Iraq Is on the Brink of an Energy Crisis

Yves here. Lots of juicy detail, but I wonder about the cheery conclusion, that the US wins in Iraq no matter how it plays the question of extending the Iraq waiver to pay for energy imports from Iran. It’s not clear to me how further destabilizing Iraq (and demonstrating that the US is an irresponsible and destructive imperialist) benefits the US beyond enriching our arms merchants.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai and authored five books. Originally published at OilPrice

As the deadline for the U.S. to renew its waiver on Iraq importing gas and electricity from Iran approaches later this month, the three key players in this ongoing geopolitical saga have been preparing for all possible outcomes. As always in the global hydrocarbons markets, particularly in the Middle East, nothing is what it seems on first sight, with each of the main countries involved looking at outcomes that go way beyond mere gas sales.

The positioning began in earnest last week with a virtue-signalling comment from the Trade Bank of Iraq’s chairman, Faisal al-Haimus, that the bank – the main vehicle through which Iraq pays for these Iranian imports – would stop processing payments is the U.S. does not renew the relevant waiver at this end of this month. This would affect the payments for the entire 1,400 megawatts (MW) of electricity and 28 million cubic metres (mcm) of gas from Iran that Iraq requires to keep its key infrastructure in power, for some of the time at least.

In this context, peak summer power demand in Iraq perennially exceeds domestic generation capabilities, made worse by its capacity to cause major civilian unrest in the country. The relatively recent widespread protests across Iraq – including in the major oil hub of Basra – were widely seen as being prompted in part by chronic electricity outages. The situation also promises to become much worse as, according to the International Energy Agency (IEA), Iraq’s population is growing at a rate of over one million per year, with electricity demand set to double by 2030, reaching about 17.5 gigawatts (GW) average throughout the year.

Ahead of the waiver renewal point this month, then, Iraq has been playing both the U.S. and Iran, as part of the ongoing tightrope act in which it has been engaged since the fall of Saddam Hussein in 2003. On the one hand, a senior oil and gas industry figure who works closely with Iran’s Petroleum Ministry exclusively told last week, Iraq has repeatedly stressed to the U.S. that it cannot effectively function – including at its oil fields – without Iranian gas and electricity supplies until a realistic alternative is up and running.

This is aimed, said the source, at extracting more investment from the U.S. both directly and indirectly, including expediting deals tentatively and firmly agreed with the U.S. before the attacks on U.S. bases in Iraq occurred. The key deal remains an integral part of Iraq’s longstanding rhetoric about reducing the epic squandering of its enormous gas natural resources through flaring. This deal, involving the signing of a memorandum of understanding with a U.S. consortium led by Honeywell, would reduce Iraq’s current level of gas flaring by nearly 20%.

Specifically, Honeywell, partnering with another U.S. heavyweight, Bechtel, and Iraq’s state-owned South Gas, would build the Ratawi gas hub. This, in its first stage would process up to 300 million standard cubic feet per day (scf/d) of ‘associated gas’ (generated as a by-product of crude oil production) at five southern Iraqi oil fields: Majnoon, Gharib al-Qurna, al-lhiss, al-Tubba, and al-Siba. “Moqtada al-Sadr [the effective leader of Iraq] knows that every time there is a hint that Iraq will continue with its historically close relationship with Iran, the U.S. comes in to offer the services of its companies at beneficial terms to Iraq,” the Iran source said.

In addition to this, Iraq has two natural hedge positions against the U.S. not extending its next waiver, and leaving Iraq supposedly without Iranian gas and electricity in the very short-term before U.S. investment and deals can actually put power on the ground in Iraq. The first of these hedges is that Iraq will just keep the money that it already owes Iran for previous supplies. According to a comment last week from Hamid Hosseini, a spokesman for the Iranian Oil, Gas and Petrochemical Products Exporters’ Association, up to US$5 billion in payments from Iraq to Iran for past gas and electricity supplies is sitting in an escrow account at the Central Bank of Iraq, but Iran cannot touch it because of the U.S. sanctions. In fact, according to the Iran source spoken to by last week, the figure is US$6.1 billion, which, if the U.S. does not extend the waiver later this month, Iraq will just keep.

The second of Iraq’s hedges against the U.S. not extending the waiver on these imports from Iran at the end of this month is just to keep importing them anyway. Iraq has a very long porous border with Iran and an even longer history of using it – and shared facilities – to circumvent oil and gas sanctions, and there is no reason to assume that this will suddenly cease.

The question then naturally arises as to why Iran would agree to continue to supply Iraq with gas and other commodities if it cannot draw out money owed to it from the Iraq escrow account. The answer is twofold: first, Iran is working in a number of areas on essentially a barter-based business methodology, according to the Iran source. “It offers oil and gas resources to China and Russia and others which, in turn, offer Iran items it needs, such as technology items, chemicals, agricultural sector goods, and finance facilities, for example, so there are ways in which Iraq could pay Iran in currency of one sort or another,” he said.

The second option for Iran, and an idea of the assassinated Islamic Revolutionary Guard Corps (IRGC) commander, Major General Qassem Soleimani, is that Iraq assigns leases and ownership to Iran through a wide range of IRGC-related entities to commercial real estate and businesses in the Shia-dominated areas of Iraq. This transfer of ownership on a limited scale has been taking place on an intermittent basis for a number of years, especially around Karbala, Najaf, and Nasiriyah, according to the source.

“It suits the Iranians well enough, as it is a way of cementing Iranian control across the Shia population of Iran, and it suits Iraq as well as it means it doesn’t have to part with any money, which is always a strain on the already strained budget, and it means that it can leave it to Iran to control the radical Shia elements in and around those regions,” he added.

