What Iraq’s urgent energy talks with Washington really mean

Iraq is to open 10 new gas exploration blocks to international investors in the coming weeks, according to Oil Minister Hayan Abdul-Ghani. These new contracts follow the awarding of concessions on 14 out of 29 blocks and domains offered in previous licensing rounds. Much of that went to Chinese firms, which manage more than a third of Iraq’s proven oil and gas reserves and more than two-thirds of current production, according to industry figures. In an interesting twist, Abdul-Ghani later stated that these new gas opportunities were to be presented during his next visit to the US, which took place last week. For seasoned Iraq watchers, particularly those in Washington, who have fought a rearguard action against growing Chinese influence in the country, the question is: Will any of this mark a significant shift in Iraq’s geopolitical alliance?

For the US, Iraq’s gas sector is equally fraught with opportunities and threats. Official estimates are that Iraq’s proven reserves of conventional natural gas amount to 3.5 trillion cubic meters (Tcm) or about 1.5% of the world total, placing Iraq in 12th place among holders of global reserves. That said, about three-quarters of these proven reserves consist of associated gas – a byproduct of oil field development. However, Iraq did not revise its figure for proven gas reserves in 2010 at the time of the upward revision of proven oil reserves. However, the International Energy Agency (IEA) estimates that ultimately recoverable resources will be much higher than the official estimate of 3.5 Tcm – its estimate is 8.0 Tcm, of which about 30% is considered a be unassociated gas. This means that almost 40% of the resources to be found are expected to be in unassociated gas fields. Furthermore, judging by the approximately 60 percent success rate of drilling activity in its oil operations, there is likely a high degree of prospectivity in its gas operations, as fully discussed in my latest book on the new order of the global oil market.

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Conversely – and perversely, given these huge reserves – Iraq is still dependent on neighboring Iran for around 40% of its energy needs, supplied in gas and electricity. This has long cemented Tehran’s enormous influence over Baghdad, along with the political, economic and military stranglehold it has over its neighbor through various proxies. Located in the heart of the Middle East, with combined oil and gas reserves that far exceed any other country in the world, this Shiite alliance of Iran and Iraq has long posed the greatest threat in the region to US interests there. And with the shackles removed following the US’s unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA, or “nuclear deal”), Iran has risen in prominence in the group of states led by China and Russia that comprise the new global opposition to the US and its allies its global. The centrality of continued gas supply to Iran’s continued influence over Iraq has long been reflected in ongoing US attempts to steer Baghdad towards other options to meet its energy needs by imposing waivers of varying duration on these Iranian gas imports . In the end, none of Washington’s initiatives in this regard succeeded, with Iraq recently signing the longest-ever agreement with Iran to continue supplying it with gas for the next five years, as fully analyzed by OilPrice.com.

The other major threat to Washington’s ongoing strategy to gradually reassert its influence over Iraq by investing in new business and energy opportunities has been China’s dramatic projection of its power into the country (and Iran) in the vacuum left by the end of US. combat mission there in December 2021. The foundations for Beijing’s power were laid in 2019.Oil for reconstruction and investment’ agreement with Iraq, which brought billions of dollars of investment into the country in exchange for cheap oil for China. In view of the end of the US combat mission, China has extended this agreement in 2021 much wider and deeper. “Iraq-China Framework Agreement”as also detailed in my last book. One element was a preference given to Chinese firms for all future oil and gas contracts for sites in which Beijing had an interest, and another element was reduced prices for Iraqi oil and gas going to China. However, the 2021 deal went much further than oil and gas, allowing China great scope to build corollary infrastructure across the country. This included awarding China contracts in 2021 to build a civilian airport to replace the military base in the capital of oil-rich Dhi Qar governorate, a region that contains two of Iraq’s largest potential oil fields – Gharraf and Nassiriya. It was later agreed that the airport could later be expanded to become a dual-use civilian and military airport.

At the same time as this superpower maneuver was in full swing, little tangible progress was made in the development of Iraq’s gas sector by either country. Various announcements have been made over the years regarding the same projects but with different developers, most notably initially the statement in 2020 that Iraq’s Ministry of Petroleum had signed a natural gas capture agreement with oil services provider Baker Hughes to tap 200 million cubic feet per day (mmcf/d) of the Gharraf oil field (and neighboring ThiQar site, Nassiriya), plus other oil fields north of Basra. According to the Ministry of Petroleum at the time, the first phase would involve implementing the advanced modular gas processing solution at the Nassiriya Integrated Natural Gas Complex to dehydrate and compress flare gas to generate over 100 mmcf/day of gas. The second stage would involve expanding the Nassiriya plant to become a full LNG facility, which would recover 200 mmcf/d of dry gas, liquefied gas and condensate. All of this production would go to the domestic power generation sector, with Baker Hughes saying that tackling flared gas from these two fields would allow 400 megawatts of power to be supplied to the Iraqi grid. According to an accompanying statement by then-oil minister Jabbar Al-Luaibi, Iraq was also negotiating a similar gas capture deal for the state-owned Nahr Bin Umar field with Houston-based Orion Gas Processors. In addition, according to subsequent comments from Iraq’s South Oil Company, gas processing facilities were to be built at the Missan and Halfaya fields, which would have a combined capacity of 600 mmcf/d of gas when completed. In tandem with this, construction of gas processing units in West Qurna, Majnoon and Badra fields would also continue with total capacities of 1,650 mmcf/d, 725 mmcf/d and 85 mmcf/d respectively. The same announcements have since been made twice, with little progress overall.

Things might be different this time, of course. Abdul-Ghani and his team sat down last week during his visit to the US with several top firms that could do the required jobs if allowed to do so. These again included Baker Hughes, BP, KBR, Hunt Oil and Honeywell, among others. However, such meetings have been held regularly for years — usually around the same time that senior Iraqi figures then go to Washington to ask for money to save their budget. They also typically demand an extension of US waivers for continued Iraqi gas imports from Iran, provided they “soon end”. That said, given the ground it has lost to China in Iraq in recent years, the U.S. may be ready to play the game with Iraq again, regardless of progress in its gas sector, if it offers Washington a greater measure. the chance to reaffirm its influence in the country.

By Simon Watkins for Oilprice.com

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