistan region have also affected the country’s oil output. Despite these challenges, Oil Minister Hayan Abdul-Ghani stressed that one of the key objectives of this bidding round is to increase production of natural gas, a resource Iraq plans to use to fuel power plants that currently rely heavily on gas imported from Iran.
Overall, these initiatives represent a strategic shift in Iraq’s energy policy, aimed at revitalizing its oil sector and securing a more reliable energy supply for its population as it prepares to increase its production capacity to about seven million barrels per day by 2027. China Petroleum & Chemical Corp. is the largest Chinese investor in Iraq, with stakes in several fields and responsible for producing around three million barrels per day of Iraqi oil.
Iraq’s strategy of adopting profit-sharing contracts and strengthening its relationship with non-OPEC countries, such as OPEC+, marks a clear shift towards greater integration and adaptation to the dynamics of the global oil market. This approach seeks not only to increase foreign investment and optimize its production capacity but also to diversify and stabilize its economy, reducing its dependence on energy imports and securing a more sustainable energy supply for the future. The active involvement of China and other countries in the development of Iraq’s energy resources illustrates Iraq’s geopolitical importance in the global energy landscape.
