US’s hopes in Iraq end with oil-for-gas deal with Iran

OilPrice.com has published an opinion piece arguing that the US has for years been giving Iraq tens of billions of dollars to help with its finances on the specific condition that the country reduces its imports of gas and electricity from Iran eventually to zero. Caliber.Az reprints this article.

Ever since the US officially ended its ‘combat mission’ in Iraq on 31 December 2021, it has been looking for a way back into the huge but still relatively untapped oil and gas regions of the country.

Iraq knows this perfectly well and has sought since then to exploit this need for money from the US whilst having no intention of allowing it to return in any meaningful way. Many analysts trace this reluctance back to the US’s invasion of Iraq in 2003 or to its continued military presence there until 2011, but although neither of these factors helped the US’s ambitions in Iraq, neither of them put the final nail in their coffin either.

This came with its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) – or colloquially, ‘the nuclear deal’ – with Iran in May 2018. Iran has wielded enormous power over Iraq for a very long time indeed through its various political, economic, and military proxies and the death knell of the deal with Iraq meant the same for any ambitions the US had in Iraq.

The game plays from Iraq and the US around this starting position were seen again last week but, as in the end of Macbeth’s fleeting moment of glory, these threats and counter-threats are ‘full of sound and fury, signifying nothing’: the game is already over, and the US lost.

The last week or so has seen a series of statements from both the US and Iraq surrounding Baghdad’s staggeringly omni-toxic idea that Iraq will pay with its own oil supplies for the gas and electricity that it has long been importing from Iran.

This is less of a slap in the face for Washington than a baseball bat in the crotch, as the US has for years been giving Iraq tens of billions of dollars to help with its finances on the specific condition that the country reduces its imports of gas and electricity from Iran eventually to zero.

For the US , the ending of Iraq’s reliance on Iran for around 40 per cent of its power grid needs (through gas and electricity imports) would have provided an excellent starting point for American companies to move back into Iraq to begin a new commercially-based chapter in the two countries’ history.

To encourage Iraq towards this end, the US has granted waivers to it to continue to import gas and electricity from Iran to manage this transition away from dependence on its neighbour. Accompanying these waivers have been massive injections of US funding into Iraq, usually following a visit to Washington in August or September each year by whoever was Iraq prime minister at the time to ask for money to bail out the Iraq budget.

The principal reason why the Iraq budget needs bailing out every year is because of the industrial-scale corruption that lies at the heart of its oil sector administration.

This offensive manoeuvre from the Iraqi playbook is such a regular annual feature in Washington that for a long time, a very senior US legal source closely connected to such discussions exclusively told OilPrice.com some years ago, it has been known as ‘the Baghdad Ballet’. 

Up until now, the most shocking betrayal of the US’s optimistic trust in Iraq in this context came from the ultra-smooth Mustafa al-Kadhimi. He had danced the usual dance with the US so well that in May 2020 Washington gave him even more money than before and the longest waiver ever given – 120 days – to keep importing gas and electricity from Iran, on the standard condition that Iraq stopped doing it soon.

However, once the money had been banked and al-Kadhimi was safely back on home territory, Iraq signed a two-year contract – the longest period ever – with Iran to keep importing gas and electricity from it. Washington let the formidable then-State Department spokeswoman, Morgan Ortagus, out of her room, and she let fly.

Not only was the next waiver to Iraq the shortest ever – 30 days – but also at the press conference in which it was announced, Ortagus let it be known that the US was hitting 20 Iran- and Iraq-based entities with swingeing new sanctions. She cited them as being instruments in the funnelling of money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force, which was entirely true.

She added that the 20 entities were continuing to exploit Iraq’s dependence on Iran as an electricity and gas source by smuggling Iranian petroleum through the Iraqi port of Umm Qasr and money laundering through Iraqi front companies, which was also true.

She also said that Washington was extremely concerned that Iraq was continuing to act as a conduit for Iranian oil and gas supplies to make their way out into the world’s major export markets.

Even against this backdrop of stunning betrayals, though, this new idea from Iraq is of an unprecedentedly omni-toxic variety. Given tangential comments from the current Iraqi Prime Minister, Mohammed al-Sudani, it may well be assumed that Baghdad knows this and, if this is the case, it might well be the latest ruse in this year’s effort to gain another waiver (including allowing Iraqi payments to be made through the regular Iranian banking system), and more multi-billion dollar funding from the US

Specifically, and apparently with no sense of the irony involved, al-Sudani said that Iraq has no choice but to start paying for Iranian gas and electricity imports with Iraqi oil because US sanctions on Iran has made it difficult for Iraq to make payments through traditional banking routes. Al-Sudani also said that such supplies are vital because of the rolling power cuts that are occurring across Iraq during the frying-pan heat of the summer. 

Two veiled threats to the US were also made by al-Sudani. The first of these was via Iraq’s State Organization for Marketing of Oil (SOMO) and was that the country’s long-term oil production prospects could be severely damaged through this oil-for-gas barter deal with Iran. Specifically, to meet the terms of the deal, Iraq would have to accelerate production from its biggest fields in the south, which could damage the structures of the wells, and reduce their longevity and overall production yields.

The threat to the US from this is twofold. First, it means that if the US did return to Iraq then many of its top oilfields would be irrevocably damaged; and second, it means that Iraqi oil production would decline over time, which would drive oil prices higher, which the US and its allies do not want. The second threat, made through Iraq’s Oil Minister, Hayyan Abdul Ghani, was that such a deal may also result in even greater cooperation between Iraq and Iran on joint oil field exploration and development, and the exchange of technical and engineering services.

For the US, this would mean some of Iraq’s major fields would be excluded from any of its future development plans forever, and possibly even worse than that would be directly under the influence of China. Effective control over all of Iran’s oil and gas fields was given to China back in 2018 through the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’.

For the moment, it appears that the US is going through the five phases of grief associated with the death of its idea for Iraq perhaps: denial, anger, bargaining, depression, and acceptance. Judging from the latest terse comment from the US State Department – “The March 2023 waiver, granted by the Secretary, allows Iraq to purchase electricity from Iran - nothing else.” – it may still be at the ‘denial stage’. 

When it reaches ‘acceptance’, it may well be that it follows the usual format of these dances and grants another waiver to Iraq to keep importing gas and electricity from Iran, including being allowed to pay for it through regular means, and gives it a few more billion dollars. At that point, it might also be expected that Iraq will drop the idea of the oil-for-gas deal with Iran – at least until that waiver runs out too.