Iranian, Saudi Interests Conflict in Iraq’s Energy Market

The lack of infrastructure for supplying electricity makes Iraq a battleground for energy between regional rivals Iran and Saudi Arabia

Energy suppliers are trying to use energy exports as a key factor in shaping foreign policy and their relations with neighbors and other countries. Iran and Saudi Arabia as two key members of the Organization of Petroleum Exporting Countries (OPEC) have their own priorities and interests in the region. Their opposing interests have forced them to support opposing sides in regional tensions, such as in Syria and Yemen. U.S. sanctions against the Iranian energy sector have given an opportunity to OPEC and non-OPEC members to export more oil to the regional and world market to take Iran’s stake in the market.

Presently, Iran exports electricity to neighboring countries and according to Iran’s 20-year development, by 2025 they must prepare all the required infrastructure to become a regional electricity hub. Iraq is the biggest importer of Iranian electricity. Both countries signed an agreement in 2005 to export Iranian electricity to Iraq.

Iraq, with huge oil reserves, has a problem in generating the required electricity and must import from its neighbors. The Iraqi government can only supply 68 percent of its electricity in normal conditions. With increasing temperatures, especially in the summer, this ineffective capacity is severely reduced. Iraq faces a shortage of 5,000 megawatts (MW), although several power plants are under construction, but the electricity demand of the country is increasing by 7 percent annually. Since the first Gulf War in 1990, the power generation infrastructure has been abandoned in Iraq. This situation worsened after the invasion of Iraq in 2003. After the end of the Gulf War, Iraq tried to attract foreign technology and financial capital to recover oil production capacity and construct an electricity grid. The Daesh problem and its negative effect on Iraqi national security is another major factor that has led to Iraq becoming an electricity importer.

Iran and Iraq have signed an agreement over exporting 150 MW of electricity to Iraq annually. This agreement is extended every year. By Feb. 11, 2019, Iran extended electricity to Iraq for one more year. Iraq imports 120-130 MW annually. But due to sanctions and Iraq’s financial problems, Iraq was not able pay for importing electricity. According to Iranian officials, Iraq is interested in paying its debt and is looking for a way to send money to Iran. Homyon Hairi, deputy to the Iranian minister of energy, believes that, “There is a positive outlook in this regard, which is to be followed by joint executive working groups.”

Iran’s gas customers

Iraq and Turkey are Iran’s major natural gas buyers. Iraq began importing gas from Iran in late June 2017, with imports of about 14 million cubic meters per day, with Turkey importing about 30 million cubic meters a day. Iran plans to export 25 million cubic meters of gas daily to Baghdad and to transfer gas to Basra province.

As mentioned earlier, Iraq is unable to pay for electricity and natural gas from Iran. According to the latest statics released by the Iranian Ministry of Oil, Iraq must pay about $2 billion to Iran over natural gas and electricity imports. It is expected to solve this problem during Iranian President Hasan Rouhani’s visit to Iraq. Rouhani has shown interest in exporting more electricity to Iraq; though he has not mentioned the methods they may be able to agree upon in paying the electricity and natural gas debt to Iran. It seems both presidents have not agreed on this issue.

Last summer, Iran cut the electricity flow to Iraq due to high domestic consumption, according to Reza Ardakanian, Iran’s minister of energy. Iran’s neighboring country has a wide range of demands, partly through Iran’s transmission lines, adding: “We are in constant touch with Iraq, and just a few days ago, the Iraqi Minister of Electricity was here and talked to us.” Stopping the export of electricity from Iran has aggravated the problem of electricity in Iraq, causing massive street protests, especially in Shiite cities, against the central government as well as against Iran.

Iran cutting electricity provides an opportunity for Saudi Arabia to use energy investments in Iraq to increase its political influence. According to the spokesman for the Ministry of Electricity, Musab Sari al-Mudaris, Saudi Arabia has agreed to launch a solar power plant with a production capacity of 3,000 MW in northern Saudi Arabia near the Iraqi border, and each megawatt of electricity will be offered to Iraq at $21, which is equal to one-quarter of Iran’s electricity exports to Iraq. Saudi Arabia has not only put electricity prices at a quarter of Iran’s electricity prices but also exported three times more exports than Iran. Saudi Arabia continues to compete with Iran in the economic sphere by building a solar power plant in Iraq and selling electricity to that country.

