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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Critical Role Of Iraq In A New Global Natural Gas Game

  • Iraq is once again repeating its promises of self-sufficiency when it comes to natural gas, promising the U.S. that it will soon cut off Iranian imports.
  • Despite these repeated promises, Iraq has failed to reduce its dependence on Iranian gas and new projects are slow in getting off the ground.
  • Since Russia’s invasion of Ukraine, the role of Iraq in the fight for global energy resources has grown, and the West will be eager for it to follow through on its latest pledges.
Natural gas

Like the first cuckoo of spring, the annual autumn refrain from senior Iraqi oil officials that gas imports from Iran will cease soon has that resoundingly pleasant ring of the familiar about it to seasoned oil industry watchers. Such reassurances are always followed by mutterings of new gas projects to be started soon, pipelines to be laid, and greener energy commitments to be fulfilled – wonderfully evocative ideas guaranteed to win approving murmurs from the U.S. State Department, and often money too. That all these things could be done with relative ease only fuels the flames of our collective optimism for a while, before we remember that we have heard it all before and that nothing has changed. 

This said, the stakes in the global gas market could not be higher for any new major player entering the game. As analyzed in depth in my new book on the new global oil market order, nowhere has the expanding schism between the Western and Eastern alliances since Russia’s invasion of Ukraine in 2022 been more dramatically felt than in the need to secure long-term gas supplies. Cheap gas supplies from Russia were the foundation stone upon which much of Europe – especially its de facto leader, Germany – built their economic prosperity over the previous two decades. The threat of these supplies being lost was sufficient for these European powers to undermine any serious plans to punish Russia for its annexation of Ukraine’s Crimea region in 2014. It was only the quick action of the U.S. and its key allies in securing substitute gas supplies fast that prevented the same diplomatic lethargy after the 2022 invasion.

Iraq’s role in this existential fight for global energy resources could be pivotal. Not only does it have the potential to become the number one crude oil producer in the world – and one of the top gas suppliers too – but its geopolitical position is crucial to what happens in the global security architecture. From around the time that China made a face-saving offer to Crown Prince Mohammed bin Salman over his disastrous idea to float part of Aramco, Saudi Arabia was lost to the U.S. This drift to China by Saudi Arabia has subsequently been confirmed through multiple events, including most recently its inclusion into the BRICS bloc, its move deeper into the Shanghai Cooperation Organisation and the relationship resumption deal with Iran – all moves brokered by Beijing. The other great Middle Eastern power, Iran, was fully confirmed as a client state of China through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully examined in my new book. As exclusively reported by Oilprice.com at the beginning of July, moves are afoot by the Western Alliance to split Iran away from the China-Russia bloc through the forging of a new, watered-down version of the ‘Nuclear Deal’ (officially, the ‘Joint Comprehensive Plan of Action’), but the deal is not done yet. The reasoning in Washington is that if Iraq – so long influenced by Iran – can be broken away from Tehran then not only might it speed up the signing of this new nuclear deal with Iran, but it would also mean that the Western Alliance would have two of the three biggest oil and gas resources in the Middle East under its influence.

France’s TotalEnergies is currently at the vanguard of the Western Alliance’s efforts to win over Iraq, in the shape of the US$27 billion four-pronged megadeal. The company faces enormous challenges at every level of Iraq’s oil and gas bureaucracy, but a further building-out of the presence of other major Western firms in the country would increase its chances of success. Such efforts are, on the face of it at least, being encouraged by the latest in Iraq’s long line of prime ministers – Mohammed Al-Sudani – who commented recently that Iraq will halt gas imports from Iran within two years after the megaprojects to develop its gas fields take shape. Of course, this is exactly what former prime minister, Mustafa al-Kadhimi, said when he went to Washington in May 2020 to ask for more money to prop up the corruption-crippled economy than before and for the longest waiver ever given (120 days) to keep importing gas and electricity from Iran. The funding and the waiver were granted by the U.S., but once the money had been banked and al-Kadhimi was safely back on home territory, Iraq signed a two-year contract – the longest period ever – with Iran to keep importing gas and electricity from it. 

At that point, Washington let the formidable then-State Department spokeswoman, Morgan Ortagus, out of her room, and she let fly. Not only was the next waiver to Iraq the shortest ever – 30 days – but also at the press conference in which it was announced, Ortagus let it be known that the U.S. was hitting 20 Iran- and Iraq-based entities with swingeing new sanctions. She cited them as being instruments in the funneling of money to Iran’s Islamic Revolutionary Guards Corps’ elite Quds Force, which was entirely true. She added that the 20 entities were continuing to exploit Iraq’s dependence on Iran as an electricity and gas source by smuggling Iranian petroleum through the Iraqi port of Umm Qasr and money laundering through Iraqi front companies, which was also true. She also said that Washington was extremely concerned that Iraq was continuing to act as a conduit for Iranian oil and gas supplies to make their way out into the world’s major export markets. This was true as well. It should also be remembered that as recently as this July, the very same Prime Minister Mohammed Al-Sudani announced that Iraq intends to pay with its own oil supplies for the gas and electricity that it imports from Iran. He added, apparently with no sense of the irony involved, that Iraq has no choice but to start paying for Iranian gas and electricity imports with Iraqi oil because U.S. sanctions on Iran have made it difficult for Iraq to make payments through traditional banking routes.

In reality, of course, Iraq could end its gas dependence on Iran relatively easily if it genuinely wanted to. Iraq’s proved natural gas reserves total around 131 trillion cubic feet (Tcf), the 12th largest in the world, and there may be a lot more, as the rate of exploration for gas reserves has not matched that for oil. Most of Iraq’s natural gas reserves are associated with oil in large oil fields in the south of the country and there have been occasional encouraging moves towards capturing this gas, rather than by just burning it off at the oil wells. This would align with Iraq’s 2017 pledge to the United Nations and World Bank ‘Zero Routine Flaring’ initiative, aimed at ending by 2030 the routine flaring of gas produced during the drilling of oil. At the time, Iraq flared the second largest quantity of gas in the world (after Russia) – some 17.37 billion cubic meters (bcm). Also at around the same point, Iraq’s Oil Ministry announced that it had signed a deal with U.S. engineering giant Baker Hughes to capture gas associated with oil from the Gharraf and Nassiriya oil fields.

The first stage of the Nassiriya plan (and a similar plan was made for Gharraf) was to have involved an advanced modular gas processing solution being deployed at the Integrated Natural Gas Complex in Nassiriya to dehydrate and compress flare gas to generate over 100 million standard cubic feet of gas per (mmscf/d) of gas. The second stage would have involved the Nassiriya plant being expanded to become a complete natural gas liquid facility that would recover 200 mmscf/d of dry gas, liquefied gas and condensate. All this output would go to the domestic power generation sector, with Baker Hughes having stated previously that addressing the flared gas from these two fields would allow for the provision of 400 megawatts of power to the Iraqi grid. The project, had Baker Hughes been allowed to just get on with it, would have taken around 30 months to be implemented. Similar development plans could then have been rolled out for other major gas capture sites, which back in 2018 and 2020 included Halfaya (300 mmscf/d), and Ratawi (400 mmscf/d) in the first instance. Synergies could then have been developed with the only major gas project that has made significant progress in Iraq over the years, the Shell-run Basra Gas Company (BGC) project. As it is, little progress on any of these projects has been made and it remains to be seen whether Al-Sudani’s latest comments will change that.

By Simon Watkins for Oilprice.com

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