Iraq asks Washington for support as Chinese money runs out

Iraqi Deputy Petroleum Minister Hamid Younes al-Zobai spent last week in Washington spearheading his country’s latest attempts to lure more money from the United States. At the heart of his efforts was the repeated claim that increased investment by Western energy companies would finally allow Iraq to reduce the extent of gas flaring and increase its gas production. The same talk used every year for more than two decades by Iraq’s various prime ministers and oil ministers includes the threat that if this money is not provided, Iraq will further deepen its already extremely close ties with Iran ( on which the country remains dependent for gas supplies to meet its electricity needs) and China (with which it has already established strong ties through a series of comprehensive cooperation agreements). In short, it’s a good old-fashioned shakedown, folks – yeehaw!

Of course, there are several real reasons why it is in Iraq’s best interest to reduce flaring and increase gas production. First, the company signed the “Zero Routine Flaring” initiative back in 2017 to stop the burning of associated gas during oil production. At the time, Iraq was the second largest waster of gas in this way after Russia, burning 17.8 billion cubic meters (bcm) of gas each year. In 2023, it burned 17.7 billion cubic meters, although its position in the ranking of global gas flaring contributors fell to third after Iran, which took second place after Russia, recorded an increase in flaring. Second, if the country does not use its own gas to generate electricity or does not monetize it through exports, this means that its treasury is being emptied to pay Iran for gas imports. Third, this dependence on Iran has resulted in the US withholding direct financial flows to the country and has led to several Western companies canceling planned projects there. Fourth, the lack of domestic resources to generate electricity has led to frequent power outages across the country over the years, leading to protests and violence among the population. And fifth, a significant increase in Iraq’s gas supplies would allow it to finally implement long-delayed petrochemical plans that would generate tens of billions of dollars in revenue from these value-added products.

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Furthermore, Iraq has abundant gas reserves that can influence all of these changes, as analyzed in detail in my new book on the new global oil market order. Official estimates put Iraq’s proven reserves of conventional natural gas at 3.5 trillion cubic meters (Tcm), or about 1.5% of the global total, ranking Iraq 12th^Th among global reserve holders. Around three-quarters of Iraq’s proven reserves consist of “associated gas” – a byproduct of oil field development. However, Iraq did not revise its proven gas reserves figure in 2010 at the time of the upward revision of proven oil reserves. No substantiated figures for unassociated gas were also provided by the Iraqi oil and gas authorities at that time or since. However, the International Energy Agency (IEA) estimates that the ultimate recoverable resources will be much larger than the official estimate of 3.5 trillion cubic meters – its estimate is 8.0 trillion cubic meters, of which about 30 percent is unassociated gas.

Yet, despite these abundant resources, Iraq has repeatedly chosen not to do anything meaningful to change the circumstances surrounding reducing its gas flaring or increasing its gas production. Instead, the country continues to sign gas import contracts with Iran every year for the same amount – equivalent to around 40 percent of its total needs – most recently with a term of five years, much to the annoyance of the US, reports OilPrice.com. The country also continues to sign amendments to the comprehensive relationship agreements with China, allowing Beijing to gradually further expand its influence over the world’s largest collective oil and gas resources – Iraq and Iran. With an eye on the end of the US combat mission in 2020, China extended the year 2019.“Oil for reconstruction and investment” Agreement with Iraq into the much broader and deeper year 2021 “Iraq-China framework agreement”as described in detail in my latest book. One element of this was the preferential treatment of Chinese companies in all future oil and gas contracts for locations in which Beijing had an interest, and another element was discounts on Iraqi oil and gas sent to China. According to industry figures, more than a third of all Iraq’s proven oil and gas reserves and over two-thirds of its current production are currently managed by Chinese companies.

However, China’s generosity in throwing money at its client states such as Iraq and Iran – and all others with which it has established such a relationship under the guise of its Belt and Road Initiative (BRI) – has increased significantly and has declined since Covid struck at the end of 2019. Although Beijing is happy to continue buying oil from Iraq at a discounted price, the amount of money goes to BRI projects in Iraq (which can also be “diverted” to other areas reserved for some senior citizens). Iraqi politicians believe it is not what it was, a senior oil industry source who works closely with Iraq’s oil ministry said exclusively OilPrice.com last week. That’s not to say that senior Iraqis didn’t make the same promises on their annual trip to Washington that are never kept – it’s just that the amount was higher this time.

Washington’s long-standing playbook for dealing with countries in which it still has a strategic interest but which regularly lie to it and don’t bother to change even the basics of the deception – such as Pakistan and its relationships with various terrorist groups in the past – is to simply repeat the list of conditions under which it will meaningfully work together and then see what happens. According to a senior figure who works closely with the US sanctions complex on Iraq and Iranian affairs, who was spoken to exclusively OilPrice.com Last week, recent Iraqi visitors to the city were told that the United States would certainly consider meaningful cooperation with Iraq on oil and gas, provided certain conditions were met. “We apply a risk-reward matrix that focuses on three factors to ensure our [U.S.] guys [firms] are not affected by any association with corrupt practices or by unfair business practices that could lead to negative consequences for them [the firms] and us [the U.S.]“, he emphasized. In fact, the independent non-governmental organization Transparency International has repeatedly highlighted this in its report “Corruption Perception Index” Iraq has been described as: “One of the countries with the worst corruption and governance indicators, with corruption risks posed by a lack of experience in public administration, weak ability to absorb the influx of aid, sectarian problems and a lack of political will to combat it corruption will be exacerbated. Corruption efforts.” It continues: “Massive embezzlement, procurement fraud, money laundering, oil smuggling and widespread bureaucratic bribery have led the country to the bottom of international corruption rankings, fueled political violence and hindered effective state building and service delivery.” It came to concluded: “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions significantly limit the government’s ability to effectively curb increasing corruption.”

The first factor central to Washington is “cohesion,” which aims to ensure that the Iraqi state itself guarantees that each key element of a project is completed fully and properly, regardless of whether there is a change of government during the life of a project. The second factor is “security,” which refers not only to the safety of U.S. personnel on site, but also to the clear legal and accounting soundness of the basic business and legal practices associated with an agreement. And the third factor is “streamlining,” which means that the core decision-making and work execution processes required to complete a project function smoothly throughout the life of the project. Therefore, the Washington source added, any major agreements signed by major U.S. oil and gas companies in Iraq would have to be fully approved by U.S. lawyers, all accounts would have to be reviewed by U.S. accounting firms and work processes would have to be reviewed checked by US project consulting firms and security issues of any kind must be continuously processed with US security organizations and then monitored.

By Simon Watkins for Oilprice.com

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