After Rouhani’s visit to Iraq, Saudi Commerce and Investment Minister Majid bin Abdullah Al Qasabi visited Iraq and met with Iraqi officials. According to an official statement by the Iraqi president, Iraq is interested in establishing a mechanism for joint economic interests with regional countries, especially Saudi Arabia. Last year, the Iraqi government showed interested in developing and boosting its relations with Arab countries. Iraq and Saudi Arabia signed an agreement in 2017 to form a coordinating council.

Saudi Arabia is seriously trying to expand its ties with Iraq with the aim of limiting Iran’s influence in Iraq, with at least a counterbalance to it. Of course, the United States has also contributed to this strengthening of relations between Iraq and Saudi Arabia, especially as the United States, like Saudi Arabia, wants to reduce Iran’s influence in the region. But the point is that all this competition will be beneficial for Iraq.

The Saudi perspective

Saudi Arabia is pursuing its main goal by strengthening its ties with Iraq: First, the decline of Iran’s influence in Iraq, and the other in attracting Iraq to its Gulf-Qatari axis. Saudi Arabia has concluded that the policy that has taken place in Iraq since 2003 is wrong and that Iraq is a fundamental part of the Arab world’s geography.

Saudi Arabia and Iraq have not cooperated for more than 27 years, and Saudi Arabia is rapidly seeking to expand ties. In the sacred city of Najaf in Iraq, Saudi Arabia seeks to establish a consulate and have a rich presence among the Shiites as well. According to Iraqi officials, this consulate will be set up soon. Cooperation between Saudi Arabia and Iraq is at an early stage and in the meantime, meetings have been held at high levels in which Saudi Arabia has pledged a $100 billion investment in Iraq and to rebuild Sunni cities such as Fallujah, Ramadi, Tikrit and Mosul.

The Saudis have focused their efforts in the province of Basra, because this province is considered the richest Iraqi province. With the implementation of large projects in the province, the Saudis hope to compete with the Iranians or even overcome them.

Iraqi officials hope that Saudis will use their money in road construction projects and re-activate the Iraqi oil export pipeline to the

Red Sea, which has been closed since 1990.

A new alliance

For about six months, officials and senior officials from Saudi Arabia and Iraq have been meeting, and there are ongoing efforts to work together and reach a new alliance. Saudi Arabia is using investments in multiple countries’ infrastructure and energy sectors to boost its political influence in the country and also trying to affect foreign policy orientation. Saudi Arabia plans to invest in an area of 1 million hectares in the livestock and poultry industry of Iraq.

The Saudi initiative, described as an opportunity to confront the influence of Iran in Iraq, is the result of efforts by former Iraqi Prime Minister Haider al-Abadi to balance ties with his neighbors. The project was initiated by the Saudi Arabian Cooperation Council and Iraq, which was founded in October 2017.

Saudi Crown Prince Mohammed bin Salman – on his visit to India, Pakistan and China – tried to use investments in these countries’ energy sectors to reduce Iran’s role in these countries’ energy basket and energy security. Iran and Saudi are Shiite and Sunni countries looking to expand their sphere of influence in the region. Iraq with both Sunni and Shiite people is very important for Iran and Saudi perspectives and it seems that in coming years both countries will be using all instruments to increase their presence in Iraq and reduce the influence of other countries in Iraq. Saudi Arabia, with huge financial capability, will be able to play an important role in Iraq post-Daesh. Iraq needs billions of dollars for construction post-Daesh and is an opportunity for Saudi Arabia to increase its influence. Iran never wants to lose its key role in Iraq and in Iraqi Shiite groups. Iran also wants to have a role in Iraq in the post-Daesh period.

Geopolitical competition between Iran and Saudi Arabia will continue in Iraq. Saudi Arabia and other Arab countries are seeking to increase their influence in Iraq, and new U.S. sanctions against the Iranian oil sector could provide such an opportunity. However, coping with Iranian influences from politics to trade is difficult.

//www.dailysabah.com

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Saudi Arabia’s Plan to Lure Iraq From Iran

A Saudi economic delegation visited Iraq on April 3, seeking to promote the expansion of diplomatic and economic relations between the two countries—and to give Iraq an alternative to growing Iranian ties. 

This was the second meeting of the Iraqi-Saudi Coordination Council, which held an initial meeting in 2017. The Saudis offered a $1 billion loan for the creation of a sports complex to be known as Sport City. The council also announced the establishment of consular centers for visa services in Baghdad and two other Iraqi cities.

