Mindful of Iraq unrest, US extends sanctions waiver to Baghdad to import Iranian energy

It is estimated that 50% of the electricity sent through Iraqi distribution and transmission lines never gets to end users.
Saturday 26/10/2019
Thorny issue. An Iraqi worker checks an electrical generator board after continual power outages in Najaf.(Reuters)
Thorny issue. An Iraqi worker checks an electrical generator board after continual power outages in Najaf.(Reuters)

The Trump administration is extending a US sanctions waiver that allows the Iraqi government to import electricity and natural gas from Iran, even as Washington pushes Baghdad to find alternative suppliers and cut its energy dependence on Tehran.

Baghdad is taking heed by improving its own power generation capacity and eyeing imports from other neighbours but the government of Iraqi Prime Minister Adel Abdul-Mahdi argues that curbing its reliance on Iranian gas imports will take time. Tehran is doing what it can to ensure its power supply relationship with Baghdad won’t change anytime soon.

The US State Department announced it was extending a waiver on sanctions for Baghdad to continue to import gas and electricity from Tehran, saying: “The waiver ensures that Iraq is able to meet its short-term energy needs while it takes steps to reduce its dependence on Iranian energy imports.”

Since reinstating sanctions last November that targeted Iran’s crude and gas exports, the Trump administration has extended the initial waiver it granted Baghdad four times.

Washington is mindful of the political unrest in Iraq and does not want a repeat of the summer of 2018 when power outages contributed to mass demonstrations in southern Iraq and Baghdad that turned deadly. Iran stopped supplying Iraq with electricity in July 2018 because of unpaid bills and an increase in Iranian power consumption.

Iranian electricity and gas imports comprise around 30-40% of Iraq’s power supply. Iraq imports 1.2 gigawatts (GW) of Iranian electricity into its power grid and takes around 1.5 billion cubic feet per day of Iranian gas through pipelines in the south and east to feed power stations.

Even with the imports, Iraq has been unable to meet its electricity needs, because of undeveloped gas reserves, flaring of associated gas and an ageing and debilitated power sector that suffered extensive damage from Islamic State attacks and is badly in need of upgrades to transmission and distribution networks.

It is estimated that 50% of the electricity sent through Iraqi distribution and transmission lines never gets to end users. Electricity demand in Iraq, which peaked at 24 GW in 2018, is growing at a rapid 7% annually. Iraqi Electricity Minister Luay al-Khatteeb said the country’s electricity production is 18-19 GW.

In October 2018, Iraq signed 5-year “road map” agreements with US firm General Electric and Germany’s Siemens AG as part of Baghdad’s plans to upgrade its power sector, spending $15 billion on new power plants and line repairs, as well as infrastructure that enables Iraq’s associated gas that is wasted through flaring to be captured and used domestically. Siemens had been the primary choice of the government of former Iraqi Prime Minister Haider al-Abadi for awarding the bulk of the power-sector projects.

However, the Trump administration heavily lobbied Baghdad to ensure that General Electric would be an integral part of the rebuilding process, probably using the leverage of the sanctions waivers to ensure the US firm scored significant deals.

In April, an agreement between the Abdul-Mahdi administration and Siemens included three contracts valued at around $778 million for a 500-megawatt (MW) power plant, upgrades to 40 gas turbines and new substations. In September, Iraq signed a $1.3 billion agreement with the German company to add 1.7 GW to the country’s power grid by repairing war-damaged power plants in the northern city of Baiji.

The International Energy Agency (IEA) recommended steps Iraq should take to improve its electricity sector, including removing subsidies and reforming electricity tariffs coupled with stronger regulation of neighbourhood generators. The IEA promoted delivering additional electricity supply to Iraq “quickly, efficiently and at least expense” by “connecting Iraq with its neighbours to stimulate regional electricity trade.”

The Trump administration has pressed Baghdad to connect to the Gulf Cooperation Council (GCC) power grid, an idea that Saudi Arabia has touted for years. In September, Iraq and the GCC signed a deal for a 300km transmission line financed by the GCC that would carry 500 MW of electricity from Kuwait to Iraq’s southern port of Al-Faw. Iraq is reportedly in talks with Kuwait, Saudi Arabia and Turkey to import electricity.

Tehran is not prepared to relinquish its electricity ties with Baghdad. Iran’s Mehr News Agency recently reported Deputy Head of Iran Electricity Industry Syndicate Payam Bagheri as saying that the power grids of the two neighbours would be interconnected by the end of 2019.

Bagheri said: “Based on a deal between Iran and Iraq, Iraq’s electricity grid losses, which is currently more than 50%, will be reduced to 30% by the end of 2020.”

Earlier this year, Tehran and Baghdad signed an electricity cooperation agreement that included plans for Iran to build a power plant in Iraq.

The Trump administration may be pleased with Iraq’s efforts to improve its power generation and transmission capabilities and find alternatives to its electricity imports but Khatteeb warned that Baghdad won’t quickly replace the Iranian gas it purchases as part of its power needs. In August, the electricity minister said: “We need three to four years.”