Japan’s need for energy security has long driven relations with the Gulf states, but, under the banner of economic diplomacy, Gulf-Japan ties are diversifying.
Iraq has a new Cabinet, minus a few key portfolios, including oil, suggesting an end to the political paralysis that has gripped the country since November 2019. But even a largely technocratic Cabinet can do little in the short term to ease the economic pressures that have been mounting since the collapse of oil prices due to the coronavirus pandemic and the loss of oil revenue that makes up nearly all of Iraq’s foreign earnings.
Among the sectors most in need of new investment and rehabilitation is the electricity sector, which has failed to meet demand, forcing Iraq to import gas and electricity from Iran, even though it is the second-largest oil producer in OPEC after Saudi Arabia. The reliance on Iran to fill the gap between supply and demand carries risk since it is contingent on the willingness of the United States to grant Baghdad waivers from sanctions imposed on Iran. Waivers have been granted on the condition that Iraq increases its efforts to attain energy self-sufficiency. The U.S. Department of State granted a waiver on April 26 for 30 days rather than the 90 or 120 it had granted previously; it subsequently granted a longer extension of 120 days as a concession to the new government in Baghdad. In a telephone call to the new Iraqi prime minister, U.S. Secretary of State Mike Pompeo was reported by a spokesperson as telling Mustafa al-Kadhimi that the United States “will move forward with a 120-day electricity waiver as a display of our desire to help provide the right conditions for success.”
However, even this longer reprieve is not enough time for Baghdad to wean itself off Iranian electricity or gas since the electricity sector is unable to meet peak demand without managing that demand or resorting to imports. OPEC oil production cuts, which kicked in on May 1, will make it that much harder for Iraq to produce enough gas to supply power plants since most of the gas it produces is associated with oil production. The OPEC+ alliance of oil producers agreed on April 12 to remove 9.7 million barrels per day (mb/d) from the oil market in response to the collapse in demand due to the coronavirus pandemic. Iraq’s share of the production cut is 1.061 mb/d, a reduction that will also put a severe strain on its finances since it relies almost exclusively on oil revenue to meet its budgetary requirements.
In a March 16 article posted on its website, the International Energy Agency said that Iraq was among the oil-producing states that would be most affected by the collapse in oil prices, currently trading around $30 per barrel of oil for benchmark Brent crude futures. It said oil and gas incomes for some key producers would fall between 50% and 85% compared with 2019 and would represent the lowest income for these producers in over two decades. Iraq’s losses would be nearer the higher end of the IEA’s estimate. For Iraq, the current price would imply a monthly deficit of $4 billion for the country to meet existing obligations for salaries, pensions, and other current spending.
The combination of lower production and weaker oil prices is likely to hit all sectors of the Iraqi economy in which there has been little effort to diversify from overreliance on oil revenue.
The Iraqi electricity sector suffers from capacity constraints, technical losses, theft, runaway demand, and decades of damage and mismanagement that have left it in shambles. Frequent interruptions to the power supply in a country where summer temperatures can be brutal was a critical factor that led to social unrest and the loss of confidence in the former government of Prime Minister Adel Abdul Mahdi, who was forced to resign.
The new Cabinet of Prime Minister Kadhimi, approved by the Iraqi Parliament on May 7, includes a new electricity minister, Majid Mahdi Handosh, a technocrat who has spent his entire career at the ministry. He replaces Luay al-Khateeb, who, while knowledgeable on energy matters, did not have much experience with the electricity sector or Iraq’s sectarian politics.
Iraq’s electricity grid was one of the main casualties of four decades of conflict, starting with the Iran-Iraq War in 1980. Iraqi infrastructure suffered further blows during the 1990-91 Gulf War, the U.S.-led invasion of Iraq in 2003, and the damage wrought by the Islamic State in Iraq and the Levant when it occupied nearly one-third of the country in 2014.
In an April webinar on Iraq’s electricity challenges, Ahmed Tabaqchali, an Iraqi energy expert at the Institute of Regional and International Studies at the American University of Iraq in Suleimani, said that from 2003 onward, despite significant investment in new capacity, there remained a substantial gap in supply and demand due to a combination of mismanagement, corruption, public expectations of free electricity, and miscommunication between various government entities.
Tabaqchali referred to the shortage of natural gas as one of the main reasons for this supply gap, with many of the combined-cycle power generating plants operating at 60% of capacity because of the unavailability of natural gas. This means the utility cannot provide enough electricity during peak demand periods, typically during the summer months when temperatures soar. In addition to problems with maintenance and transmission losses due to poor infrastructure, theft is another problem. Even if Iraq were to raise its power production capacity and halt imports from Iran – Iranian gas represents 31% of the gas used in Iraq – rising demand means a supply gap would persist.
Iraq currently has some 32 gigawatts of capacity but can only generate around 16 GW because of its inefficient grid. Of the 16 GW it produces, about 40% is lost during distribution the IEA said in an April 2019 report on Iraq.
