TotalEnergies walks the carbon tightrope with $ 27 billion Iraq energy deal
Iraq’s announcement this month of a $ 27 billion deal with TotalEnergies has received little public attention outside Baghdad. Perhaps this is what the recently renamed French oil major wanted.
Like its peers, Total is in the process of overhauling its business, caught between maintaining oil and gas projects that generate most of its profits, and stronger calls to increase investment in cleaner energies. The agreement with Iraq seeks to do both at the same time.
While Total will finance the construction of a huge 1 gigawatt solar power plant, other projects covered by the agreement involve injecting seawater into oil fields to increase production and capture the gas currently flared and to sell it to local power plants.
As a sign of the sensitivities around any new oil and gas project, Total, which has pledged upfront investments of $ 10 billion, has said little about the impact on oil production.
Managing Director Patrick Pouyanné instead focused on the positive effects of reducing gas flaring, better management of water resources and solar energy. Iraqi Prime Minister Mustafa al-Kadhimi said the investment would increase crude production in a field from 85,000 to 210,000 barrels per day.
Climate activists, including Mia Moisio of Climate Action Tracker, said Total’s deal was not in line with a landmark report by the International Energy Agency this year that said meeting climate targets de Paris required a global halt to new investments in fossil fuels.
Total, who declined to comment, argued that big investments in clean energy are only possible through its oil and gas business.
Ahmed Mehdi, a visiting scholar at the Oxford Institute for Energy Studies, said the company had “made it clear that it cannot fund its net zero roadmap without access to low cost, low emission barrels. The “green” part of the Iraqi deal gives investors and shareholders the assurance that Total’s upstream in Iraq will be different from its peers in the past.
Oswald Clint, analyst at Bernstein, said that compared to its larger European competitors BP and Shell, Total was generally more willing to publicly recognize the need to continue investing in hydrocarbons to finance greener projects.
“Total sort of sits in the middle,” he said, “still pushing the oil and gas agenda, but also extending to low carbon.”
So far, investors have supported the strategy. Unlike BP and Shell, Total maintained its dividend in 2020 when oil prices collapsed, and its shares – now up around 10% year-to-date – have generally outperformed its peers.
BlackRock, which owns around 7.5% of Total’s shares, said in its annual investment vote report in July that the oil group’s approach “strikes a reasonable balance between ambition and pragmatism when it comes to the energy transition. world ”.
Another large investor told the Financial Times he was comfortable with the separation between oil and gas and renewables in Total’s portfolio, adding that the transition to cleaner technologies must be funded by the “brown part” of the business.
Total has announced that it will spend more than $ 2 billion this year on electricity and clean energy, but Pouyanné also warned of the risk of overpaying renewable assets with “crazy” valuations.
The development of new renewable energy projects in countries such as Iraq could provide a way to start a clean energy business at a lower cost, according to Bernstein’s Clint.
“In these potentially riskier countries, when you do renewable energies, the conditions and prices will be more attractive and you then say that it is a competitive advantage because [new renewables companies] can’t go to Iraq and use solar power.
Total has been present in Iraq for nearly a century. The company was founded when a union of French industrialists and financiers took over the French government’s stake in Iraq Petroleum, then called Turkish Petroleum, in 1924, and has maintained deep roots in the country since then. French President Emmanuel Macron visited Iraq in August, for the second time in less than a year, just a week before the announcement of the deal with Total.
The Iraqi oil ministry, which courted foreign investors, described the deal as “the biggest investment by a Western company” in the country. The prime minister said this would improve the stability of the national electricity grid and “optimize” the yields of Iraq’s oil, gas and water reserves. National legislative elections are scheduled for October.
A plan to use seawater to increase oil production has already been discussed with ExxonMobil. The U.S. oil company was set to accept a $ 53 billion investment in 2019, but has now said it is looking to pull out of Iraqi assets to focus on low-cost fields closer to home in Guyana, Brazil and the American Permian Basin.
Iraqi Oil Minister Ihsan Abdul Jabbar said in July that BP is also considering withdrawing from Iraq, where political instability, security risks and corruption continue to complicate operations.
But Total has generally appeared more confident than its peers in its ability to continue to operate profitably in complex jurisdictions. While other oil majors withdrew from many parts of Africa and the Middle East, Total continued.
Last year, it increased its stake in the Lake Albert oil project in East Africa, which plans to make Uganda an oil producer for the first time and export crude through a heated pipeline. to electricity of 1,400 km.
At the same time, the French energy group is pursuing major liquid natural gas projects in Mozambique, where an Islamist insurgency has forced the company to declare force majeure in April and in Yemen, where the long civil war threatens progress.
In Iraq, Aditya Saraswat, analyst with consultancy Rystad Energy, said security risks in the oil-producing south had diminished and the water injection and gas capture project looked likely to generate good returns. yields.
“At first glance it looks like a risky investment,” he said, but “the beauty is in the detail”.
Additional reporting by Chloe Cornish in Beirut