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Is Iraq Too Risky For Oil Majors?

Description: Tensions in Iraq seemed…

Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Caught In The Middle: Iraq’s Struggle For Energy Independence

The U.S. invasion of Iraq in 2003 completely altered the geopolitical landscape of the Middle East. After Saddam’s forces were defeated, a violent insurgency led to the deaths of 4,487 American soldiers and 228,000 mostly Iraqi citizens. Arguably, Iran benefitted most from the defeat of Iraq’s former dictator.

Since 2003 Tehran’s influence in the region has grown substantially in countries such as Syria, Lebanon and Yemen. Furthermore, the improved relations between Iran and Iraq is staggering considering the two countries fought a bloody war during the 80s of the previous century. Since Saddam’s defeat, Tehran has fostered good political relations with Shia parties in Bagdad and developed significant bilateral economic interests. Therefore, Iraq is one of the few countries in the world which enjoys good relations with both the U.S. and Iran.

The current U.S. administration strongly opposes the close affiliation between Bagdad and Tehran. Washington’s efforts to isolate Iran on the international stage to exert maximum political and economic pressure are obstructed by Iraq's purchase of Iranian energy. The U.S., therefore, has been pushing Bagdad to become energy independent.

Iraq’s awkward position

War has ravaged Iraq and destroyed a significant portion of its energy infrastructure. Currently, generators are used in many areas to produce electricity to improve people’s livelihoods in a country where temperatures can reach 50 degrees Celsius (122 degrees Fahrenheit). Not only the ongoing conflicts have damaged the Arab country’s infrastructure, but also looting and corruption. Approximately 30 to 50 percent of electricity is wasted due to inadequate transmission infrastructure. 

According to the World Bank, Iraq’s electricity distribution system “is the most problematic with adverse effects on the entire electricity sector in terms of financial sustainability, compromising the economic sustainability of the upstream generation and transmission business.”

The inadequate and damaged infrastructure increases Iraq’s dependence on foreign energy imports from primarily Iran. Despite the vast domestic energy reserves, the import of 1.5 billion standard cubic feet of Iranian gas per day via pipelines, supplies 40 percent of the Arab country’s electricity needs. Related: The Last Truly Underdeveloped Oil Frontier In The Middle East

Iraq aims to increase domestic production of natural gas in two ways. First, officials hope to end gas flaring from oil fields, which is costing the country nearly $2.5 billion in lost revenues. Second, the development of several gas fields is high on the agenda, but the adverse global economic outlook as a consequence of the U.S.-China trade war and other events is having an unfavourable effect on energy investments. Also, rampant corruption and a vast bureaucracy are not beneficial to the rapid development of domestic gas resources. 

Washington’s interests

Besides the political and security aspect of isolating Iran, the U.S. also has economic reasons to push Bagdad for energy independence. The Arab country has allocated $40 billion to rebuild the power infrastructure. According to analysts, Siemens is well placed to receive the bulk of the orders. The current mercantilist U.S administration, however, would prefer GE being in the driver's seat instead of its German competitor.

After Prime Minister Abdul Mahdi confirmed the preference for Siemens on April 30th, Washington increased its lobbying efforts and pressure to secure a role for GE. More recently, sources familiar with the matter confirmed that Iraq is prepared to distribute the contracts among the competitors due to American pressure.

Iraq’s predicament

Despite Washington’s efforts, Iraq seems unable in the short term to become energy independent from Iran. The U.S. has acknowledged Bagdad delicate position by granting it another 90-day waiver to continue importing Iranian energy. Especially during the hot summer months, the consumption of electricity will increase significantly, which requires a stable flow of natural gas to maintain production. Outages could have a destabilizing effect compared to last year's demonstration.

Furthermore, the delay in developing Iraq’s domestic gas fields could have been intentionally caused by pro-Iranian politicians to keep the Arab country dependent on its neighbour for its energy needs.

By Vanand Meliksetian for Oilprice.com

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