Islamic State’s onslaught in Iraq is forcing the OPEC producer to delay its first project-finance deal, an oil pipeline to the Red Sea through Jordan that would bypass the Persian Gulf’s Strait of Hormuz shipping chokepoint.

Iraq has agreed to postpone bids to build the export link amid fighting between Islamic State militants and Iraqi and Kurdish forces seeking to eject them from the nation’s north, Nateq Balasem, deputy director general of State Co. for Oil Projects, said by phone Sept. 14. Islamic State has declared a so-called caliphate in parts of Iraq and neighboring Syria, persecuting minorities and committing atrocities.

The militant group, also known by the acronym ISIS, “has cast doubt on Iraq’s plans to open a key route to global markets for its main export,” Arabia Monitor Chief Economist Florence Eid-Oakden, whose firm advises investors on business risks in the Middle East, said by phone from London yesterday. “In the rest of the Gulf region, project finance should continue to develop despite the militant threat at the door, unless the international coalition’s efforts to contain ISIS fail and the fight spills over.”

Disruption Threats

Iraq, with the world’s fifth-largest proven oil reserves, is rebuilding its economy and energy industry after decades of war and international sanctions. Its eastern neighbor Iran has made occasional threats to disrupt the Strait of Hormuz in response to U.S.-led sanctions on its nuclear program and Israel’s threat to attack it. About 20 percent of the world’s traded oil is shipped daily through the Strait, which is 21 miles (34 kilometers) wide at its narrowest point.

The pipeline to Jordan’s Aqaba port from the northern Iraqi town of Hadditha would open an alternative route for as much as 1 million barrels a day of crude. Iraq, second-largest producer in the Organization of Petroleum Exporting Countries, pumped 3.09 million barrels a day in August, according to data compiled by Bloomberg. It currently exports mostly by sea from the Gulf, as an older pipeline to Turkey has ceased to operate amid sabotage and the conflict with Islamic State.

Commercial bids including basic financing plans should be received in the first half of 2015, Ghassan Ashqar, vice president for business development at SNC Lavalin Group (SNC), which advises the government on the project, said by phone Sept. 14. The pipeline will cost several billion dollars, he said, declining to be more specific so as not to influence the bids.

Strategic Outlet

The planned 1,000-kilometer link to Jordan is a strategic project for Iraq, Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis, said by e-mail yesterday. “But until the area is secure and the IS is clearly defeated, no firm financial commitment to the project can be expected,” he said.

The deadline for technical bids has been pushed back to Nov. 30 from Aug. 3, according to Balasem of State Co. for Oil Projects. The pipeline will be Iraq’s first project-finance deal, and Citigroup Inc. (C) is among international banks that have expressed interest in funding it, he said.

Iraq has also delayed construction of a second export pipeline to Turkey due to the lack of security, Balasem said. This planned $270 million link would run parallel to the one that halted operations, he said.

World Cup

Project finance of more than $1 trillion in neighboring Gulf countries won’t be at risk unless Islamic State militants are able to create instability elsewhere in the region, Arabia Monitor’s Eid-Oakden said. Governments in the six-nation Gulf Cooperation Council are seeking financing to develop infrastructure and as Qatar prepares to host the 2022 soccer World Cup and Dubai the Expo world fair in 2020.

The yield on the 2019 dollar bonds sold in July by Kuwait Energy Co., which is exploring for oil in southern Iraq, rose to as much as 10 percent on Aug. 8, at the height of the Islamic State offensive, according to data compiled by Bloomberg. It fell 122 basis points in the next 10 trading days as U.S. airstrikes helped Iraq and Kurdish troops contain the militants’ advance, and the bonds yielded 8.83 percent today, the data show.

President Barack Obama is enlisting support from Saudi Arabia and other GCC monarchies to help combat the group.

“Currently there is little evidence that the IS has the capacity to invade the Arabian Peninsula now that the GCC has announced its participation in a U.S.-led international coalition,” Tom Byrne, senior vice president at Moody’s Investors Service’s Sovereign Risk Group, said in an e-mail yesterday. “In addition, GCC countries have considerably reinforced their security apparatus.”

Source:Bloomberg