These positive developments in Iraq-Saudi relations are the latest chapter in a new Riyadh approach to Iraq which began in late 2015. Until then, Saudi Arabia refused to recognize the Shia-dominated government that came to power in Baghdad after the 2003 US invasion. From 2003 – 2014, Saudi Arabia tried to confront Iran’s influence in Iraq and the rise of pro-Iranian Shia political groups by supporting the Sunni insurgency against Iraq’s central government. 

This policy did not succeed, and, in a major turnabout, Saudi Arabia re-established diplomatic relations with Iraq in late 2015. Diplomatic contacts and economic relations between the two countries have increased since then, as other Gulf Cooperation Council (GCC) countries such as Kuwait and the United Arab Emirates have also improved their relations with Iraq. In the meantime, the main objective of Saudi policy toward Iraq remains the same: reducing Iran’s influence in Iraq in the context of the ongoing Iran-Saudi proxy war.

Iraq’s economic, diplomatic, and religious ties with Iran have grown despite efforts by the United States and Saudi Arabia to diminish them. In 2016, Iran was the third largest exporter to Iraq after China and Turkey, and accounted for 16 percent of Iraq’s total imports. Iranian religious tourism to the Shia holy cities of Najaf and Karbala is the leading source of tourism revenue for Iraq. Even more significantly, Iraq, despite its own considerable energy sector, imports a large amount of natural gas and electricity from Iran. Iran also enjoys significant political influence in Iraq and has developed close ties with several Shia and Kurdish political factions.

From the Saudi point of view, the most important dimension of Iraq’s dependence on Iran is energy imports. Saudi Arabia is planning to provide Iraq with alternative sources of energy in an effort to reduce this dependency, but this will not be an easy task. Iraq, despite huge oil reserves, faces a shortage of electricity and relies on imported electricity from Iran to cover a portion of this shortage. Domestic electricity production in 2018 was 16,000 MWs and it also imported 1,200 MWs from Iran. Yet Iraq still faces an electricity shortage that in hot summer months exceeds 5,000 MWs.

Furthermore, in addition to direct electricity imports, Iraq relies on natural gas from Iran to produce a portion of its domestic electricity. As a result, about one third of Iraq’s electricity is produced directly or indirectly through energy trade with Iran.

In 2018, Iraqi officials intensified their efforts to find alternative sources for electricity imports for several reasons. First, Iraq has come under pressure from the United States to abide by US economic sanctions on Iran and reduce its energy dependency on that country. Given how hard this is to achieve in the short run, Washington has repeatedly provided waivers but with reluctance, emphasizing that these exemptions are temporary. The energy imports from Iran are also risky because in periods of high domestic demand, Iran might reduce or even stop energy exports to Iraq. This happened in the summer of 2018 and led to severe power outages in southern Iraq. These shortages caused massive street protests, especially in the southern port city of Basra, against the Iraqi central government and Iran.

Iran defended its reduced electricity exports to Iraq because of rising domestic needs, but Iraqi officials criticized this policy and decided to approach Saudi Arabia as a potential alternative source. This development has provided Saudi Arabia with an opportunity to use energy trade to gain more political influence in Iraq. In June 2018, the spokesman for Iraq’s Ministry of Electricity, Musab Sari al-Mudaris, announced that Saudi Arabia had agreed to launch a solar power plant with production capacity of 3,000 MWs in its northern region near the Iraqi border for electricity exports to Iraq at a discounted price. Although there has been a dispute about the accuracy of this report, the potential for energy cooperation between Saudi Arabia and Iraq remains strong and the United States is also putting diplomatic pressure on Iraq to expand these ties in order to reduce Iraq’s dependence on Iran.

The warm reaction of the Iraqi government to Saudi initiatives does not imply that Iraq will abandon its economic and diplomatic relations with Iran. Rather it appears that Iraq is trying to create a balance in its relations with Iran and its Sunni Arab neighbors. This balanced approach was evident in Iraqi President Barham Salih’s April 2 interview with Asharq Al-Awsat in which he emphasized that “Bolstering relations with the Kingdom is an integral part of our vision for what Iraq’s ties should be like.” He added, “It is in our interest to enjoy good relations with Iran based on common interests.” 

