Since firebrand cleric Moqtada al-Sadr became the effective leader of Iraq after the victory of his ‘Sairoon’ (‘Marching Forward’) power bloc in the May 2018 general elections, the practical application of that power has been constrained by his electoral message of not allowing Iraq to become overly dependent on any one country. This ambiguity allowed Iraq to continue to benefit on the one hand from U.S. security and financial support but on the other hand to benefit from incoming financial and technical support from Russian and Chinese companies embarking or expanding on oil field exploration and development projects. Given the announcement last week that Iraq has signed a two-year contract – the longest deal yet - for the export of electricity from Iran, despite persistent U.S. calls for it to bring the arrangement to an end, al-Sadr is either taking a huge gamble that the U.S. holds out sufficient hope of bringing Iraq back into its power bloc or he has decided now to firmly and finally align Iraq with the Iran-Russia-China bloc.
So incensed was the U.S. by al-Sadr’s clear game playing between it and Iran, Russia, and China that at the beginning of April the waiver granted by the U.S. for Iraq to continue to import Iranian electricity and natural gas was just 30 days, its shortest waiver ever. At the same press conference that Morgan Ortagus, a U.S. State Department spokeswoman, announced the new short waiver, she also pointedly announced new sanctions against 20 Iran- and Iraq-based entities that were cited as funneling money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force. This Force functions in large part as Iran’s chief foreign intelligence operation, as well as its most zealous military unit, having been built up and led by General Qassem Soleimani until his assassination by the U.S. on 3 January. According to Ortagus at the time, these 20 entities are exploiting 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, among other sanctions-busting activities. As one of a number of sources in Washington close to the Presidential Administration spoken to by OilPrice.com at that time said: “We’ve been down this road before with Pakistan – [with] the government pretending to help in our fight against AQ [Al-Qaeda] but at the same time the ISI [Inter-Services Intelligence] offering all the help it could to [Osama] bin Laden and we’re not playing that game again.”
At that point in April, according to the sources, unless Iraq showed the U.S. some compelling evidence that it was intending to reduce its imports of Iranian electricity and gas, then there would be no more waivers for Iraq after the 30-day one made in April expired. At the same time, the sources said, more names in Iraq – connected to the perennial sanctions-busting activities that have marked the two countries’ relationship since the original sanctions were introduced – would be added to the relevant lists. Moreover, financing and security support would be cut and the prospects for the absolutely vital oil infrastructure project – the Common Seawater Supply Project – would be severely damaged, with no chance of ExxonMobil returning to it. According to the same sources, the U.S. received the right sort of reassurances from Iraq that it was acting to address all of these shortcomings to grant it a 120-day waiver on Iran electricity and gas imports as from 7 May. These re-assurances were taken more seriously in light of the appointment of the new Iraq prime minister, Mustafa al-Kadhimi, a former Iraq intelligence chief who, Washington believes, understands the need for some degree of compliance with the U.S. more than many of his predecessors. Related: API Shocks Market With Large Crude Oil Build
The problem with this view is first, al-Kadhimi will be no more in real charge of Iraq than any of these predecessors since May 2018 - power will remain with al-Sadr and his grouping. Secondly, that the basis for al-Sadr’s view on how Iraq will position itself with regard to Iran, Russia, and China was laid out shortly after his power bloc’s victory in 2018 in a far-reaching agreement with Iran and none of this was pro-U.S. Interestingly, one of the key points in this agreement was that the previously shorter-term deal for electricity and gas imports from Iran should be extended to two to three years, exactly as it has just been. That 2018 deal (supported by al-Sadr back then, as now) – which also covers oil and gas exploration, petchems development, transport, pricing, marketing, and security – envisaged steady growth in co-operation in power between the two countries over the two to three year period.
Iraq’s then-power minister, Luay al-Khateeb, noted that imports from Iran already accounted for nearly 30 percent of Iraq’s daily 14,000 megawatts (MW) electricity consumption, with around 1.25 billion cubic feet per day (Bcf/d) of gas imported by pipeline, feeding three power plants in the Diyala and Baghdad provinces. Another 350 million cubic feet per day (Mcf/d) was being sent by pipeline to a power plant in Basra, with Iraq also sourcing around 1,000 MW of electricity from Iran directly via transmission lines. A testament to how much Iran stands to gain from the co-operation arrangement signed in 2018 is that at that time it was prepared to continue to supply gas to Iraq, despite being owed around US$1 billion in non-paid bills, a figure representing around five months’ worth of gas supplies.
A key part of the reason why Iran was, and is, willing to allow Iraq such leeway is that the other elements of the 2018 deal more than make up for the inconvenience over delayed payments for electricity and gas. Increasing the co-operation on the development of shared oil fields, for example, is effectively a license for Iran to produce and export all of the oil that it can possibly dig up in these shared fields, as it is absolutely impossible for the U.S. to detect which oil comes from the non-sanctioned Iraq part of a field and which from the sanctioned Iran part of the same field. This is precisely why Iran is prioritizing the development of the West Karoun fields, as seven of these shared major oil fields contain about 14 billion barrels of recoverable oil. These are' Azadegan (Iran side)/Majnoon (Iraq side), Azar/Badra, Yadavaran/Sinbad, Naft Shahr/Naft Khana, Dehloran/Abu Ghurab, West Paydar/Fakka/Fauqa, and Arvand/South Abu Ghurab. The adjunct part of the 2018 deal, which concerns marketing and pricing is the metaphorical icing on the cake for Iran. Not only can it produce from these shared fields as much as it can physically drill but also it can aggregate its own oil with that of Iraq in order to receive nearer the market price for the grade than otherwise, it could achieve as a sanctioned entity. Moreover, it can also send its own oil to wherever Iraqi oil can go, which is anywhere. In smaller amounts, this is done via the long-running trucking method and in larger quantities, it is done through the usual export methods and routes out of Iraq, including pipelines and very large crude carriers.
Overall, it was not just al-Sadr who gave the nod to Kadhimi as new prime minister but also the Fateh Coalition, a very powerful political bloc of parties that have very close ties with Iran. The key reason for the Fateh Coalition’s sudden support for Kadhimi – which had previously vetoed Kadhimi’s appointment - a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week, is that: “The new PM, an old intelligence hand with already close links with the IRGC [Iran’s Islamic Revolutionary Guards Corps, with which Kadhimi co-ordinated the strategy to defeat Islamic State] has agreed to the pre-existing deal with Iran within the framework of an even broader and more far-reaching agreement.” He added: “As part of that, Tehran has guaranteed the electricity and engineering needs of Baghdad for the upgrading of utilities in five key cities, almost at cost price and it has also been agreed that all the Shi’ite paramilitary units come under one umbrella in order to ensure closer coordination with the soon to be restructured intelligence services in Baghdad.” He concluded: “The guaranteed expanded footprints of Beijing and Moscow in Iraq for whatever is needed were direct assurances that Tehran provided to Baghdad, focussed initially on its needs in energy and in the key railway and transport infrastructure upgrading projects, so effectively this puts Baghdad on a divorce path with the U.S.”
By Simon Watkin for Oilprice.com
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