Tough Geopolitical Playing Field Complicates Iraq’s Energy Plans

Iraq is looking to become more independent in electricity generation and distribution.
While the Iraqi federal government has made efforts to de-escalate internal and regional tensions in the past eight months, it may encounter a number of security challenges.
Iraq also has to balance the different geopolitical interests of its partners.

Strategically, the current Iraqi government is placing significant emphasis on improving the country’s energy infrastructure, primarily by expanding its capacity to generate and distribute electricity. Additionally, plans are in place to enhance oil and gas output and exports. These comprehensive initiatives hold great potential for delivering substantial economic and strategic benefits to the country. However, they may face opposition from various regional and global interests, including geopolitical and commercial concerns. While the Iraqi federal government has made efforts to de-escalate internal and regional tensions in the past eight months, it may encounter challenges in dealing with hardliners in the complex new Middle East, especially considering China and Russia’s aspirations to replace the US in the region.

Despite Al-Soudani’s limited political influence within the Iraqi context, the state’s security situation has significantly improved compared to the years when Iraq had to combat ISIS, contend with the growing power of the Hashd Al-Shabi Militias, face regional interference, and endure direct military intervention by global powers. Additionally, Al-Soudani is currently engaged in negotiations with the northern Iraqi Kurdish region to address a range of outstanding concerns, including issues related to oil and gas, the budget, and contested regions under Article 140 of the Iraqi constitution. Nevertheless, while he has achieved certain milestones, his accomplishments and efforts may not be sufficient to ensure the realization of his ambitious development goals.

Devastated Economic Infrastructure:

Despite being OPEC’s second-largest crude oil producer, with more than 145 billion barrels of oil reserves and estimated gas reserves exceeding 3.714 trillion cubic meters, Iraq has struggled to meet basic welfare needs and develop essential infrastructure. In many provinces and cities, electricity supply falls below 10 hours per day during peak consumption, and only 59.7 percent of the population has access to drinking water.

The lack of public services, particularly electricity, has been a significant challenge for previous administrations in Iraq and has been a driving force behind numerous uprisings that have resulted in changes of government. However, despite seven different cabinet ministries since 2003, the Iraqi government has made limited progress in addressing these issues. In 2022, the country’s power demand reached 35,000 MWh, surpassing its capacity of around 22,000 MWh. Additionally, the rate of electricity transmission and distribution losses stood at approximately 54.4% (5), making it financially and operationally difficult to meet the sector’s demands.

Furthermore, the government remains the largest employer in the country, employing over 37% of the workforce, while the majority of other employers are closely linked to the public sector in some capacity. With a lack of a robust private sector, the jobless rate is expected to remain high at 15.5% in 2022. The state’s budget heavily relies on oil revenue, which accounts for nearly 90% of its funding. In 2021, Iraq’s dependence on oil revenue was rated at 42.8, the highest among countries after Kuwait, according to a World Bank analysis. These factors highlight the country’s overreliance on a single economic driver and the need for diversification.

Al-Soudani’s Strategic Projects:

The administration of Al-Soudani faces the delicate task of balancing the revitalization of Iraq’s economy with the challenges it presents. The timely completion of their projects holds immense importance for the country’s energy security, reducing reliance on neighboring countries, boosting employment, and establishing stronger ties with Western buyers of oil and natural gas via Turkey. However, these endeavors may also pose a threat to the interests of Russia and Iran.

After significant delays, the contract with General Electric to construct new power plants and enhance capacity at existing units in Iraq was finally signed this year. This agreement has the potential to add nearly 14 gigawatts to the country’s power infrastructure. Additionally, the previous contract with Siemens to refurbish 11 GW of Iraq’s power infrastructure complements this effort, promising significant improvements to the country’s power generation and transmission capabilities. Furthermore, Iraq has signed a contract with its Arab neighbors to import 500 MWh of electricity to alleviate power shortages during the hot summer months.

However, the reality of power generation, which currently relies heavily on around 45 million cubic meters per day of imported electricity from Iran and has minimal internal output, may be influenced by fuel supplies for the power plants. Despite plans and rapid progress in expanding power production capacity, Iraq’s current natural gas production capability, including approximately 12 million cubic meters from the semi-autonomous Kurdistan region and nearly double this amount in the southern provinces, can generate less than 6,000 MWh of energy.