In light of Iraq’s ethnic mix and the proportional representation of Sunnis, Shias, and Kurds in its political institutions, remaining neutral in the Saudi-Iran proxy war will serve Iraq’s interests well. Hence it should come as no surprise that after his April 6 visit to Tehran, Iraq’s Prime Minister Abdul-Mahdi plans to visitRiyadh later this month.

www.atlanticcouncil.org

Nader Habibi is a Henry J. Leir professor of practice in the economics of the Middle East at the Crown Center for Middle East Studies in Brandeis University. He focuses on economic conditions of Iran and GCC countries. Follow him on Twitter: @NaderHabibi2.

Omid Shokri Kalehsar is a Washington-based senior energy security analyst, currently serving as a visiting research scholar in the Schar School of Policy and Government at George Mason University. Omid is a PhD Candidate in international relations at Yalova University, Turkey. Follow him on Twitter: @ushukrik.

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Iran’s Rouhani In Iraq: A new era in bilateral ties?

The potential for trade and economic growth between Iran and Iraq is enormous but global rivalries are a constant wrench in the relationship.

Rouhani’s official visit to Iraq comes at a time when Iran is experiencing multiple regional and foreign policy challenges partly resulting from the imposition of new sanctions against Iran’s energy industry. According to Iraj  Masjedi, the Iranian Ambassador to Baghdad, the purpose of Rouhani’s trip is to strengthen relations between the two countries in political, economic, cultural, and social matters.

With the intention of reducing the effects of the US sanctions against Iran’s energy sector and circumventing sanctions through its neighbours, Iran is interested in boosting its relations with Iraq.

Developing and expanding relations with neighbours is Iran’s first foreign policy priority.  Rouhani’s visit to Iraq is his first visit to Iraq as a president. Considering the good relations between Iran and Iraq, this trip could have taken place years ago, but political problems have led to a long-delayed trip.

In his meeting with Iraqi President Barham Salih, Rouhani mentioned the vital role Iraq has in Iran’s regional policy and both countries intentions to boost relations in coming years.

Barham Salih told Iranian journalists that Iraq wants to help the Iranian people reduce the suffering from US sanctions. He said that Iraq and the region would be affected by sanctions, but they are working to minimise the impact – which is quite a strong message to the US government.

Five memorandums of understanding were signed regarding industry, mining, trade, a railroad project, business visas, healthcare cooperation and oil.

Energy exports to Iraq

Iran exports electricity to neighbouring countries, and plans to become a regional electricity hub in the long term. Iran exports between 200 and 250 megawatts of power to Iraq, Afghanistan, and Pakistan. Currently, Iraq is the largest importer of electricity from Iran. The official electricity export agreement between Iran and Iraq was signed in 2005 and has annually renewed. According to the latest deal between the two sides, Iran exports 120 megawatts of electricity annually to Iraq through three transit routes in Basra, Diyaleh, and Amarah.

According to Mohammad Hosseini, the secretary-general of the Iranian-Iraqi joint business room, Iran has $2 billion demand for energy exports to Iraq. Under the contract with Iraq, Iran’s exports of electricity to Iraq are done in dollars, and gas exports to Iraq are done in euros. But after the US invasion, Iraq was not able to pay the price of electricity and gas imported from Iran based on either of these two currencies.

Electricity exports to Iraq have become a thorny issue in bilateral ties. Last summer Iran cut electricity exports to Iraq due to a lack of a domestic network. Some analysts believe that despite the lack of debt payments, Iran intends to continue to export energy to Iraq for political and economic reasons.

Iran’s failure to export power to Iraq has paved the way for Saudi Arabia to invest in the construction of a 3000-megawatt solar power plant in Iraq to increase its presence in the Iraqi energy market with the intention of reducing Iran’s share of the market in the long run and consequently achieve its political goals in Iraq.

Saudi Arabia has offered to sell electricity from the plant for a quarter of Iran’s electricity exports to Iraq. Iranian officials during Rouhani’s visit to Iraq shows their interest to supply Iraqi natural gas and electricity, but there is no significant progress on paying back their debts to Iran.

Iraq’s greater production in shared oil fields

Iran and Iraq share several joint oil and gas fields. The shared fields encompass Azadgan, Azar, NaftShahr, Dehloran, Paydar Gharb, Yaran, Yadavaran, and Arvand.

