U.S.’s New Hopes In Iraq Are Dashed As It Signs Longest Ever Gas Deal With Iran

• Iraq has always been well-aware of Washington’s strategy and has been keen to play along.
• Despite promises to stop importing Iranian gas, the Iraqi government has continued to receive financial support from Washington while extending its gas deals with Tehran.
• The sheer length of Iraq’s new gas deal with Iran means Baghdad can be under no illusion that Washington will regard it as a serious political statement of intent.

Given its huge oil and gas reserves, strategically critical location in the heart of the Middle East, and its initial welcoming of the U.S. after the fall of President Saddam Hussein in 2003, Iraq has long been at the top of Washington’s list of countries in the region with which it wants a deeper working relationship. In many ways, the U.S.’s end of combat mission in the country on 31 December 2021 was regarding by the White House as a temporary tactical retreat, before a new diplomacy-led relationship could be forged. Washington’s long-running financial aid to Iraq would be used as the basis for this diplomatic renaissance, which could be gradually leveraged into a weakening of the bond Iraq has with Iran  - and by association, therefore, with China and Russia too. A good starting point for this, the U.S. believed, would be the substitution of Iranian gas used by Iraq to keep its power grid going with supplies from elsewhere. Iraq has always been well-aware of Washington’s strategy and has been keen to play along, offering scraps of hope at regular intervals – the occasional engineering award to a U.S. firm, being a favourite – in exchange for hundreds of billions of dollars given it as a reward. Given this long-running game of bluff and double-bluff, it is exceptionally interesting to see that Iraq has now apparently thrown all caution to the wind and signed its longest ever deal with Iran to keep supplying it with gas for the next five years. So, what does it all mean for the U.S.? Related: The Energy Sector Is A No-Brainer, but There’s More to Come

The sheer length of Iraq’s new gas deal with Iran means Baghdad can be under no illusion that Washington will regard it as a serious political statement of intent. It may also see it as a significant betrayal of assurances repeatedly given by all the recent leaders of Iraq that in exchange for U.S. funding to help in this process, the country will move away from its dependence on Iran, in the first instance by reducing its imports of gas eventually to nothing. Baghdad knows perfectly well that the White House sees these ongoing gas imports by Iraq as a key means of funding for Iran. Only last week, Iran’s Deputy Oil Minister (and managing director of the National Iranian Gas Company), Majid Chegeni, stated that his country has earned US$15 billion from exporting around 52 billion cubic metres (bcm) of gas to Iraq since 2017. Baghdad also knows that Washington sees Iraq’s close cooperation with Iran on the two countries’ shared oil fields as the primary method in which Iran has been able to keep its economy intact over the years despite sanctions,  as analysed in depth in my new book on the new global oil market order. There are many shared fields between the two countries, but the most notable ones are Azadegan (on the Iran side)/Majnoon (on the Iraq side), Azar (Iran)/Badra (Iraq), Yadavaran (Iran)/Sinbad (Iraq), Naft Shahr (Iran)/Naft Khana (Iraq), Dehloran (Iran)/Abu Ghurab (Iraq), West Paydar (Iran)/Fakka/Fauqa (Iraq), and Arvand (Iran)/South Abu Ghurab (Iraq). The oil on the non-sanctioned Iraqi side of the border is often drilled from the same reservoirs as the oil drilled on the sanctioned Iranian side, sometimes even through long-distance horizontal directional drilling. Even if the Americans, Europeans, or any of their most trusted appointees stationed people at every single rig in every single shared field in Iraq they would not be able to tell if the oil coming out it was from the Iraq side or the Iranian side. So this has allowed for decades Iranian oil simply to be rebranded at source as Iraqi oil and shipped to wherever is required in the world. 

Up until now, the most shocking betrayal of the U.S.’s optimistic trust in Iraq in this context came from the ultra-smooth former Iraqi Prime Minister, Mustafa al-Kadhimi. He had danced the usual dance with the U.S. so well that in May 2020 Washington gave him even more money than before and the longest waiver ever given – 120 days – to keep importing gas from Iran, on the standard condition that Iraq stopped doing it soon. However, once the money had been banked and al-Kadhimi was safely back on home territory, Iraq signed a two-year contract – the longest period ever at that point – with Iran to keep importing gas from it. Washington then let the formidable then-State Department spokeswoman, Morgan Ortagus, out of her room, and she let fly. Not only was the next waiver to Iraq the shortest ever – 30 days – but also at the press conference in which it was announced, Ortagus let it be known that the U.S. was hitting 20 Iran- and Iraq-based entities with swingeing new sanctions. She cited them as being instruments in the funnelling of money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force, which was entirely true. She added that the 20 entities were continuing to exploit Iraq’s dependence on Iran as an electricity and gas source by smuggling Iranian petroleum through the Iraqi port of Umm Qasr and money laundering through Iraqi front companies, which was also true. She also said that Washington was extremely concerned that Iraq was continuing to act as a conduit for Iranian oil and gas supplies to make their way out into the world’s major export markets. This was true as well, as additionally analysed in my new book on the new global oil market order.

Knowing these things, Iraq appears with its latest five-year gas import deal with Iran to have finally closed the door on Washington’s diplomatic advances. It would not have done so without further assurances from Iran (and China and Russia) that its interests would be safeguarded in a stronger alliance with them. For the most important of these – China - Iraq and Iran represent a giant oil and gas station for it in the Middle East, which it can also use for geopolitical pressure purposes against the U.S. In Iran’s case, China has been successful so far into effecting this transformation from it as sovereign state into a Middle Eastern equivalent of Hong Kong (a Special Administrative Region of China) through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ , as first revealed anywhere in the world in my 3 September 2019 article on the subject and analysed in full in my new book on the new global oil market order. China is using the same sort of arrangement for Iraq, as evidenced in the equally all-encompassing ‘Iraq-China Framework Agreement’ of 2021. This in turn, was an extension in scale and scope of the ‘Oil for Reconstruction and Investment’ agreement signed by Baghdad and Beijing in September 2019, which allowed Chinese firms to invest in infrastructure projects in Iraq in exchange for oil.

Following this, Iraq approved nearly IQD1 trillion (US$700 million) for infrastructure projects in the city of Al-Zubair in the southern Iraq oil hub of Basra. The Al-Zubair announcement came around the same time as the awarding by Baghdad of another major contract to another Chinese company to build a civilian airport to replace the military base in Nasiriyah - the capital of the oil-rich DhiQar Province. This airport project, China announced, would include the construction of multiple cargo buildings and roads linking the airport to the city’s town centre and separately to other key oil areas in southern Iraq, which it now controls. In the later discussions involved in the 2021 ‘Iraq-China Framework Agreement’, it was decided unanimously by both sides that the airport could be expanded later to be a dual-use civilian and military airport. The military component would be usable by China without first having to consult with whatever Iraqi government was in power at the time, a senior source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com at the time.

By Simon Watkins for Oilprice.com

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