While the recent contract between the Iraqi government and UAE’s Crescent Petroleum to produce around 800 million cubic feet per day of dry gas from three oil and gas fields in Diyala and Basra could contribute to the supply of power plants, it alone will not suffice to achieve independence from natural gas imports. To address this, the government has planned the sixth licensing round for the exploration of 11 gas blocks, concurrent with its contract with the energy giant TotalEnergies. This comprehensive approach includes the construction of a new gas gathering network, treatment units, and the development and operation of a one GWh photovoltaic power plant. These initiatives have the potential to reshape the natural gas landscape for power generation in Iraq, although future increases in demand must be considered.

Accordingly, the Iraqi government has signed contracts with UAE’s Crescent Company and two Chinese firms to develop three oil and gas fields in Diyala and Basra with the goal of producing 800 million standard cubic feet per day (mmscf/d) within the next three years. These efforts complement the government’s contracts with the renowned French company TotalEnergies, which entail the construction of a new gas gathering network and treatment units, as well as the establishment and operation of a one GWh photovoltaic power plant. A sixth licensing round for the exploration of 11 gas blocks (11) holds the potential to reshape the natural gas landscape for Iraqi power plants in the future.

Another strategic project of the Al-Soudani government is the Basra-Turkey railway, spanning 1,200 kilometers from Al-Faw port in Basra to the Turkey border. This ambitious endeavor not only has the potential to create 100,000 jobs for Iraqi youth but also aims to facilitate the transportation of 3.5 million containers and 22 million metric tons of bulk cargo annually, with phased increases to 7.5 million containers and 33 million tons per year.

While this project has strengthened Iraq’s economic and energy ties with Arab countries, Turkey, and the West, the Iraqi government has also reached a strategic agreement with Iran to pay for natural gas prices in oil and heavy fuel oil. This agreement could render US sanctions ineffective in discouraging cooperation with Iraq’s neighbors. Additionally, proposals have been made to support Iran-Iraq connections through the sale of Kurdish oil via Iran or Syria.

The Geopolitical Challenges of Infrastructure Projects:

These strategic projects initiated by the Al-Soudani government hold significant importance for Iraq’s infrastructural advancements, but they also pose risks to the geopolitical interests of regional and global powers.

While Iran has prioritized its north-south corridor and aims to play a critical role in Qatar-Turkey connections, the Iraq-Turkey railway could greatly diminish Iran’s geopolitical advantages by facilitating trade between GCC members and Turkey. This includes the United Arab Emirates’ ten billion dollar contract with Turkey and Qatar’s access to Turkish products. Notably, the railway’s intended path traverses the historically close ties between Turkey and the peaceful and secure Kurdish region of Iraq.

Furthermore, the state’s gas production projects, particularly the Okkas field and recent agreements with Crescent, along with future licensing rounds focused on 11 gas fields, have the potential to not only supply existing and future power plants but also reduce Iraq’s reliance on Iranian natural gas, a significant influencing factor in neighboring countries. Moreover, these projects could assume greater geopolitical significance when considered alongside Qatar’s aspirations to transport its natural gas pipeline to Turkey through Iraq. If successful, this could reduce the importance of gas in Iran and Russia’s foreign policies towards the West.

Additionally, the majority of the 11 gas fields, as discussed by Simon Watkins on Oilprice.com, are located in western Iraq, in close proximity to the borders with Syria and Saudi Arabia. These regions hold strategic significance for Russia, China, and Iran. Notably, the Iraqi militia loyal to Iran, Hashd Al-Shabi, exerts considerable control and influence in certain areas.

The Iraqi government’s growing programs are also creating opportunities for Chinese investment, leading to increased Chinese influence. As China becomes more involved in Syria, its proximity to the Mediterranean Sea could be related to its oil, gas, and geopolitical projects in Iran.

Although recent developments between Erbil and Baghdad indicate centralizing strategies towards the Kurdistan Regional Government and federalism, with Iraqi intentions to dominate Kurdistan’s oil and gas reserves, control borders with Iran, and the recent unilateral suspension of Erbil and Sulaymaniyah airports by Baghdad, the KRG’s Ministry of Transportation and Communication has denied any security or administrative issues.

The successful implementation of the new Iraqi government’s strategic projects could have far-reaching consequences, including strengthening central governance in Iraq against federalism, primarily impacting the interests of the Kurdistan region, and influencing Turkish interests in Kurdistan’s oil and gas exports. Moreover, these projects could draw Iraq closer to China, facilitate connections between Arab countries, Turkey, and ultimately Europe, and ultimately challenge Iran’s hegemony in Iraq and its geopolitical advantages. However, as has been the case in the recent past, significant barriers may impede these transformative shifts in the geopolitics of Iraq and the region.

By Shahriar Sheikhlar for Oilprice.com