The Azadegan and Azar oil fields are the most important of the lot. Iraq has been able to extract and produce more oil than Iran and Iraq designed a new oil contract which favoured foreign companies. US sanctions mean Iraq is unable to attract foreign capital and technology to regain its oil and gas production capacity.

Currently, Iraq produces twice as much as Iran from the shared fields.

Iraq, from 2005 to 2017, has been able to increase its oil production from about 1.7 million barrels per day to 4.7 mpbd. In June 2018, Iraq handed over the development of several oilfields near the Iranian border to the UAE’s Alhelal company.

Meanwhile, Iran has also taken steps to increase production in the western part of Karoun, some of which are shared with Iraq. It should be noted that the amount of reserves in the section of Iran, which includes the Azadegan (North and South), and Yaran (north and south) fields, is estimated to be at 64 billion barrels.

The United States has repeatedly called on the Iraqi authorities to reduce energy imports from Iran, but Iraqi officials have declared how hard it’s been to find an alternative.

The two countries potential bilateral cooperation has tremendous commercial potential, but the current complications have prevented Iranian firms from benefiting from the Iraqi market.

Turkish firms have been more successful than their Iranian counterparts in the Iraqi market as the Turkish government supports all the businessmen and the private sector in the Iraqi market. The volume of trade between the two countries is currently at $12 billion, and the two countries are trying to increase the trade volume in the medium term to $20 billion.

Iran intends to use the Iraqi dinar in its exchanges with Iraq instead of the dollar. The possibility of using the Iraqi dinar can have a direct impact on the economic areas in the border regions.

Iran seemingly intends to play a role in rebuilding Iraq, but the presence of Iran at every level is a threat to US interests in the region. Iraqi officials have repeatedly expressed their desire for good relations with their neighbours, primarily for economic growth. The withdrawal of US forces from Iraq has increased Iran’s political influence in Iraq. The active presence of Iran in all political, economic, and military sectors in Iraq can be considered as a trump card against the United States.

www.trtworld.com

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What do Middle East Energy Markets Hold in Store for 2019?

 

In 2018, the oil market showed great instability, with no apparent balance between supply and demand.

One of the main factors influencing oil prices may be regional political developments, given that the Middle East supplies 70 percent of the world’s oil. In 2018, geopolitical tensions, financial developments, and supply-and-demand triggered a change in the price of oil on the global market, while US President Donald Trump’s tweets also sparked a tense atmosphere.

 

But 2019 is expected to see further fluctuations in the oil market. In recent months, OPEC members have not been able to reach lasting agreement, despite long days of talks, so let’s take a look at the economic situation of major producers – Saudi Arabia, Iran and Iraq.

The latest IMF report explores the developments in the oil market, saying that the economic outlook for oil-exporting countries is largely dependent on the “uncertain future” of oil prices.

The United States has meanwhile unilaterally imposed sanctions on Iran and predicted such measures would “potentially reduce Iranian oil production and exports dramatically for at least the next two years”.

The IMF predicts oil prices will continue to rise to $60 a barrel by 2023. The Organization of Petroleum Exporting Countries (OPEC) and its allies, which account for 55 percent of world oil production, have faced a challenge in their role stabilising the oil market. Saudi Arabia, which has a significant surplus capacity, could not implement the necessary production reductions to maintain oil prices at $70 per barrel.

 

Most OPEC members benefit from oil prices between $70 and $90 – enough to cover domestic budgets, but not so high as to drive investment in alternative fuel sources and technologies, especially renewable energy and electric vehicles.

 

What will happen in Middle East energy markets in 2019? What affect will any price rise/fall have on ordinary people and on regimes?


Iran

One of Tehran’s principal development goals is to achieve a production capacity of 5.7 million barrels of crude oil and gas liquids per day, with a production capacity of more than one billion and 300 million cubic metres of natural gas per day.

 

Exports of Iranian crude oil and gas condensate in the past round of sanctions under the former US administration dropped by about 1.2 million barrels per day over two years, but this did not have a significant impact on oil prices, as the world was facing a surplus of oil supplies between 2014 and 2016.

One of the most important factors in pricing is the state of market equilibrium in terms of the possibility of substituting oil from the market due to sanctions, oil prices and geopolitical factors. Since the reintroduction of US sanctions, Iran’s oil exports have fallen.

