Foreign investment in Iraq, study by Dunia

Dunia collected data from a combination of publically-available regional and industry-specific media and private sources on 98 projects totaling $63bn in announced capital commitments.

Four major deal structures were considered:

1. Direct equity investments in Iraqi-owned companies and new ventures.
2. Oil and gas sector Service Agreements (SAs)
i. Between foreign investors and U.S. governmental agencies
ii. Between foreign investors and the Kurdistan Regional Government (KRG)
iii. Between foreign investors and the Government of Iraq (GOI)
3. Oil and gas sector Exploration and Production Sharing Agreements (EPSAs) between foreign investors and the KRG.
4. Engineering, Procurement and Construction (EPC) contracts.
i. Between foreign investors and U.S. governmental agencies
ii. Between foreign investors and the KRG
iii. Between foreign investors and the GOI

Dunia anticipates that 2009 has the potential to be an even stronger year in investment terms. In the past month, at least $618m in investor capital has been announced for real estate projects across Iraq; these investments have a much wider geographical footprint than heretofore, with investors seizing on previously overlooked opportunities in north-central and south-central Iraq.

The provincial elections that took place on January 31st 2009 point to a strong and continued showing by Prime Minister Nuri al-Maliki's Dawa party and his governing State of Law Coalition, auguring positively for a stronger central government and greater political stability in Iraq; barring any wide scale breakdown of relations with the Kurds. Combined with national elections scheduled for the end of the year, a steady drawdown in U.S. troops, and relatively strong real GDP growth forecast, 2009 should be an important year for investment in Iraq.

Over $63bn in foreign investment has been announced in Iraq since April 2003. These investments have been characterized by three major phases.

1. In Phase I, corresponding roughly to the first year of the U.S. military presence in Iraq (2003-4), foreign investment was dominated by large lump-sum oil and gas Service Agreements (SAs) and Engineering, Procurement, and Construction (EPC) contracts for major infrastructure work awarded by various U.S. government agencies to U.S. companies. These companies included Halliburton-KBR (KBR was spun off in 2007), Fluor, Parsons and Bechtel.

2. In Phase II, corresponding to the highly unstable 2005-7 period, foreign investment in Iraq declined economy-wide in absolute terms, from $6.7bn in 2004 to $1.2bn in 2005. Total investment ticked upward in 2006 to $5bn; however, this largely reflected a single $4bn investment announced by Anglo-Kurdistan (UK) in Kurdish real estate. Iraq attracted just $2.7bn in 2007, reflecting a major $1.2bn investment by Merchant Bridge (domiciled in Luxembourg; Head Office in London) in the Information and Communications Technology (ICT) sector in the Kurdistan Regional Government (KRG), and several smaller Exploration and Production Sharing Agreements (EPSAs) signed by Western International Oil Companies (IOCs) in the KRG3.

3. In Phase III, corresponding to 2008, foreign investment in Iraq surged by nearly 1,500% year-on-year from 2007, increasing from $2.7bn in 2007 to $42.9bn in 2008. This increase was concentrated in the oil and gas and real estate sectors. The rest of the Iraqi economy, with the exception of manufacturing, witnessed a net decline in foreign investment. The major investments in the oil and gas sector included a slew of EPSAs between the KRG and several Western oil 'juniors' in Q3, and the conclusion of a $3B SA for the Al-Ahdab field in Wasit province between the GOI and Oasis Oil - a JV between the Chinese National Petroleum Company (CNPC) and Chinese North Industries Company (NORINCO), announced in November 2008. The major announcements in the real estate sector included Al Maabar's (UAE) $10bn investment in Baghdad and Damac Properties' (UAE) $15bn investment in Erbil.

Looking forward to 2009 and 2010, Dunia estimates that private foreign investment in real estate will continue to grow robustly, with estimated upper-range investment of $35bn in 2009 and $40bn in 2010. This is based on the expected construction of 350,000 new housing units in 2009 and 400,000 units in 20104 with an average investment of $100,000 per unit,5 coupled with a severe decrease in viable real estate opportunities in the GCC region over the same period. Similarly, investment in the oil and gas sector is expected to increase to $24bn in 2009 and $48bn in 2010.

