IRAQ - Seeking Foreign Investment.

Under Shi'ite Prime Minister Nuri al-Maliki, the Baghdad government on Feb. 26, 2007, approved a new petroleum law to lure international investment into Iraq's energy sector. The government hopes parliament would approve the law by end-May (see omt18IraqProspctApr30-07 & gmt18IraqE&P-Apr30-07).

The government is hoping foreign investment will flow into Iraq's electricity, oil refining, petrochemicals as well as petroleum E&P sectors. All these sectors are offering incentives for foreign investment (see the refining sector in DT No. 19 and the petrochemicals sector in DT No. 20).

As part of these efforts, Maliki headed a large delegation on a recent tour of the Far East and neighbouring Kuwait. On April 24, Maliki asked for but failed to get Kuwait to forego a major part of a $15 bn debt owned by Baghdad from the days of Saddam's Sunni/Ba'thist dictatorship. Lingering bitterness from the 1990 Iraqi invasion of Kuwait and distrust of Maliki's Shi'ite-led government were the main obstacles. But, ending a two-day visit on April 25, Maliki said he still hoped Kuwait's parliament would be "generous" and write off some of the debt. He said he believed Kuwait was "no less generous" than fellow GCC member Saudi Arabia, which was writing off 80% of a similar sum in debts. But Saudi Arabia has no legislature. Kuwait, a constitutional democracy, cannot make such a decision without its elected parliament. And while Kuwait's government itself may be willing to oblige Maliki and US requests, the decision rests with parliament, where strong sentiments prevail.

Kuwaiti MP Muhammad al-Mutairi on April 27 was quoted as saying: "A commitment [not to help Iraq] is a commitment; we have suffered enough from that neighbour". For seven months starting Aug. 2, 1990, Saddam's occupying forces rounded up Kuwaitis, executed them at the doorsteps of their houses, changed names of neighbourhoods, hospitals and ports, and blew up some 700 oil wells. Hundreds who went missing are still unaccounted for. Taking a forgiveness motion to parliament will be difficult for a government which a few months ago opposed a bill to pay off consumer debts owed by its own citizens to local banks and companies, as some MPs proposed. Independent Kuwaiti economist Jassem al-Sa'doun said the cabinet will seek the largest majority vote possible before it tabled the Iraq debt cancellation proposal.

The UN panel overseeing compensation for victims of Iraq's 1990 invasion of Kuwait on April 26 said it had paid out a $280m instalment from Iraqi oil funds to cover claims for losses and damages. The latest transfer brought the total amount paid in compensation to more than $22.1 bn. Most of the payments - about $229.5m - went to 35 claimants in Kuwait, the United Nations Compensation Commission said.

Japan on April 9 lent some $862m to the Maliki government as the oil-hungry Asian power looked to boost output from the war-torn country. The 40-year low-interest loans will fund construction of an oil export facility in southern Iraq and several other projects. Maliki was then making his first visit to Japan and South Korea, two key economic partners of Iraq, which have both sent troops to help its reconstruction. The 102.8 billion yen Japanese loan, repayable over 40 years with a 10-year grace period at an interest rate of 0.75% a year, will also fund fertiliser and oil refinery plants and help improve electricity. This is part of $6 bn in debt waivers and $1.5 bn in aid which Japan announced for Iraq in 2003. Much of the aid is on hold due to concerns about instability.

Japan, pacifist since defeat in World War II, took the landmark step of sending 600 troops to Iraq on a reconstruction mission. It marked the first time since 1945 that Japan sent its Self-Defence Forces to a country where fighting was under way. Japan ended the troop deployment in 2006. But Tokyo in March 2007 decided to extend by two years an air mission flying goods and personnel into Iraq on behalf of the UN and the US-led coalition.

Later Maliki's delegation visited South Korea and on April 11 signed MoUs covering petroleum and other areas of bilateral co-operation. South Korean firms are to work with the Iraqi Oil Ministry's companies in developing oil and gas projects (see OMT No. 19). Seoul pledged to provide soft loans for development projects in various other fields.