Although the export figures for Iranian oil are not officially announced, according to estimates from various sources, during the months of August and September 2018 Iran’s export of crude oil and gas condensates declined between 300 and 600 thousand barrels per day. According to estimates from secondary sources, in the same time, Iran’s crude oil production fell by about 450,000 barrels per day.

 

The US government initially announced that it would attempt to reduce Iran’s oil exports to zero by November 4, 2018, but eventually it was forced to exempt eight countries that imported oil from Iran.

However, there is likely to be a market surplus this year, and Iran’s oil exports will certainly be affected. But, if oil prices continue to decline, the likelihood of a drop in supply from OPEC and non-OPEC producers is high.

 

Iran under sanctions is unable to play an important role in the global oil market and cannot produce or export more oil.

Any increase in the oil price is therefore in favour of Iran. Iran had been producing about 2.5 mbpd in recent months but was expected to drop to about 1 mbpd when January 2019 figures are more fully estimated.

By October 2018, Iran had begun to sell oil in energy exchanges within the private sector to sell more on the regional market. But energy exchanges have not been as successful as expected, and Iranian oil exports will not increase. Since domestic production is in short supply, the export of goods is not affected by the exchange rate – which has a more visible and noticeable effect on Iran’s imports, as all four of Iran’s main economic sectors, agriculture, industry, oil and services, import capital goods, and intermediaries are dependent on the outside world – so rising oil prices can lead to lower prices for domestic products, or falling oil prices lead to higher prices for domestic products.

 

Saudi Arabia



For decades, Saudi Arabia has traditionally played the role of swing producer in the oil market; a producer with enough spare capacity that can quickly change its oil production at no extra cost. But for a long time, Saudi Arabia has not played such a role: the rise in US oil production, along with a host of other factors, has led to a surplus of demand for the oil market, and as a result, oil prices have fallen.

OPEC’s expectation was to cut oil production to increase prices. At OPEC’s annual meetings, Iran, and most OPEC countries, made the same request, while Saudi Arabia and its allies offered another target that was not so wrong: protecting market share.

In October 2014, Saudi Arabia took a different policy towards the oil market and refused to reduce its crude oil production in line with maintaining oil prices, which initially caused great damage to the country’s economy.

 

Saudi Arabia has spent billions of dollars of its own money in order to maintain its share in the global oil market, as well as to force OPEC member and non-member countries to reduce oil production. Speculation about the fall of oil was ripe during this period: Did Saudi Arabia target Iran and Russia, or plan to reduce oil production from unconventional shale, or was there some other story?


Iraq

The proposed $111.9 billion budget, sent to the Iraqi parliament in October, estimated the export of crude oil at 3.8 million barrels per day at $56 per barrel. The proposed budget will increase spending by 23 percent and a deficit of $ 22.8 billion.

This budget will not cover the country’s reconstruction after many years of war, with about 1.8 million people still yet to return to their homes. Part of Mosul, Iraq’s second city, has been destroyed, like many other cities and villages that were in the hands of IS.

 

The Iraqi Ministry of Planning estimates that the country needs about $88 billion to rebuild. In February 2018, donors at the Kuwait Summit promised $30 billion in loans and investment assistance to fund a portion of this budget, but little progress was made. Meanwhile, protests, unemployment and public service disruption have plagued , the southern resource-rich region in recent months.

The interruption of electricity is also a national problem in Iraq and in the south, drinking water is unclean.

The Iraqis chose their new government in early 2018, but the government is influenced by political factions similar to those that have run the country over the past 15 years. Legislators have rejected the draft budget and are demanding a new budget based on an estimate of the level of oil price closure, and more allocated funding for public investment.

While global attention is focused on the destruction caused the wars in northern and western Iraq and protests in the south, the budget crisis is also a major concern for Iraqis living in more stable regions.

 

Half-finished construction projects have remained at a standstill all over Baghdad for years. But after the government declared war on IS, the general budget fell. When oil prices recovered in 2017, the government began to pay instalments on construction mega-projects, but only for those that were mostly completed.

Payments are once again waiting for the outcome of budgetary negotiations. The attempt to diversify the economy has been halted by the rise of domestic political conflicts and corruption, as well as war and instability.

“Our destiny depends on oil. When the [price] goes down, our blood pressure will rise,” said one Iraqi analyst.

During the most recent period of sanctions, Kirkuk oil – along with Russian oil – became an alternative to Iranian oil because of a similar chemical profile. In 2019, Kirkuk oil’s share in Iraq oil exports is likely to increase – and this will not be good news for Iran.

