US rescinds sanctions waiver for Iraq's energy imports from Iran

Washington will not 'allow Iran any degree of economic or financial relief'

High-voltage electrical transmission towers in Kirkuk, northern Iraq. AFP

The US refused to renew a 120-day sanctions waiver for Iraq’s energy imports from Iran, raising the prospect of severe electricity shortages in coming months as demand increases with the rising temperatures.

The country, Opec’s second-largest oil producer, is not self-sufficient in gas or electricity and relies on Iran to make up part of the shortfall. It has been granted such waivers for Iranian gas and electricity imports for more than a decade, including under US President Donald Trump's first administration.

“The US Department of State did not renew the waiver for Iraq to purchase Iranian electricity,” a State Department representative told Reuters.

“This decision is in line with National Security Presidential Memorandum 2 and ensures we do not allow Iran any degree of economic or financial relief,” said the representative.

The previous 120-day waiver, granted under former president Joe Biden, expired on Saturday and Mr Trump’s administration had signalled its intention not to renew it as part of its “maximum pressure” campaign, which aims to curb Iranian influence in the region and prevent Tehran from exploiting Iraq's financial system.

Farhad Alaaldin, foreign affairs adviser to Iraqi Prime Minister Mohammed Shia Al Sudani, said Iraq was working towards energy independence but needed more time.

“Over the past year, the government has taken significant steps to expand domestic production, invest in renewable energy projects, and enhance partnerships with international companies to modernise infrastructure and increase generation capacity,” Mr Alaaldin told The National.

“Major projects are under way to develop natural gas resources, expand power plants, and integrate alternative energy sources, with a clear vision of achieving long-term sustainability. However, these developments require time and continued co-operation with global partners,” Mr Alaaldin said.

“Any disruption to existing energy arrangements before viable alternatives are fully realised could slow this progress and impact millions of Iraqis who depend on uninterrupted electricity supply.”

Iraqi efforts show progress

Iranian electricity and gas imports, which accounted for up to 40 per cent of Iraq's power supply in 2023, are essential to meet the country's energy needs, particularly during the extreme heat of summer when demand reaches its highest levels.

“Despite new energy links and ongoing efforts to expand domestic production, Iraq may find it difficult to completely replace Iranian energy supplies in the short term,” said Umud Shokri, senior visiting fellow at George Mason University and energy strategist.

“Iraq has made significant progress in diversifying its energy sources and reducing its reliance on Iranian imports, which could help mitigate the impact of potential sanctions,” Mr Shokri told The National.

Following a three-year pause, Turkey restarted electricity exports to Iraq last year, and Iraq now intends to double its imports from Turkey to 600 megawatts.

Last year, Iraq also signed an agreement with Turkmenistan to import 20 million cubic metres of gas daily to generate electricity.

Iraq began importing electricity from Jordan through a 340km line in March last year, and aims to connect to the Gulf Co-operation Council's (GCC) power grid by late this year.

“To navigate this crisis, Iraq must also implement financial reforms and demonstrate efforts to align with US policies, including cracking down on alleged illicit oil exports to Iran,” said Mr Shokri.

Iraqi fuel oil, occasionally mixed with Iranian oil, is being illegally exported to conceal the true origin of the Iranian product, media reports say.

“Diplomatic engagement will be crucial, emphasising the potential political instability and social unrest caused by energy shortages,” Mr Shokri said.

Falling reliance

Iraq’s imports of Iranian gas and electricity have shrunk in recent months as Iran struggles with high heating demand during the winter.

Iran's energy contribution to Iraq has fallen from 10 gigawatts to 1.5 gigawatts, due to Iran cutting two-thirds of electricity exports and 85 per cent of its committed winter gas supply, according to a report published this week by the Washington Institute for Near East Policy (Winep).

Iran's energy cut-off last year revealed Iraq's potential for energy independence, the report said.

“Iraq only lost 5.2 gigawatts of power last winter because it had not made preparations to replace Iranian supplies by burning greater quantities of available crude and fuel oil, plus light diesel oil,” the report said.

“Even then, Iraq did salvage 3.3 gigawatts with no advance notice just by switching parts of three plants to Iraqi liquid fuel.”

Winep said that if Iraq were ready for such a transition this summer, up to 8.1 gigawatts of the 8.8 gigawatts of Iranian-powered generation could be shifted to liquid feedstock, with most of it already available in Iraq’s inventory.

One possible reason fuel oil has not been redirected to power generation is that Iraq’s pro-Iranian militias have earmarked it for smuggling operations to international markets, the report added.

Kurdistan exports

The US may have seen the sanctions waiver review as a way to increase pressure on Baghdad to allow Kurdish crude oil exports via Turkey, Reuters reported on Friday, quoting sources.

A 970km pipeline transports Iraqi crude oil, primarily from the Iraqi-Kurdish Kirkuk area, to export terminals at Ceyhan on Turkey's Mediterranean coast.

Last week, an association of eight international oil companies operating in Iraq’s Kurdistan region said they would not resume oil exports through Ceyhan, despite an earlier announcement from Baghdad that the restart was imminent.

The companies want guarantees that their current contractual agreements will be honoured.

In March 2023, Turkey suspended the flow of about 450,000 barrels of Iraqi oil daily through the Ceyhan pipeline, of which 370,000 bpd originated from the Kurdistan region.

The stoppage came after an arbitration court ruled in favour of Baghdad, saying Ankara had breached a 1973 agreement when it allowed the Iraqi Kurdistan administration to pump without the consent of the federal government in Baghdad.