This Energy Waiver Is Critical to Iraq... And a Huge Embarrassment to D.C.
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This Energy Waiver Is Critical to Iraq… And a Huge Embarrassment to D.C.

by | published February 21st, 2020

A current American-Iraqi policy mess is bringing back some very personal and frustrating memories. More than a decade ago, I was advising on an energy project in Iraq. It remains one of the more galling experiences of my life.

The situation was this: As with just about any country coming out of prolonged hostilities, Baghdad needed to ramp up its ability to provide reliable electricity.

No power? No economic recovery.

Some of the generating and grid infrastructure had been upgraded via U.S. aid, and preliminary indications had called for a rapid increase in electricity availability as major new crude oil production projects were phased in.

That’s because the escalation in oil extraction would bring about a significant rise in the associated gas from the oil fields. Unless the gas was also developed, field pressure could not be sustained, and the amount of oil lifted would plateau.

Oil export proceeds were vital to the national budget. Therefore, the idea was forwarded to harvest the associated gas, thereby improving the amount of oil realized. That gas, in turn, would be piped to power plants and used as fuel for the generation of the needed electricity.

Seemed straightforward enough at the time, but like most anything in Middle Eastern energy politics, it wasn’t…

It Was Supposed to Be So Easy

Royal Dutch Shell PLC (NYSE ADR:RDS-A) and Mitsubishi Corp. (OTC:MSBHY) promptly formed a joint venture for a massive gas project, with Iraq controlling 51%. The South Gas Co. was formed to administer it on behalf of Baghdad. The initiative is still alive today, with South Gas now known as Basra Gas Co..

Unfortunately, the idea was a disaster. Natural gas is being produced from free standing gas fields, with volume distributed both domestically and for export, while plans are also underway for the production of liquefied natural gas (LNG) as a value added export stream, the situation with the associated gas back at oil fields has languished.

For the first several years of the “Shell project,” (as the company and its foreign partners were “shelling” out billions), Iraqi officials could not agree on how to manage the associated gas.

You see, the ministry controlling oil production – and, thereby, also the associated gas at the oil fields – was under the administration of one politico-ethnic faction… while the ministry overseeing the power plants and networks was under another.

The plan collapsed under the full weight of a Sunni/Shiite shouting match that has continued for over a decade.

My involvement ended when I wrote a plan that required the cross-border transmission of energy raw materials (crude oil and gas) from Iraq to Iran in return for processed oil products and electricity. One of the side benefits was the increased availability of diesel in the Iraqi market, from which private generation of electricity could take place.

The problem? Washington wasn’t ready to admit that Iraq would be dependent on Iran for basic energy. D.C. is unwilling to admit it to this day.

Iraq possesses some of the most extensive crude oil and natural gas resources in the world, but it has remained dependent on neighboring Iran for much of its electricity and natural gas. In fact, the two are closely connected, since the imported gas is the primary fuel for Iraqi power generation.

Meanwhile, the problems with associated gas at Iraqi oil fields continue, sacrificing both a local fuel source for power generation and creating pressure ceilings that limit full field production of oil.

The Iraqi-Iranian “energy bridge” developed despite Washington’s misgivings. That my report supported that bridge hardly help much either.

Well, a decision to renew a waiver by the U.S. allowing for the continued Iraqi energy imports from Iran has apparently been made. The current waiver was set to expire last Thursday (February 13). And while there has been no official announcement, my sources on both ends say permission has been extended for another 120 days.

This Isn’t What U.S. Policymakers Hoped For

As we all know, the Trump Administration has been zealous in enforcing sanctions on Iranian energy exports. To allow Iraq to import natural gas and electricity from Iran under waivers regularly granted is nothing less than embarrassing.

But, just as I experienced over ten years ago, the primary Iraqi power plants remain dependent on Iranian natural gas supply.

Now as then, those plants still are not generating enough electricity to serve the minimum requirements of the domestic economy. As such, Iraq also remains dependent on the import of Iranian electricity to make up the difference.

There was a face-saving device introduced. The U.S. Department of State has said the waiver could be extended if Iraq comes up with a plan by the end of this week on how it could cut off its dependence on imports of natural gas from Iran.

The word I am receiving is that Iraq’s “plan” was three paragraphs long…

And Iraqi demand for Iranian gas continues to grow. Sources tell me it is now surpassing 1.7 billion cubic feet per day through pipelines in the south and east of Iraq. To put this in perspective, that is more than 120% higher than the estimate my report carried several years back.

But Tehran also has its own frustrations. Despite the ongoing sequence of waivers for the energy trade, Iran cannot access the payments made by Baghdad in Iraqi dinars. By the end of this month, the equivalent of some $5.2 billion remains in an account at the Iraqi Central Bank. However, Iran cannot touch it, according to Hamid Hosseini, a spokesman for Iranian Oil, Gas, and Petrochemical Products Exporters’ Union (OPEX)

U.S. sanctions have cut Iran off from the Society for Worldwide Interbank Financial Telecommunications’ (SWIFT) global payment system. To date, Tehran has been unable to find a way of transferring the money.

Meanwhile, Washington has its own need to tread lightly. Relation remain strained with Baghdad following the U.S. assassination of Iranian Quds Force general Qasem Soleimani at the capital’s airport last month. The Iraqi parliament and government have demanded the removal of American troops from Iraqi soil.

For its part, Iran is playing a long game. Iraq may accomplish the Iranian purpose of removing U.S. troops from the Persian Gulf without Tehran having to do anything on its own.

Sincerely,


Kent

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