As the global oil market simultaneously sees an increase in Russian, American and Saudi oil production, as well as the maintenance of the quota of Iranian oil with a slight decrease in the market, the world’s oil production rate has  surpassed demand and has become one of the factors behind the fall in commodity prices.
Major oil producers will be hit by declining prices because most of the revenue of these nations comes from oil. Iran under sanctions will unable to sell more, but if prices are to rise, Iran’s damaged economy would stand to benefit.

The US decision to grant exemptions to some of Iran’s oil buyers changed the market dynamics that were already under pressure from three major manufacturers: the US, Russia and Saudi Arabia.

Non-OPEC oil production could yet increase from 1.5 to 2.2 million barrels per day in 2019, with shale being behind the rise. The sharp rise in US production will be a major hindrance to rising oil prices in 2019.

Oil demand will grow between 0.9 and 1.5 million barrels per day in 2019. This figure was between 1.1 to 1.5 million barrels per day in November’s poll. In terms of demand, the main factor is the question of how far economic growth will slow in 2019 and how much lower the demand for oil will be in the coming year.
The IMF expects to see oil prices rising in 2019, which could improve the economic conditions of the Gulf states. Given the trade and economic constraints with Tehran, the economies of Iran’s neighbours will not be subject to a re-imposition of sanctions. Oil-related sanctions against Iran do not make good business sense for foreign companies looking to make investments, and this will make the economic situation worse for Iran.

The worrying global economic downturn has furthered the negative impact of a surplus supply. China’s and India’s oil imports have not yet been enough to offset consumption in other developing countries.

Although the shale gas revolution has serious potential for increased production, and Russia has voluntarily reduced its quota over the past few years by cooperating with OPEC, now Moscow is also seeking to increase production.

 

However, Saudi Arabia, as the third actor in the triangle of production increases, can not, in the long run, increase production beyond its capacity, because its ability to produce a glut of oil is dependent on the Iranian oil industry failing.

Perhaps Moscow and Washington could make headway in this situation for a while, but in Riyadh that potential is basically absent. Of course, it also should be noted that although the global oil market is likely to contract as prices fall, Moscow also must slow its domestic revenues to increase its income – but this cannot be predicted within a specific time frame.

 

www.alaraby.co.uk/

 

 

 

 

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Rethinking future Iran-Iraq energy relations

Iraq is perhaps Iran’s most important neighbour, sharing the country’s longest border and deep demographic, religious and ideological ties – not-to-mention vast reserves of natural resources, which may provide the basis of a convergence of geopolitical interests to the benefit of both.

Given the recent history of these two former warring nations, the two countries today enjoy surprisingly good political relations. With huge oil reserves, both Iran and Iraq are members of OPEC and have enjoyed a long presence on the world oil markets.

They share a number of fields, with the majority of Iraqi oil fields located inland and thus easy to extract, and the majority of Iranian oil and gas fields located offshore and therefore much tougher and costlier to exploit.

There is no doubt that the establishment of security and political stability are important in ensuring the success of efforts to expand the production capacity of both suppliers. Iran has frequently stated that is ready to develop oil and gas in cooperation with Iraq. Iranian energy firms are equally interested in Iraq’s energy infrastructure and fields.

Thus, the future holds much in the way of regional cooperation, with possible areas for this outlined below. Events and developments in other areas may, however, hold sway over their realisation.

 

Iran-Iraq Natural Gas pipeline 


In 2013, Iran signed an agreement to export gas to Iraq. Iranian gas is exported to Iraq to supply the country’s power plants. With seven million cubic metres of gas being pumped to Baghdad daily, Iraq has become the second-largest export destination for Iranian gas.

Iran has agreed to export 40-65mcm to Baghdad and Basra every day for the next six years, both countries having invested around $2.3 billion in the construction of a shared pipeline.

When the pipeline was launched in 2017, Iran began to export 14mcm to Iraq daily, a figure it looks forward to increasing. The project is a short-term one which involves exploration in gas-rich areas of Iraqi Kurdistan. Iraq is also interested in using Iranian capital and technology and experience in the LPG sector.