Finally, the U.S. cannot lose either way. If it extends the waiver, it keeps the door open to Iran coming back to the table to renegotiate the Joint Comprehensive Plan of Action nuclear deal whilst also keeping Iraq on side for future U.S. energy projects and keeping it from fully defecting to the Iran-Russia-China sphere of influence. If it does not extend the waiver then a relatively large non-Shia section of Iraq will keep the government in the state of flux that it has been since the fall of Hussein, which also benefits the U.S.

This strategy was previously known as the ‘Kissinger Doctrine’ of foreign policy – analysed in depth in my new book on the global oil market – in which the U.S. attempts to keep power in balance across a broad region through individual states fighting amongst each other, usually based on exploiting factional and or tribal and/or religious differences between groups.

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  1. PlutoniumKun

    One further complication – the gas flared in Iraq is likely to be wet gas (or have a substantial proportion of wet gas). This is gas with a high proportion of non-methane gases, such as propane and butane. This would mostly be used in the petrochemical industry for producing base chemicals, not as a fuel. Bechtel (mentioned above) were leaders back in the 1970’s in persuading the Saudi’s to stop flaring off their wet gas and instead use it for industrial purposes. But as regular NC’ers know, there is a massive expansion in the US in industries using natural gases for plastics manufacturers. I can’t help wondering if some of these companies would see merit in preventing a new competitor for what is already looking like a saturated market.

  2. The Rev Kev

    It may be more than just a matter of influence but more a matter of control. Consider the fact that in spite of all the sanctions and bombings on Iraq, Saddam managed to keep the electricity running. But after nearly twenty years, which included a period of several years of direct occupation, the US has never quite gotten around to making a stable electricity supply for the population in spite of the billions spent. That is why the Iraqis gave up on American corporations and gave a contract for the Chinese to do it which I have no doubt that they will. Trump went berserk at this development of course.

    So my point is this. All countries depend on energy to power their development and growth. That is why the Germans are pushing through Nord Stream 2 – because if the economy is to expand, they have to have the additional energy. In fact, the Germans are already talking about a Nord Stream 3. So I have began to wonder if this might be a way that Washington seeks to exercise control of countries and reduce their competitiveness against the US – by reducing their access to energy.

    Putting a lid on Iranian energy is a bonus game because it limits the economies of several countries such as India and Japan. Fighting to stop Nord Stream 2, if successful, would limit Germany’s growth & competitiveness. Limiting Iraq’s energy, puts a lid on its ability to reconstruct but helps keep it in tow to the US. So my idea is that this is all about reducing the economic competitiveness of countries in the US’s favour and Iraq is part of this pattern here.

    1. Ford Prefect

      Do the Chinese convoys get hit with IEDs? I haven’t heard about any in the news. Much of the American work is inefficient because the Americans have to hide.

    2. Tony Wright

      So, the old strategy of badly run companies wherein the boss keeps his subordinates ill informed, inadequately resourced, trodden down and subserviant eh?
      Obnoxious behaviour in the corporate world, and downright despicable in relationships between sovereign nations.
      Still, we are talking about a country led by someone who believes in win/lose rather than win/win in any transaction.

  3. a different chris

    >Iraq’s population is growing at a rate of over one million per year,

    >Germans are pushing through Nord Stream 2 – because if the economy is to expand, they have to have the additional energy.

    >there is a massive expansion in the US in industries using natural gases for plastics manufacturers.

    There’s no hope, is there? A million per year in a half-destroyed country. Germans needing more energy for bigger cars, I guess. And the US as always doing what the US does.

    I wouldn’t care at this point but I have kids.

    And not surprisingly, but I guess I have to note it. *Twice* in the article it makes it sound like Saddam was just walking down the street and fell on his face dead. No agency at all. Just a natural occurrence…

    >that it has been since the fall of Hussein,

    What a depressing start to the day.

    1. Math is Your Friend

      It seems more likely to me that Germany needs alternate energy sources to replace French nuclear power as the French need more of it for themselves.

      The German grid is already dealing with issues around too much power being unreliable and unpredictable so they need demand following and base load power sources.

      Or they could be sensible and start building new nuclear plants, but don’t hold your breath…

  4. James

    Looking back now, it’s obvious that the infamous Pottery Barn rule – you break it, you own it – was never going to apply at all to the US. No doubt Messrs. Cheney, Rumsfeld, and Wolfowitz, realized that all along. Much easier and more enjoyable to break things when you don’t have to worry about any messy cleanups afterward. Not unlike modern capitalism in general.

  5. doug

    ‘no agency at all’.
    plus see: the assassinated Islamic Revolutionary Guard Corps (IRGC) commander, Major General Qassem Soleimani
    no agency at all…

  6. Eugene

    How long has this been going on? It’s like a broken record being played over & over again by incompetent members. Yves is correct about the arms merchants being the beneficiary, while here at home, the country’s resources are taken, the environment is degraded, which seems to mirror what is happening in all the war torn countries the U.S. has invaded in the name of democracy? One might ask the question: “when will the natives here at home rise up in revolution?”

    1. Tony Wright

      There is a great song about that – ” Flowers of the night” by Paul Kantner, Grace Slick and David Freiberg, dated about 1972 on an album titled ” Baron Von Tollbooth and the Chrome Nun”

  7. Rod has been told by a senior oil industry figure who works closely with Iran’s Petroleum Ministry and Iraq’s Oil Ministry. China will begin with the oil and gas sector and work outwards from that central point. In addition to being

    The above was written 10/19. By Oil Price.
    I would of thought the author might bring it up, rather than the Rev.

    Wet or Off, flaring it is just sinful.
    The first Chinese contracts were for collection and controls–in kind trade.

    Who are we??

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