Refining for Politics

Iraq’s failure to attract investments for its four refineries offered to private investors after more than two years since their launch should invite a rethink of the investment model. Luckily this rethink has started and Iraq’s oil ministry is now on course to change the business model from a BOT (build-own-operate) to one that is based on a fixed fee per barrel. This is a welcome change for the potential investors. However, to make any new refinery viable, the ministry and those running the energy sector need to go further and drop the political priorities that dictated the location of those refineries and opt for priorities that focus on market economics and favor the country’s future global energy standing.

The investment in the refining sector has been privatized since the adoption of law 64 of 2007, and later amended in 2011. Among the incentives offered to private investors, and maybe the major one, is the supply of crude by the government at the average export price minus 5%, provided that the discount shall not be less than $ 4 and shall not exceed $ 8, for a period of 50 years. That was a welcome gesture but not enough to pour billions of dollars into refineries focused on catering for the domestic market, itself heavily subsidized by the state.

The new approach of paying the investor a fee, which should be high enough in the earlier years to help recoup his investment, takes the responsibility of marketing the refined products off the hands of the investor. However, it’s not enough to make use of the option to export products once the domestic market is saturated especially that Iraq’s energy strategy envisages turning the country into a refined products exporter. The advantage of exporting products is that it relieves it from seeking markets and buyers for its crudes once it reaches its plateau production targets and allows it to maximize its output when restrictions are imposed due to Opec quota.

That’s why energy decision-makers in Iraq should put their political priorities aside and stop turning the energy sector into a hostage to their narrow constituencies by cancelling all four refining projects launched in Karbala, Nassiriya, Kirkuk and Missan and focusing on export refineries, strategically located inside and outside of Iraq. Only then would private investors see an opportunity to grab in Iraq’s refining sector.

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