Iraq is planning to use LPG in cars and housing. Iran and Iraq have signed an agreement allowing Iranian companies to assist in the construction of Iraqi LPG facilities. This cooperation comes in various forms, including distribution, provision of vehicles, and the construction of hospital and residential complexes. The volume of gas exports to Iraq are set to increase to 35 million cubic metres per day with the launching of a sixth natural gas pipeline.


Oil swap


Iran is transporting Kirkuk Oil to the consumer market. In past years, Iran has used Turkey’s Ceyhan port to transit oil to markets. In December 2017, both countries signed a trade agreement promising to swap a daily amount of 60,000 barrels of Iraqi oil from Kirkuk.

This gives Iran the opportunity to have a greater sphere of influence in Iraq, with all the economic benefits this ensures, providing an opportunity for the central government in Iraq to exert greater control over Iraqi territory.


Electricity export


Iran exports electricity to its neighbours and is planning to become a regional electricity hub in the long term. Iran exports between 200 to 250 MW to Iraq, Afghanistan, and Pakistan. Iraq takes a large share of this, with around 120-130 MW electricity. Iraq is the biggest importer of electricity from Iran.

 

Last summer, Iran cut off electricity to Iraq due to a shortage in its domestic market. Some analysts have said that Iran aims to export to Iraq for political as well as economic reasons. In September 2018, Iraq was unable to pay its electricity bill to Iran, and has a debt of around $1.4 billion outstanding to Tehran.

After Iran cut the power, Baghdad signed an agreement with Saudi Arabia to make up the shortfall. Saudi Arabia reportedly offered to build a 3000-megawatt solar plant in Saudi Arabia and sell electricity to Iraq at a quarter of the price of Iranian supplies, though Iran plans to increase imports in general despite this loss of custom. Domestic supplies remain, however, a priority.

Joint Oil fields 


Iran shares a number of oil and gas fields with Iraq. Iran’s inability to attract foreign capital and technology to recover oil and gas production capacity in light of sanctions particularly affects its inability to benefit from the shared fields.

By 2017, Iraq was involved in the extraction of nine shared oil and gas fields at Azadeghan, Yadavaran, Azar, NaftShar, Behloram, Paydar Gharb and Arvand.

At present, Iraq produces twice as much as its neighbour from shared fields. Iraq has managed to increase its oil production from around 1.7 million barrels a day to 4.7 million barrels per day in the time between 2005 and 2017, making it easier for foreign companies to enter the market and add to investment.

In June 2018, Iraq ceded the exploration and development of several oilfields near Iran to the UAE’s al-Hilal company. At the same time, Iran launched measures aiming to increase production in the West Karun block, some of which is shared with Iraq. It should be noted that the amount of reserves in the Iranian section, which includes the Azadegan fields (north and south), Yaran (north and south), is estimated at 64 billion barrels.

Russian companies currently have had an active presence on the Iraqi side of these fields, yet the long delay in Chinese companies launching work on the Yadavaran and North Azaghan Fields has caused Iran to miss out on effectively exploiting these reserves.


US withdrawal from the JCPOA


The US withdrawal from the JCPOA Iranian nuclear deal and its re-implementation of fresh sanctions against Iran’s energy sector provides a good opportunity for Iraq to increase its oil and gas production from shared fields and take the lead over Iran’s share of the consumer market.

It can be expected that after new sanctions are introduced, foreign oil firms will be unable to invest in the Iran energy sector at all.

Iraq is also increasing its share of the Turkish oil market and is likely to overtake Iran in this regard. Furthermore, if Iran is no longer able to enjoy electricity deals with Iraq, Saudi Arabia will take its share in Iraq’s electricity market.

Given the political tensions between Iran and Saudi Arabia, Riyadh is no doubt ready to take effective steps to exploit the resulting shortfall. Iran needs to revise its regional policy and resolve its current tension with its neighbours if it is interested in using energy exports as an instrument of foreign policy.

The US withdrawal will not only delay Iran’s plans to increase production in the common oil fields, but will provide Iran’s neighbours with an opportunity to encroach on what little progress Iran has made, and take a larger share of the regional and global oil markets.

Shared resource pools can act as a good basis for regional diplomacy to improve and expand ties with neighbouring countries. However, the continuation of sanctions will mean increasing the withdrawal of neighbouring countries from common areas and reducing Iran’s presence on the global market.

 

https://www.alaraby.co.uk/english/comment/2018/10/19/rethinking-future-iran-iraq-energy-relations

 

 

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