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Iraq forges US energy ties, but White House race may shape oil strategy

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Iraq forges US energy ties, but White House race may shape oil strategy


Following US visit, Iraqi premier looks to implement $8 bil energy deals

Biden presidency may be more lenient towards Iranian energy imports

Iraq, OPEC's second-largest oil producer, relies on Iran for gas and electricity

  • Author
  • Dania Saadi
  • Editor
  • James Leech
  • Commodity
  • Electric Power Natural Gas Oil

Dubai — Fresh off a trip to Washington, Iraqi Prime Minister Mustafa al-Kadhimi faces no shortage of challenges turning much-hyped deals he signed into actual investment for the beleaguered energy sector. However, the US presidential election in November could have an even bigger impact on Baghdad's future oil and energy strategy.

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US President Donald Trump has been eager to support Kadhimi as he tries to rebuild the country after years of war amid a fractured political landscape. But Trump's tough stance on Iran has threatened Iraq's internal stability. This could change under Democratic Party opponent Joe Biden, who is thought to be more conciliatory towards Tehran.

Kadhimi has touted the deals worth around $8 billion, including with Chevron for upstream investment, as a critical step to invigorating the country's oil and gas industry, which provides the bulk of Iraq's revenues. Analysts warn these deals may prove to be little more than window dressing, as the announcements included few details, timelines or specifics.

The onus will be on Iraq to make itself a desirable investment destination as it weighs political ties with the US beyond November's presidential race.

"The key factor will be whether Iraq begins to change its contractual terms at some point in the future to make them more attractive, and whether Baghdad sees political virtue in securing US investment in the country," according to Raad Alkadiri, senior director at the BCG Center for Energy Impact. "Kadhimi's recent visit to Washington suggests that the jury is still out on that question. A host of MOUs were signed in the energy sector, but they lacked substance; many were agreements to negotiate, rather than concluding deals."

Security and politics

Iraq is OPEC's second-largest crude oil producer, with a production capacity of some 5 million b/d.

The recent OPEC production cut accord has imposed a quota of 3.80 million b/d on Iraq through the end of the year, and the reduction in output combined with the slump in prices due to the COVID-19 pandemic has hit the country's budget hard.

Iraq's unstable security environment presents a major challenge, with the country in the crosshairs of US-Iran tensions that peaked with the US assassination of key Iranian general Qassim Soleimani in Baghdad in January.

Despite his hawkish stance towards Iran, Trump has already started a drawdown of US troops from Iraq towards an eventual full withdrawal, a sensitive topic for Iraqi sovereignty. Biden has said he would maintain a US troop presence in the Middle East but has not specified his plans for Iraq.

So far, ExxonMobil is the only US oil major in Iraq as operator of the giant West Qurna 1 field in the south and a partner with Norway's DNO in the Baeshiqa license in the semi-autonomous Kurdish region in the north. It is the only major energy company operating in both federal Iraq and the Kurdish region.

ExxonMobil, however, withdrew its foreign staff in May 2019, citing the deteriorating security situation, raising the ire of then oil minister Thamer al-Ghadhban. The withdrawal took place while ExxonMobil and PetroChina were in negotiations with the Iraqi government to run the Southern Iraq Integrated Project, a complex, multi-billion dollar development.

Current oil minister Ihsan Ismaael said on Aug. 23 that Iraq was still in talks with ExxonMobil to develop SIIP, but gave no further details.

ExxonMobil didn't reply to questions seeking comment on SIIP, while Chevron declined to provide details on its upstream deal.

In the meantime, European and Asian companies are dominating the energy sector, both in Iraq and the Kurdish region, and this is unlikely to change under a Biden or Trump administration, according to analysts.

"In the absence of US investments, Iraq will look elsewhere, including China," said Paul Sheldon, chief geopolitical advisor for S&P Global Platts Analytics. "The history of oil markets indicates companies are often willing to tolerate political risk to access low-cost reserves such as Iraq's, but the investment terms must be sufficiently appealing."

Pressure over Iran

A White House victory for Biden could provide Iraq with some breathing room on US sanctions that have loomed over its substantial energy imports from Iran.

Trump has heavily pressured Iraq to reduce its reliance on Iranian gas and power supplies, issuing a series of short-term sanctions waivers to Baghdad that the White House has repeatedly warned could end. Its most recent waiver, for 120 days to import Iranian electricity, expires in September, while Iraq still faces significant civil unrest from rolling blackouts due to its creaky infrastructure.

Iraqi Deputy Prime Minister Ali Allawi has said his country may not be able to begin lowering its Iranian energy imports until next year at the earliest.

"The Trump administration has been myopic, viewing Iraq through the prism of US-Iran policy," Alkadiri said. "A Biden administration is likely to view Iraq far more in its own context, which could make waivers a moot point, especially if US policy towards Iran shifts markedly away from the maximum pressure campaign."

Biden was vice president when then-President Barack Obama signed the Joint Comprehensive Plan of Action with Tehran and other world powers, suspending sanctions on Iran's energy exports in exchange for restrictions on Iran's nuclear program. Trump withdrew the US from the deal in 2018.

Iraq has been eager to progress its much-delayed Ar Ratawi gas capturing project that could supply its power plants, with help from US company Honeywell, as well as a power grid connection to the Gulf Cooperation Council's electrical system.

Political and financial hurdles have stymied both projects so far, and the cash-strapped government has many priorities competing for limited capital.

A $1.2 billion deal with GE was among the other agreements signed by Kadhimi in Washington, and Allawi said Iraq is seeking financing from the US Export-Import Bank and other institutions to help fund the gas capture project.