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Iraq's power shortages, OPEC+ cuts seen pushing Baghdad closer to Iran


Iraq imports gas and electricity from Iran

Power cuts are exacerbated by gas shortage

OPEC+ cuts mean Iraq produces less associated gas

Dubai — Iraq's chronic power shortages and its OPEC+ commitment to cut crude output have pushed the country closer to Iran at a time when the US wants to isolate Tehran.

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OPEC's second-largest oil producer relies on associated gas production and Iranian gas to power a number of it plants, and is allowed to make the imports under waivers from the US. Iraq, which currently produces between 16 to 18 GW/day, also imports up to 1.2 GW of electricity from Iran during peak demand. Iraq's efforts to comply with OPEC+ output cuts are also making it more reliant on Iran imports.

"Certainly, the reduction in oil production is impacting the production of the associated gas and increasing the reliance on imported gas from Iran," Harry Istepanian, senior fellow at the Iraq Energy Institute, told S&P Global Platts.

Prime Minister Mustafa al-Kadhimi has been caught in a political crisis over power shortages, particularly after two protesters demanding better electricity services were killed last week. The government blamed unknown criminal groups for the killings, but the popular discontent at the power cuts has become a political issue given that summer temperatures have surpassed 50 C (122 F).

Kadhimi blamed the power problems on previous governments and singled out Iraq's major reliance on generating power from gas turbines as an issue his cabinet is trying to resolve by boosting production of the fuel. Iraq in 2009 bought from GE 56 gas turbines capable of supplying 7 GW of electricity, but it didn't have enough gas to power the plants.

OPEC+ cuts

Iraq may have missed its goal to comply better with OPEC+ cuts in July because exports fell only 2% compared with June, although it was supposed to make up for overproduction in the previous two months. Iraq's Oil Minister Ihsan Ismaael has pledged to reach 100% compliance by early August, but continued electricity cuts and protests could put that to the test because Baghdad needs associated gas to power a number of its plants.

Despite Iraq's rising reliance on Iranian gas and electricity imports, Baghdad continues to receive US waivers to get these supplies without the threat of sanctions, a process that started in 2018 when Washington re-imposed sanctions on Tehran's energy sector.

But Washington's patience is wearing thin and it is currently in the midst of a strategic review of its ties with Baghdad that will come to the fore during a visit by Kadhimi to the US expected to take place this month.


Gas flaring

Iraq's gas woes are also exacerbated by flaring a big percentage of its associated gas.

The OPEC producer is the world's second-worst offender after Russia, flaring some 18 Bcm (632 Bcf) last year, according to a World Bank study published July 21.

"The decrease in associated gas is one issue, but a bigger issue is that Iraq still flares nearly 18 Bcm per year," Ali al-Saffar, MENA program manager at the International Energy Agency, said. "This puts it towards the top of the league of flaring countries in the world, but unlike any other country on that list, it stands out in that it flares gas at the same time that it is gas short and has to import it. This is a situation that needs urgent attention, and there are signs that this government is taking steps to bring in the necessary investment in this sector."

One solution to Iraq's gas shortage could lie in the semi-autonomous Kurdish region, which has gas fields that need investment.

Kurdish gas

Former oil minister Thamer al-Ghadhban in April had discussed conducting a study about investment in Kurdish gas fields.

"In order to meet the deficit in the gas supply, Iraq needs urgently to invest in the Khor Mor gas field (in the Kurdish region) to increase production from the current 400 million standard cubic feet per day (MMscfd) to 650MMscfd by 2021 before ramping up further to reach 900MMscf/day by 2023," Istepanian said.

In addition, government subsidies are in excess of $10 billion a year and electricity is often wasted through distribution losses, analysts say.

"Currently grid-supplied electricity is heavily subsidized (at around 90%)," Saffar said. "As well as being a huge burden on already stretched government budgets, this means that the utility does not get much revenue, this feeds back to under-investment, and because of this, poor service provision."

The electricity sector has for years been mismanaged and needs to be reformed so it better serves the public, analysts added.

"The Ministry of Electricity and associated companies do not have neither the financial capacity nor experience to start any reform," Istepanian said. "Although there have been several reports and studies by many organizations such as the World Bank and IEA on reforming the electricity sector, little was done."