In the absence of sufficient supply from the national grid, customers have relied on small operators using their own generators for electricity, thereby depriving the state utility of revenue, not to mention the harmful environmental impact of diesel-operated generators. Tabaqchali cited the IEA report that showed Iraqis paid $4 billion in 2018 to these small operators, which he said was equal to the entire budget of the Ministry of Electricity.
Speaking during the same webinar, the former Iraqi electricity minister, Khateeb, listed other issues that have plagued the sector. The destruction caused by ISIL during its occupation of large tracts of Iraqi territory in 2014 knocked out 25% of capacity. Subsidies that kept tariffs artificially low would need to be removed to manage demand. If subsidies were scrapped, the grid could provide uninterrupted electricity even during peak times, he said, putting current capacity at 19.2 GW, higher than the IEA’s estimate due to recent additions to capacity. The government’s lack of priority on collecting electricity tariffs has caused demand to increase faster than capacity: “When the price is zero, demand is infinite,” the former minister said.
Compounding these problems is the issue of security, Khateeb said. High tension lines in several Iraqi provinces had been damaged or stolen for copper over several years and were attacked by terrorists in late April. While most of the damage has been in the north, it affected the whole country, including the southern oil province of Basra, because all provinces are interconnected by the national grid. Piracy is also a financial drain. Of some 4 million units of commercial and household users registered with the government, half thrive on power piracy. This means the government pays $12 billion a year (based on 2019 oil prices) on their behalf. Added to that are what he called one million “squatters” who do not pay for electricity. He said that most Iraqis expect the government to provide electricity for free, although they seem willing to pay neighborhood generators that are privately owned and that charge more than the state utility.
Without tariff reforms and active collection, the electricity sector would remain stretched with power generation demand rising by an average 8% annually and population growth at 3.3%, Khateeb said.
The current financial crisis has forced a revision of plans and strategies to meet the goals set out in the government’s roadmap, he noted, adding that this included contracts for electricity projects signed with European, U.S., and Chinese companies. Bid rounds for renewable energy projects that were due to be held in February were also shelved, Khateeb said.
Iraq’s ambition is to become energy independent, not because it is being told to do so, but because it is a strategic decision by the Iraqi state, said Khateeb. Baghdad has no desire to be a party to the dispute between Tehran and Washington, he added. Iraq had been looking at alternatives to Iranian gas and electricity because it wanted to secure the best deal in a free market. Several other options have been considered, including possible supplies from Saudi Arabia, Kuwait, Jordan, and, most recently, Turkey. However, the government was unable to finalize any agreements because the former Cabinet had been acting in a caretaker capacity since November 2019. Baghdad signed an agreement in September 2019 to connect its grid to the Gulf Cooperation Council Interconnection Authority, which should provide excess Gulf electricity at a price 15% less than Iran. The process, however, will take a year to implement. For now, there are no alternatives to Iranian gas and electricity, Khateeb explained. In the meantime, Iran has reduced its prices to be more competitive. Tehran has latched on to gas and electricity contracts with Iraq as economic lifelines as its oil exports have been reduced to a trickle by U.S. sanctions. Iraq is the only country granted a waiver to continue with imports from Iran, but future exemptions cannot be guaranteed.
Baghdad is looking to conclude an agreement with the Kurdistan Regional Government, which has a surplus of gas, to secure supplies. But this may be complicated by a dispute over revenue sharing that has been a bone of contention between the federal government and the semiautonomous region since 2003. The previous government halted the transfer of federal funds to Erbil in April, saying the KRG had failed to supply the 250,000 b/d of crude oil to the state oil marketing body as agreed when the 2019 budget was passed, according to the April 27 “Iraq Oil Report.”
Khateeb said the negotiations with the KRG were meant to secure gas from the Khor Mor gas field but that it would take from six to 12 months to build the necessary pipelines and gas processing capacities. Jordan was offering a competitive price for gas, but this would require the building of 435 miles of transmission lines and nearly 20 substations.
The obvious solution, proposed by the IEA and others, would be for Iraq to supplement gas and other fuels with renewable energy by tapping into its vast solar potential given high irradiation levels in the country. “Bringing the share of renewables up to 30% of electricity supply by 2030 would bring environmental gains without increasing total costs for electricity supply. Compared with continuing the current structure of electricity supply, reducing network losses and relying more heavily on gas and renewables would free up 9 billion cubic meters of gas for other uses in 2030, plus 450,000 b/d of oil for export,” according to the IEA’s report.
There are no easy solutions for Iraq. Many of the legacy issues that have hampered reforms have now been compounded by the loss of oil revenue that is likely to decline further in the months ahead as oil and gas production are curtailed. It will take time for a new government to formulate its policies as it takes charge amid a health and economic crisis unprecedented in modern history. As demand for cooling begins to rise with the onset of warmer weather, the electricity sector will again come under renewed pressure, and there are no quick fixes in sight.
is a non-resident fellow at the Arab Gulf States Institute in Washington, a contributing editor at the Middle East Economic Survey, and a fellow at the Energy Institute.
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