Deal With Iran Reflects Iraq’s Frustration With US and increased energy crisis

A recent barter deal under which Iraq agreed to supply Iran with crude oil and fuel oil in exchange for Iranian gas, points to Iraq’s frustration with US sanctions that make it difficult to pay for its gas imports and cause power outages during the scorching summer months.

Iran slashed its gas exports to Iraq on Jul. 4, from 45 million cubic meters per day to 20 MMcm/d, cutting off fuel supplies to 5,000 megawatts of power generation capacity in Iraq, Electricity Minister Ziyad Fadhil told state media, adding that Iran also cut off 1,000 MW of electricity supplies.

The minister attributed the cuts to the problems Iraq encounters in paying for the gas and power it imports from Iran, even though it has reportedly deposited more than $10 billion into an Iraqi bank account that was set up to pay Iran.

It’s far from clear how the new barter deal will work in practice, including the exchange rate and the volumes of Iraqi oil involved, because the government has revealed few details.

On Jul. 11 the cabinet agreed that the oil ministry would sell quantities of crude and fuel oil “equivalent to the value of Iranian gas and electricity supplies.”

Payment for those supplies are currently deposited into the restricted account at the Trade Bank of Iraq, and Iran may only use those funds to purchase certain non-sanctioned goods.

The cabinet also tasked state oil marketer Somo with setting up the necessary marketing and contractual arrangements.

However, it’s hard to see how any international buyer could purchase oil from Iran in hard currency without violating US sanctions.

It’s also difficult to understand why Iran would be willing to accept payment in Iraqi crude oil, which is similar in quality to its own and would presumably have to be sold to China, which is the only significant buyer of sanctioned Iranian barrels.

This suggests that the deal may be inherently unworkable, and a way of demonstrating to the US that its Iran sanctions policy is restricting the Iraqi people’s access to electricity.

A spokesperson said the US State Department had no comment on the reported barter deal.

“We regularly consult with our Iraqi counterparts about sanctions on Iran, which remain in place due to Iran’s ongoing nuclear activities. We seek to ensure our sanctions on Iran do not harm Iraq,” the spokesperson told Energy Intelligence.

Collateral Damage

Farhad Alaaldin, foreign affairs adviser to Iraqi Prime Minister Mohammed Shia al-Sudani, said that Iraq’s continued dependence on Iranian gas calls for a solution to the problem created by US sanctions “that serves Iraq.”

“The agreement with Iran on bartering oil for gas is based on solving a chronic problem that Iraq has been suffering from for a long time, and one of the solutions is to get out of the arena of conflict and disagreement between the US and Iran,” he tweeted recently.

Former electricity minister Luay al-Khateeb warned that in addition to the risk of stoking social upheaval in Iraq and potentially disrupting oil exports, the constant blackouts could turn public opinion in Iraq against the US.

“The Iraqi media now says the Americans are interfering in Iraq’s electricity sector … and labeling the American administration as the enemy of the people,” he told Energy Intelligence.

Weaker US-Iraq Cooperation

Michael Knights, a fellow at the Washington Institute for Near East Policy, suggested that the barter agreement indicated a weaker level of cooperation between Baghdad and Washington than existed under former Prime Minister Mustafa al-Kadhimi.

“This is a reaction to the loss of Iranian gas. But yes, it also shows that the Sudani government looks to Iran for ideas, not to Washington. Iraq now asks for forgiveness from Washington, not permission,” he told Energy Intelligence.

Knights defended the US policy, which involves issuing temporary sanctions waivers that allow Baghdad to pay Iran for its power imports by transferring funds to the special account. “The US idea of Iraqi energy self-sufficiency is a good idea … and it does serve Iraq’s interests.”

Iraq, meanwhile, argues that the deal with Iran does not violate US sanctions because it is a barter agreement and avoids financial transactions altogether.

Self-Sufficiency Remains Elusive

The State Department has issued a series of 120-day sanctions waivers which have allowed Iraq to import electricity from Iran as part of a policy of encouraging Iraq to reduce its dependence on Iran.

The latest of these waivers was set to expire on Wednesday, and Reuters reported that US Secretary of State Antony Blinken on Tuesday issued another 120-day waiver that would allow Iraq for the first time to make such payments into non-Iraqi bank accounts. Whether that eases Iranian pressure on Iraq, allowing gas flows to rise and removing the need for the barter deal, remains to be seen.

Iraq’s prime minister acknowledged in May that Iraq was flaring as much as 1.2 billion cubic feet (43 million cubic meters) per day of associated gas and that gas imports from Iran of around 1 Bcf/d (28 MMcm/d) were costing the country at least $4 billion a year.

But Iraq will face power shortages for years to come because of soaring demand, and because it will take time take to implement agreements to capture and use more of its own flared gas, such as the recent one with TotalEnergies.

In the meantime, as al-Khateeb noted, Iran offers its neighbor gas volumes and prices that others cannot match.