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TotalEnergies walks carbon tightrope with $27bn Iraq energy deal

Iraq’s announcement this month of a $27bn deal with TotalEnergies garnered little public attention outside Baghdad. That may be what the recently rebranded French oil major wanted.

Like its peers, Total is in the process of a challenging overhaul of its business, caught between sustaining oil and gas projects that generate the bulk of its profits, and louder calls to increase investment in cleaner energy. The Iraq deal seeks to do both at the same time.

While Total will fund the construction of a huge 1 gigawatt solar power plant, other projects covered by the agreement involve injecting seawater into oilfields to boost production and capturing gas that is currently flared and selling it to local power stations.

In a sign of the sensitivities around any new oil and gas projects, Total, which has committed to initial investments of $10bn, said little about the impact on oil output.

Chief executive Patrick Pouyanné focused instead on the positive effects of a reduction in gas flaring, better water resource management and solar energy. Iraq’s prime minister Mustafa al-Kadhimi said the investment would increase crude production at one field from 85,000 to 210,000 barrels a day.

Climate activists, including Mia Moisio at Climate Action Tracker, said Total’s deal was not in line with a landmark report by the International Energy Agency this year that stated meeting the Paris climate targets required a global halt to new fossil fuel investments.

Total, which declined to comment, has argued that big investments in clean energy are possible only because of its oil and gas business.

Patrick Pouyanné, Total’s chief, has focused on the positive effects of a reduction in gas flaring and better water resource management © Christophe Morin/Bloomberg

Ahmed Mehdi, a visiting research fellow at the Oxford Institute for Energy Studies, said the company had “made it clear that it cannot fund its net zero road map without access to low-cost and low-emission barrels. The ‘green’ part of the Iraq deal gives investors and shareholders confidence that Total’s upstream in Iraq will be different to its peers in the past.”

Oswald Clint, an analyst at Bernstein, said that, compared with its biggest European competitors BP and Shell, Total had generally been more willing to publicly acknowledge the need for continued investment in hydrocarbons to fund greener projects.

“Total is kind of in the middle,” he said, “still pushing the oil and gas agenda but yet spanning out into low carbon as well”.

So far investors have backed the strategy. Unlike BP and Shell, Total maintained its dividend in 2020 when oil prices crashed, and its shares — now up about 10 per cent since the start of the year — have generally performed better than its peers.

BlackRock, which holds about 7.5 per cent of Total’s stock, said in its annual investment voting report in July that the oil group’s approach “strikes a reasonable balance between ambition and pragmatism as it relates to the global energy transition”.

Another large investor told the Financial Times it was comfortable with the split between oil and gas and renewables in Total’s portfolio, adding that the transition to cleaner technologies had to be funded by the “brown part” of the business.

Total has said it will spend more than $2bn this year on electricity and clean energy, but Pouyanné has also warned of the risk of overpaying for renewable assets with “crazy” valuations.

Developing greenfield renewables projects in countries such as Iraq may provide a way to build a clean energy business at a lower cost, according to Bernstein’s Clint.

“In these potentially riskier countries, when you do renewables, the terms and the pricing will be more attractive and then you say, this is a competitive edge because [new renewables companies] can’t go to Iraq and bring on solar.”

Total has had a presence in Iraq for almost a century. The company was founded when a syndicate 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 ever since. French president Emmanuel Macron visited Iraq in August, for the second time in under a year, just a week before the Total deal was announced.

Iraq’s oil ministry, which has been courting foreign investors, described the deal as “the biggest investment by a western company” in the country. The prime minister said it would improve the stability of the national power grid and “optimise” returns from Iraq’s oil, gas and water reserves. National parliamentary elections are scheduled for October.

A project to use seawater to increase oil output was previously discussed with ExxonMobil. The US oil company was close to agreeing a $53bn investment in 2019 but has now said it is seeking an exit from Iraqi assets to focus on low-cost fields closer to home in Guyana, Brazil and the US Permian Basin.

A Total oil refinery in France
Total has said that big investments in clean energy are possible only because of its oil and gas business © Cyril Marcilhacy/Bloomberg

Iraq’s oil minister, Ihsan Abdul Jabbar, said in July that BP was also considering withdrawing from Iraq, where political instability, security risks and corruption continue to complicate operations.

But Total has generally appeared more confident that its peers that it can continue to operate profitably in complex jurisdictions. As other oil majors have withdrawn from many parts of Africa and the Middle East, Total has pushed on.

Last year it increased its stake in the Lake Albert oil project in east Africa, which expects to make Uganda an oil producer for the first time and export crude via a 1,400km electrically heated pipeline.

At the same time, the French energy group is pursuing large liquid natural gas projects in Mozambique, where an Islamist insurgency forced the company to declare force majeure in April, and in Yemen, where the long-running civil war threatens progress.

In Iraq, Aditya Saraswat, an analyst at consultancy Rystad Energy, said that security risks in the oil-producing south had receded and that both the water-injection and gas-capture project appeared likely to generate good returns.

“On the face of it, it looks like a risky investment,” he said, but “the beauty lies in the detail”.

Additional reporting by Chloe Cornish in Beirut

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