This forecast is based on the scheduled signing of 8 SA tenders in 2009 and 16 more in 2010, and on an average contract value ofMeanwhile, growth in the remaining sectors of $3bn the Iraqi economy is estimated to be a simple average of the growth rates in real estate and oil and gas, or just over 50% per annum in 2009 and 2010.

Foreign investors have clearly responded positively to the wholesale changes in security and political stability that have occurred in Iraq since Q3 2007, at which point violence and violent deaths in Iraq began a steady downward trend that continues to this day. Dunia considers that increased investment has been the result of three primary factors.

Improved security: Security has improved markedly in Iraq a result of:
• The 'surge' of U.S. forces in mid-2007;
• The Sunni 'Awakening' movement that has largely driven Al Qaeda out of Western Iraq;
• The defeat of Shia armed groups such as Jaysh al-Mahdi
• The increased competence of the Iraqi Armed Forces and Iraqi Police, as demonstrated in the Iraqi Army's successful operations in East Baghdad and Basrah in March/April 2008, which ended large-scale militia activity in those areas.

Increased political stability: Although the GOI remains fragile, its authority broadened during 2008, with most national and international observers perceiving that Prime Minister Nuri al-Maliki grew in stature. This is primarily because of Al-Maliki's perceived personal oversight of the Iraqi Army's successful operations in East Baghdad and Basrah in March/April 2008. This perception was additionally validated in the provincial elections of January 31st, in which Al-Maliki's Dawa party and his allies in the ruling State of Law Coalition performed strongly in the majority of provinces south of the KRG.

Comparatively strong macroeconomic fundamentals: Although Iraq will not escape the effects of the global economic recession, and declining oil prices will weaken its fiscal position, the country is better positioned than many other economies in the region from a macroeconomic perspective. This is due in large part to its non-integration with global capital markets and large cash reserves, even after taking into account its $19bn budget deficit this year. Whereas global real GDP growth is expected to be 0.2% in 2009 and 2.4% in 2010, growth in Iraqi real GDP is expected to be significantly higher.

Theme 1: UAE investors led the field; US investment declined abruptly Since April 2003, over 100 private investors domiciled in 26 foreign countries have announced projects in Iraq. UAE investors have the lion's share, accounting for $31bn in investments across eight mega-projects, or 50% of total project value. As you can see in the Appendix, most of these projects were announced in 2008, not coincidentally the same year that the UAE forgave $7bn of Iraqi foreign debt, as well as the year it reopened its embassy in Baghdad; making it the first Arab country to reopen a permanent presence in the nation. On paper, private US companies are in second position with over $10.2bn invested since 2003; however, this total includes over $9.8bn in EPC contracts awarded by U.S. government agencies to U.S. companies in 2003 and 2004. Following this initial U.S.-dominated reconstruction phase, U.S. private investors have become negligible players in Iraq. Meanwhile, UK private investors are in third place, having invested some $6bn across six mega-projects since 2003.

Theme 2: Non-oil investments dominated; real estate developments in top spot Sixty-eight investments in Iraq's non-oil economy accounted for 71%, or $45bn, of total invested value in Iraq since April 2003. Within the non-oil economy, comparatively minor investments, totaling $11B, were made in the manufacturing, ICT, utilities and financial services sectors. However, 'mega' projects in real estate dominated investment in Iraq. Iraqi residential and commercial real estate has attracted more investment since 2003 from private overseas investors than any other sector. In all, 20 outside investments worth $33.5bn have been announced in the Iraqi real estate sector since 2003, representing 20% of all projects but 53% of total invested value. Two massive projects by Damac Properties (UAE) and Al Maabar (UAE) accounted for 75% of all investment in Iraqi real estate. Meanwhile, US investors Summit Global Group announced a high-profile $100M investment in a new 5-star hotel in central Baghdad. The real estate investment boom looks set to continue into 2009, with $620m in foreign-backed real estate announced in January alone.

