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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iraq's Untapped Gas Potential: A Turning Point in Global Energy?

  • Iraq's reliance on Iranian energy imports has political and economic implications, including U.S. tensions.
  • New gas projects with foreign firms could add substantially to Iraq’s gas production, reducing dependence on imports.
  • Despite past failures in developing its gas sector, Iraq's vast untapped reserves hold potential for significant global impact.
Iraq

Iraq has potentially huge gas reserves but its failure so far to properly develop them has led to three key problems for itself and the global energy markets. First, it has left the country dependent on neighbouring Iran for up to 40 percent of its energy requirements, which are imported through gas and electricity supplies. This exacerbates the already tight control that Tehran has over Baghdad through its networks of political, economic, and military proxies. Second, these imports from Iran have remained a major source of friction between Iraq and the U.S. for years, deterring many intended investments in the country. Third, it has meant Iraq frequently experiencing catastrophic budget crises, despite its vast and still largely untapped oil and gas resources. However, last week Oil Minister Hayan Abdel-Ghani said that several major projects awarded to foreign firms recently would add nearly 3 billion cubic feet a day (bcf/d) – around 517,000 barrels of oil equivalent per day - to Iraq’s gas production and would open the way for new projects to be undertaken as well. Whether any of this will turn out this way remains to be seen, given Iraq’s checkered history in this area. 

One of these key gas projects is part of the four-pronged US$27 billion project originally agreed between France’s TotalEnergies and Iraq’s government in 2021, but long-delayed due to attempts by the Iraqis to change the terms of what had already been agreed, as analysed in depth in my new book on the new global oil market order. The first part of the deal features an initial investment of around US$10 billion focused on the ‘Gas Growth Integrated Project’. The basic aim of this is to capture gas associated with oil field development and, rather than burn it off as had largely been the case before, use it instead for domestic power needs and later for exports to generate cash for the budget. These efforts and others connected to the idea of utilising and/or monetising the previously flared associated gas have seemingly been encouraged by the latest in Iraq’s long line of prime ministers – Mohammed Al-Sudani – who commented recently that Iraq will halt gas imports from Iran within two years after the megaprojects to develop its gas fields take shape. This is exactly what former prime minister, Mustafa al-Kadhimi, said when he went to Washington in May 2020 to ask for more money to prop up the corruption-crippled economy than before and for the longest waiver ever given (120 days) to keep importing gas and electricity from Iran. The funding and the waiver were granted by the U.S, but once the money had been banked and al-Kadhimi was safely back on home territory, Iraq signed a two-year contract – the longest ever – with Iran to keep importing gas and electricity from it. At that point, the U.S. understandably lost its cool, imposing swingeing new sanctions on 20 Iraq- and Iraq-based entities that were complicit in various sanctions-busting activities, which they were – as also detailed in full in my new book

It should also be remembered that as recently as this July, the very same Prime Minister Mohammed Al-Sudani announced that Iraq intended to pay with its own oil supplies for the gas and electricity that it imported from Iran. Iraq had no choice but to undertake this enormously geopolitically insensitive action because – he added, with no apparent sense of irony at all - U.S. sanctions on Iran had made it difficult for Iraq to make payments through traditional banking routes. Consequently, and with the three other elements in the four-pronged deal equally subject to the ever-changing whims of the Iraqi government, it is fair to say the US$27 billion deal looks precarious. And so do the other major gas deals alluded to earlier by Abdel-Ghani. As also analysed in my latest book, these deals have been announced several times before, following which very little has happened. Around the same time in 2017, as Iraq pledged to adhere to the United Nations and World Bank ‘Zero Routine Flaring’ initiative - aimed at ending by 2030 the routine flaring of gas produced during the drilling of oil – its Oil Ministry also announced that it had signed a deal with U.S. engineering giant Baker Hughes to capture gas associated with oil from the Gharraf and Nassiriya oil fields. At the time, Iraq flared the second largest quantity of gas in the world (after Russia) – some 17.37 billion cubic metres (bcm). 

These plans have since been reannounced at various points, although some of the participants have been changed at different stages. The first stage of the Nassiriya plan (and a similar plan was made for Gharraf) was to have involved an advanced modular gas processing solution being deployed at the Integrated Natural Gas Complex in Nassiriya to dehydrate and compress flare gas to generate over 100 million standard cubic feet of gas per (mmscf/d) of gas. The second stage would have involved the Nassiriya plant being expanded to become a complete natural gas liquid facility that would recover 200 mmscf/d of dry gas, liquefied gas and condensate. All this output would go to the domestic power generation sector, with Baker Hughes having stated previously that addressing the flared gas from these two fields would allow for the provision of 400 megawatts of power to the Iraqi grid. The project, had Baker Hughes been allowed to just get on with it, would have taken around 30 months to be implemented. Similar development plans could then have been rolled out for other major gas capture sites, which back in 2018 and 2020 included Halfaya (300 mmscf/d), and Ratawi (400 mmscf/d) in the first instance. Synergies could then have been developed with the only major gas project that has made significant progress in Iraq over the years, the Shell-run Basra Gas Company (BGC) project, as also analysed in depth in my new book on the new global oil market order. As it was, little progress on any of these projects was made and it remains to be seen whether the latest comments from Al-Sudani and Abdel-Ghani will change that.

Perhaps the most extraordinary element in the long-running farce of Iraq developing its gas sector, is that it genuinely has the potential to become a huge global player in the business. Iraq’s proved natural gas reserves total around 131 trillion cubic feet (Tcf), the 12th largest in the world, and there may be a lot more, as the rate of exploration for gas reserves has not matched that for oil. Additionally, the extra gas resources it may have that are associated with further oil development may also be massive. As also analysed in full in my new book, even using the most conservative figures, Iraq had produced only around 15-20 percent of its ultimately recoverable oil resources back in 2017 when it signed up for the ‘Zero Routine Flaring’ initiative’, compared with 23 percent for the Middle East as a whole, according to the International Energy Agency (IEA). This figure for Iraq has not significantly changed since then. Further exploration is highly likely to add substantially to the proven reserves figure over the coming decades, particularly given the high success rate of drilled prospects in Iraq. For example, less than half of the potential hydrocarbon-bearing geological prospects identified by geophysical means in Iraq have been drilled but, of these, oil has been found in 65 percent of them. In sum, the IEA puts the level of ultimately recoverable crude resources at around 246 billion barrels (crude and natural gas liquids), with associated gas likely to feature heavily in these.

By Simon Watkins for Oilprice.com

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