Sharjah-based Crescent Petroleum and its unit Dana Gas on April 15 signed a strategic alliance with the Kurdistan Regional Government (KRG) to review the autonomous region's gas resources. The alliance launched the "Kurdistan Gas City" project, a gas-utilisation industrial complex to promote private investment in a variety of gas-related industries. Dana Gas got a $400m service contract to develop, process and transport gas from the Khor Mor gas field on a fast-track basis, and to appraise the potential of the Chemchemal gas field to supply two power plants under construction near Arbil and Suleymania by January 2008. The Khor Mor field, found in the 1950s, has never been fully developed, and has not operated since 1991. Chemchemal, which has never been appraised or developed, has estimated reserves of 1-4 TCF.

The contract involves connecting existing wells to separation facilities and a new liquids extraction plant which are to be ready for installation in July, in time for the first gas to be supplied in January. A planned 180-km pipeline, taking the gas to the power plants, will have spare capacity to accommodate additional production from nearby fields. Initial production is expected at 150-200 MCF/day and could be double that eventually.

Crescent Petroleum and Dana Gas Chairman Hamid Dhiya' Ja'far, an Iraqi-born business tycoon, on April 15 said: "As a regional integrated natural gas company, we (Dana Gas) are able to provide a complete solution of gas field development, processing and transportation which is...required on a fast-track basis for electrical power generation". (Dana Gas aims to expand across the Middle East and North Africa into gas-related businesses, from E&P to distribution and downstream industries and petrochemicals).

The agreement with Crescent was signed in Arbil by Ja'far and Kurdistan's Prime Minister Nechirvan Barzani. The ceremony was attended by several KRG officials, as well as by members of the boards of Dana Gas and Crescent. Barzani said: "We are very pleased to enter into this strategic partnership with Dana Gas, as a regional company and one that is fully committed to the region and all aspects of the natural gas sector. The KRG is in urgent need of natural gas as fuel for electricity generation projects...long overdue, and will benefit not only the people of Kurdistan but contribute affordable power for the whole of Iraq. We are also devoted to launching private-sector initiatives for development of additional industries and inviting related investments so as to enhance job creation and boost the economy of the region and in turn the entire country".

Dana Gas is the first regional private gas company in the Middle East, set up with over 300 founder shareholders from across the Gulf region, and some 425,000 investors from over 100 nationalities worldwide. It is listed on the Abu Dhabi Stock Market and has a current market capitalisation of $2.5 bn. It has operations and projects in the Gulf, North Africa and South Asia in gas exploration, production, processing, transportation and marketing, and is currently the sixth largest gas producer in Egypt.

The Iraqi Gas & Power Markets: There have been varied estimates about Iraq's production and consumption of natural gas. One APS source on April 26 said the volume of marketed production in Iraq was between 200-250 MCF/day. The Oil Ministry is yet to come out with a strategy on development of the gas market in Iraq.

In the past two years, there has been heated debate between the Electricity and Oil Ministries over the use of Iraq's 900 MCF/d of gas production - a third of which is flared, enough to fire 6,000 MW. The former wants the gas to be sidelined to fuel power generation, arguing that improving the power supply would most benefit Iraq's economic recovery. The latter wants to export non-associated gas, claiming the income could be better used to fund reconstruction.

Resistance to privatising the power industry is strong in certain quarters. Experts at the Ministry of Electricity say they would like to get the private sector involved with everything - from generation, transmission, distribution, maintenance to collection - leaving the ministry as a regulatory body. But they face more major problem - politics.

The Electricity Ministry estimates it has more than 40,000 under-employed engineers on its books. Cutting jobs in the current economic climate will be no easy task. The ministry, willing to embrace other options, has been speaking to investors about the possibility of leasing some of its existing plants or tendering them on a rehabilitate-own-transfer (ROT) basis. It is also examining the potential for private involvement in wind and solar energy, especially in the north.