The oil and gas sector in Iraq attracted an estimated 27 investments since 2003, with a total value of $18bn, or 29% of all private foreign investment in Iraq by value. These have taken three main forms since 2003: SAs between U.S. EPC firms (Bechtel, Halliburton-KBR etc.) and U.S. government agencies; SAs between oil and gas companies (Shell, CNPC, Weatherford etc.) and the GOI; and full EPSAs between independent oil 'juniors' and the KRG, several of which have been deemed illegal by the GOI.

Despite Iraq's hosting of what are believed to be the world's second largest crude reserves, investment in Iraq's oil and gas sector has been subdued since 2003. Large amounts of investment are expected as a result of Iraq's current and future oil field bid rounds, but the bid processes have been rife with IOC skepticism and concern. Aside from continuing security concerns and political instability in Iraq, IOCs' reticence to enter the Iraqi market is the result of several additional factors.

• First, most IOCs are waiting until the conclusion of the Phase 1 bidding round before jumping fully into the country, while only a fraction have already made a decisive move into Iraq.
• Second, the continuing constitutional/legal/regulatory uncertainty surrounding the respective authorities of the KRG and GOI to conclude SAs and EPSAs with international firms is causing IOCs to hold back, particularly in the KRG region.
• Third, the lack of passage of the national draft hydrocarbons law, revenue sharing law, or potential Iraqi National Oil Company (INOC) laws, and concomitant lack of an updated legal basis upon which IOCs can do business in Iraq, has precluded many firms from entering the Iraqi market.
• Fourth, amid continuous restructuring in the Iraqi Ministry of Oil, IOCs are waiting to see if the GOI decides to spin off any new provincially-based oil firms from the North Oil Company (NOC) or South Oil Company (SOC), similar to the recent spin-off of the Maysan Oil Company (MOC) from SOC. It is currently expected that new spin-offs are in store in Dhi Qar and potentially other areas.

Theme 3: Top structures: Non-oil equity ventures; oil and gas SAs; EPC contracts Private companies domiciled outside Iraq invested a total of $40bn in Iraqi equity ventures (64% of total); $11bn in oil and gas service agreements (18% of total); at least $8bn in the form of EPC contracts awarded by either the U.S. Government, Iraqi Government or Kurdistan Regional Government (KRG); and $3.5bn in the form of EPSAs with the KRG (6% of total).

Theme 4: Investors favored large (>$1bn) projects The average project size (to include shares of all foreign participants in the case of JVs) was $700m while the median size was $105m, indicating that the distribution was skewed by several massive projects. Just 13 projects - each in excess of $1bn - accounted for 81% of total invested value between April 2003 and February 2009, or $51bn. A total of 33 intermediate-sized projects in the $100M-$1bn range accounted for 17% of total invested value, or just over $10.5bn. Lastly, a total of at least 44 projects in the sub-100M range represented just 2% of total invested value, at just over $1bn.

Theme 5: Substantial regional disparities In 2008, the pattern of investment in Iraq pointed to the relative attractiveness of the far north (Kurdish provinces of Erbil, Dohuk and Suleimaniyah), the far south (Basrah province) and the capital (Baghdad province). Combined, these five Iraqi provinces attracted 84% of all private foreign investment since 2003, or $53bn. Although these figures suggest a high level of regional concentration, investment in Iraq is no longer a tale of the Kurdish north versus the rest of the country. Amid improved security in 2008, Baghdad and Basrah attracted an increased level of outside investment. As can be seen in Figure 3, Phase I (2003 to end-2004) saw a reasonably even distribution of investment between non-Kurdish and Kurdish parts of Iraq as U.S. contractors worked on countrywide reconstruction contracts. This was followed in Phase II (2005 to end-2006) by a squeeze on investment in non-Kurdish Iraq, as instability became severe in Iraq's 15 Arab-majority provinces. Phase III (after 2007) saw a gradual rebalancing of investments across the country during 2007 in parallel with increasing stability in the second half of the year, followed by an acceleration of this trend in 2008. However, it should be noted that this proportional shift essentially reflected a handful of major real estate and oil and gas SAs in Baghdad and Basrah.