Identification

1. Identification

   	Title/Number	EU – Iraq Energy Centre CRIS ICI+/2012 / 023-885
   	Total cost	EUR 4 million EU contribution: EUR 4 Million
   	Aid method / Method of implementation	Project approach – centralised direct
   	DAC-code	N.A.	Sector	N.A.

2. Rationale

   1. Sector context and problem analysis

Iraq's Gross Domestic Product (GDP) grew 9.9% in 2011, a trend which is expected to continue and accelerate in the coming years. EU-Iraq business is currently dominated by big international companies. This might be due to the fact that for those companies the strategic asset of being present in Iraq outweighs the significant market entry and operating barriers. Moreover, most of them are engaged in the most vibrant sector of the economy, the energy sector.

European Small and Medium-sized Enterprises (SMEs) are reluctant to engage in Iraq due to the high security risk generating high market entry and operation costs. Moreover, the shortage of adequate local staff prevents business to mitigate those market barriers. Moreover, the business climate for structural reasons is not favourable in terms of regulation, investment security and difficulties in market analysis. For the time being, the lack of electricity and missing or dilapidated infrastructure are also not favouring a positive investment decisions in particular when it comes to European SMEs.

Iraq is an important supplier of petroleum and gas, and a potentially very attractive market for EU technology, expertise and business. In addition, Iraq is currently embarking on a massive expansion of production and export of petroleum (oil and gas). EU companies have a significant presence in the petroleum sector, and many other EU companies are regular buyers of Iraqi crude oil.

Since 2011 the energy sector, which is at the core of the country's economic recovery accounting for more than 90% of government revenue, has become the main sector for foreign investment. In 2011 foreign commercial activities amounted to 54.1 billion USD (a 27% increase from 2010). Oil, gas and electricity accounted for 24 billion USD of foreign investment in 2011, followed by real estate (17 billion USD), water and sanitation (4.3 billion USD), defence (2.9 Billion USD) and telecommunications (2.1 billion USD).

In the light of this, the EU and Iraq have agreed on a set of strategic objectives which are outlined in the proposed Partnership and Cooperation Agreement (PCA)² ; the Memorandum of Understanding (MoU) between the Government of Iraq (GoI) and the EU on a Strategic Partnership in Energy (signed on the 18^th of January 2010)³, reflecting strategic EU policy guidelines aiming at diversifying energy supply to the EU; and the Joint Declaration (26^th May 2011) which identifies specific action-oriented measures, including the establishment of an energy centre.

More concretely, the parties to the MoU have agreed to contribute to a comprehensive and integrated energy policy for Iraq in the light of potential exports to EU markets. Existing energy supply networks and modernisation needs, along with an exploration of additional gas routes to the EU, in accordance with international technical and environmental standards shall be assessed and explored. Moreover, both sides agree on the importance of technological and knowledge transfer concerning renewable energy, energy demand management and energy efficiency.

The Joint Declaration reaffirms this mutual commitment with special emphasis on the initiation to establish a Centre of Excellence for research and training on energy in Iraq. Iraq and the EU shall jointly identify gas export volumes to the world market including through the Southern Corridor to the EU and possibilities to increase oil exports to the EU. Security of electricity supply and sustainable energy in Iraq are given priority in this context. The implementation of these activities would contribute to serve the EU-Iraq business partnership as well as the security of energy supplies.

These strategic components of the EU-Iraq partnership are also in line with the Iraq National Development Plan (NDP) 2010-2014 aiming at 9.4% annual growth rate in GDP, with investment to be financed by government and private sources. Total investment allocation for the NDP is $114.6 billion from the national budget and $71.5 billion from the private sector (national and foreign). Adhering to their agreements with international actors, the NDP and Ministry of Oil (MoO)’s Plan 2011-14 in particular, offer many business opportunities for EU enterprises and companies of different sizes and in different sectors, but under current and foreseeable conditions in Iraq, business success requires a systematic approach, strategic planning and long term cooperation with a suitable Iraqi partner.⁴

Iraq has ratified some important international agreements and conventions to provide protection for foreign business and investment. Moreover, Iraq has concluded bilateral agreements with many EU MS, providing measures to encourage and protect foreign investments and businesses. All such multilateral and bilateral agreements are enacted by law according to the Iraqi constitution.⁵

In order to tackle the negative consequences of corruption, the GoI has adopted a series of initiatives such as: joining the Extractive Industries Transparency Initiative (EITI); approving the National Strategy to Combat Corruption (NSCC 2010-2014), and establishing the Iraqi EITI National Secretariat (IEITI). A workshop by the State Oil Marketing Organisation (SOMO) and other modest actions were taken to comply with EITI requirements. Many Iraqi civil society organizations (CSOs) are actively involved and have formed a special alliance.⁶ In addition to the accession to the UN Convention against Corruption and the adoption of the NSCC, the Cabinet decided in May 2011, to form a committee to assess whether to have a special anti-corruption law or to amend the existing valid laws and directives.⁷ The World Bank, UNDP, UNIDO and ILO, among others, have many initiatives to promote private sector and business development.

Iraq was also known for its research activities during the 1970s. However, Iraq’s research capability gradually declined afterwards and current activities focus mostly on basic training, capacity-building and some analysis. This situation is particularly severe in the energy sector which generates most of the country's revenue where research is limited to addressing immediate problems of the energy industry. The Ministry of Oil, Ministry of Science and Technology, Ministry of Electricity and appropriate departments at Baghdad, Basra and other universities are gradually trying to rebuild their research capability but the lack of capacity is pervasive. In the energy sector, the ongoing oil service contracts require the international oil companies to provide in total over $60 million per year for the Training, Technology and Scholarship Fund (TTSF), over a period of at least 20 years

The Ministry of Oil (MoO) has four oil training centres (in Baghdad, Basra, Baiji and Kirkuk), one research and development centre and the current MoO plan 2011-2014 envisages the creation of a new Petroleum Academy. Moreover, there is a possibility that the private sector might establish an Iraq Energy Academy. These training centres may provide services to the international oil companies, but business cooperation is not part of their mandate. In the energy sector, UNDP and Royal Dutch Shell have recently concluded an agreement on vocational training with the aim of establishing a “training park” in Basra to develop the skills of oil industry personnel. The involvement of Basra Investment Commission (BIC), and Basra Provincial Council (BPC), using the funds allocated in the budget to petroleum-producing governorates (‘petro-dollars’), could help in reducing the human resources gap.

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