Addressing political differences key to Iraq's energy sector revival

The country risks being drawn into conflicts not of its making, involving regional and global players

A power plant smokestack in Basra. Iraq, the second-largest oil producer within Opec, has room to grow output substantially. AFP

It’s a rare forum these days that can bring together senior figures from the US, Russia, Turkey, the Iraqi federal government, including groups close to Iran, and the two main parties from the Kurdistan Region of Iraq.

The Erbil Forum last week did that, but it also illustrated just how hard it will be to find common ground between all parties involved — and that is before throwing China into the mix.

There was a general feeling that, amid the war in Ukraine and the strategic competition with Beijing, Washington had lost interest in Iraq.

Yet the country remains pivotal to global energy. The second-largest oil producer within Opec, Iraq has room to grow output substantially and is a critical part of replacing any losses from Russia, if and when the group decides to open the taps. The Iraqi Kurdistan region’s gas resources could power the rest of Iraq and export to Turkey, providing Europe with a partial alternative to Moscow.

It is the fourth-largest Arab country both by population and greenhouse gas emissions. Its people languish in heat and darkness, while its renewable energy potential remains virtually untouched.

The geopolitical games are multilayered. Iraqi affairs have gradually improved since the darkest days of the civil war in 2006-2007 and the onslaught of ISIS in 2014.

But the country now risks being drawn into conflicts not of its making, involving two regional players, Iran and Turkey, and three outside powers, the US, Russia and China.

Two weeks ago, the federal government finally concluded six petroleum contracts waiting for signature since the fifth bid round in 2018.

Three were with Sharjah-based Crescent Petroleum, which already operates Iraqi Kurdistan’s largest gasfield, Khor Mor, in partnership with Abu Dhabi-listed Dana Gas and three European companies.

The gas production from these blocks could be crucial in improving electricity supply and in supplementing Iraq’s costly and unreliable imports from Iran.

This was doubly interesting.

Firstly, rocket attacks on Khor Mor in recent months were interpreted as warnings to Kurdish parties to fall in line with Tehran’s plans for the new government in Baghdad, but since they occurred again after government formation, they may also be seen as a threat not to pursue independent gas exports in competition with Iran in Iraq and Turkey.

Secondly, the Federal Ministry of Oil had warned companies not to operate in the Iraqi Kurdistan region, after a February 2022 supreme court ruling that its oil and gas law was unconstitutional. The judgement was seen as politicised, but still has been enough to scare off several leading oil service companies and possibly to discourage traders from renewing arrangements to purchase Kurdish oil.

Nevertheless, Prime Minister Mohammed Shia Al Sudani showed himself ready to sign with one of the most prominent operators in the semi-autonomous region.

Iraq's Prime Minister Mohammed Shia Al Sudani addressing the final signing ceremony of the contracts for the latest licensing round for oil and gas border exploration blocks and fields in Baghdad. AFP

A long-running arbitration wending its way through a Paris-based tribunal is expected soon to find in favour of Baghdad versus Ankara in declaring that Turkey breached a treaty when it allowed the Kurds to send oil through the Iraq-Turkey pipeline. Ankara won’t pay up the mooted multiple billions of dollars in damages, but whatever compromise is reached could also cast aside Kurdish interests.

Three of the other new field development contracts went to Chinese companies. They have become increasingly dominant in Iraq as others have packed their bags. If ExxonMobil leaves the West Qurna-1 field in favour of a Chinese partner, as is widely expected, China would operate more than half of Iraqi oil output. Chinese credit lines help underpin lending to Iraqi infrastructure, and Baghdad recently announced it was open to conducting some trade in yuan.

Russian corporations — Rosneft, Gazprom Neft and Lukoil — also have a strong position. Rosneft paid and loaned up to $3 billion to the Iraqi Kurdistan region for oil sales, fields and pipelines just ahead of Erbil’s referendum on independence in September 2017. They are unlikely to expand their position, though, given the difficulties of access to finance, banking and technology imposed by the Western sanctions.

The Iraqis themselves are aware of the danger of over-dependence on Beijing, but their investment-unfriendly policies block off alternatives. Recently, France’s TotalEnergies reportedly nearly walked away from a multibillion package to develop oil, gas, water injection and solar power.

A last-minute change of heart in Baghdad has brought them back to the negotiating table. However, there is not a great appetite from the other major international oil companies to do more, given their decarbonisation trajectories and the spread of opportunities elsewhere.

Iraq could manage external powers better if its own house were in order. But a federal law that would resolve management of the Kurdish petroleum sector, how oil should be sold and the revenues divided, appears out of reach. Despite talk of progress, the outline sounds like several previous deals that fell apart almost as soon as concluded.

The Kurdish position, meanwhile, is weakening, because of the widening split between the two main parties and even within the smaller of them, the Patriotic Union of Kurdistan. The colourful Bafel Talabani, leader of the PUK, appeared at the forum wearing his trademark mountain boots and, at the conclusion of his interview, theatrically tore off his tie, reportedly borrowed from his urbane brother Qubad.

He has previously said that gas exports to Turkey, from fields located in PUK-controlled areas, would take place over his “dead body” if the people’s interest were not fairly consulted.

But with oil resources running down, major gas projects are the main hope for new revenues and political importance.

Iraq thus illustrates in microcosm the dilemmas that many smaller and fragile states will encounter as Sino-Russo-American relations become increasingly uncompromising.

Stronger non-aligned countries can cleverly play off one great power against another. Weaker ones can easily be torn apart — bad news not just for their people, but for global energy security.

Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis