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Iraq's energy deals in limbo as US pledges help for clean projects

Highlights

Iraq's $8 billion US deals yet to bear fruit

Washington focusing on renewables, clean projects

Iraq seeking extension of waiver to import Iranian energy

Iraq's $8 billion worth of energy deals with US companies clinched in August 2020 during the prime minister's inaugural visit to Washington have yet to bear fruit, but Mustafa al-Kadhimi will try to drum up support for the country's beleaguered oil and gas sector for a second time this week.

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Kadhimi will meet with US President Joe Biden on July 26 in Washington at a time when international oil companies are seeking to exit the country's energy sector, due to what the Iraqi oil minister Ihsan Ismaael described as the inappropriate investment climate in OPEC's second biggest producer.

Exxon Mobil -- operator of the giant West Qurna 1 southern field -- wants to sell its 32.7% stake after divesting this year its 32% interest in the Baeshiqa license in Iraq's semi-autonomous Kurdistan region.

"IOCs are likely reducing their exposure to Iraq's upstream sector on challenging fiscal terms and geopolitical instabilities," said Nareeka Ahir, a geopolitical analyst with S&P Global Platts Analytics. "This could challenge southern field development plans and increase the difficulty of reaching production targets."

Iraq could see its production spare capacity fall from 530,000 b/d in June to 100,000 b/d by year-end, according to estimates by Platts Analytics. The country -- which will have a 4.653 million b/d baseline on which its OPEC+ quota will be based until April 2022 -- will see that figure raised to 4.803 million b/d from May 2022 onwards, leaving little room for spare capacity. Iraq -- currently with a production capacity of about 5 million b/d -- was hoping to boost it to 7 million b/d in the next few years with the help of IOCs.

However, the IOCs' hesitancy in operating in Iraq is evident in the slow progress achieved in the agreements signed during Kadhimi's visit to Washington in August 2020.

The US since provided few details about energy cooperation with Iraq in a statement following a US-Iraq Higher Coordinating Committee meeting in Washington on July 23.

"The US and Iraq discussed ways to advance vital energy projects with US companies," the statement said. "The US plans to cooperate with Iraq to strengthen climate adaptation and mitigation governance capacity, reduce gas flaring, develop renewable and clean energy initiatives."

Five companies

During Kadhimi's August visit, Iraq's oil ministry inked agreements with Chevron, Honeywell and BakerHughes, while the electricity ministry struck deals with Stellar Energy and GE.

Chevron declined to comment on the progress of the agreement to enter into exclusive negotiations on an exploration, development, and production contract in the Dhi Qar Province.

"It is not our policy to comment on ongoing commercial matters," a company spokeswoman told Platts.

BakerHughes declined to comment on its deal to collaborate on flare gas-to-power opportunities, and deployment of US oil field services and equipment. Honeywell couldn't be reached for comment on an agreement to develop Ar Ratawi gas project. TotalEnergies agreed in March to work on a project in Ar Ratawi, but it is not immediately clear if the two deals are different. The Iraqi oil ministry couldn't be reached for comment. Both GE and Stellar Energy couldn't be reached for comment.

Kadhimi's visit also coincides with the July 30 expiry of a 120-day waiver granted to Iraq to continue to import Iranian electricity. Since 2018, Washington has been granting Baghdad waivers to import Iranian energy, which has been subject to US sanctions since that year.

A State Department spokesman declined to comment on the possibility of extending the waiver beyond July 30.

US waivers

However, Iraq is also under pressure to wean itself off Iranian energy, but its inability to capture flared gas is hampering its efforts which are complicated by the power Tehran wields in Iraqi politics.

Matthew Reed, vice president of Washington-based Foreign Reports, said Biden does not want to pick a fight with Baghdad over the waiver.

"An extension is virtually guaranteed given the extreme summer heat," Reed told Platts. "It's another matter entirely whether the Iranians can deliver."

Iraq has suffered from power shortages this year due to intermittent supply of Iranian electricity and gas. Iran is grappling with outages, while Iraq has difficulties in settling billions of dollars in arrears to Tehran without the threat of financial repercussions from the US.

Rachel Ziemba, founder of New York-based Ziemba Insights and adjunct senior fellow at the Center for a New American Security, also expects the waiver to be granted despite Iraq's tough-to-curb dependence on Iranian fuel. If anything, Ziemba said the Iraqis might ask for additional exemptions to make it easier to pay Iran.

Ziemba is also watching whether Kadhimi's White House visit produces any opportunities for US firms to help Iraq roll out renewables or gas-capture projects to reduce flaring.

Iraq was the world's second worst gas-flaring nation after Russia in 2020 and it has held this rank since at least 2016, according to the World Bank.