What's New

Iraq is committed to increasing investment in its gas sector as a key driver for economic growth, according to Oil Minister Hayan Abdul Ghani recently. There is certainly sufficient potential there for the idea to become reality, with official estimates being that Iraq has proven reserves of conventional natural gas amounting to 3.5 trillion cubic metres (Tcm) or about 1.5% of the world total, placing Iraq 12th among global reserve-holders. Around three-quarters of Iraq’s proven reserves consist of ‘associated gas’ – a by-product of oilfield development. However, Iraq did not revise its figure for proven gas reserves in 2010 at the time of the upwards revision of proven oil reserves. Well-founded figures for non-associated gas were not provided at the time – or since – from the Iraqi oil and gas authorities either. However, the International Energy Agency (IEA) estimates that ultimately recoverable resources will be much larger than the official estimates of 3.5 Tcm – its estimate is 8.0 Tcm, of which around 30% is thought to be non-associated gas.

There are also three very good reasons for it to further develop these reserves, beginning with cold, hard cash. For many years, Iraq has essentially been burning billions of dollars of lost revenue every year by flaring off the gas produced from its oil drilling. However, in 2017 Baghdad signed up to the United Nations and World Bank's ‘Zero Routine Flaring’ initiative aimed at ending the routine flaring of associated gas by 2030. At that point, Iraq was second only to Russia in the amount of gas it wasted in this way, flaring 17.8 billion cubic metres (Bcm) of gas each year. That said, after six years in the programme, Iraq was still burning off 17.7 Bcm, although its position in the league table of global gas flaring offenders slipped to third, following a surge in flaring in Iran, which took second spot after Russia. This figure has reportedly fallen since the advent of TotalEnergies’ US$27bn four-pronged deal in Iraq, of which an initial investment of around US$10 billion is focused on the ‘Gas Growth Integrated Project’, as analysed in full in my latest book on the new global oil market order. The basic aim of this is to capture associated gas and use it instead for domestic power needs and later for exports to generate cash for the budget.

The second reason is that by developing its gas potential, Iraq could finally build a world-class petrochemicals sector, in the first instance the Nebras Petrochemical Plant (NPP). This would require sustainable gas volumes of up to an average 28.3 million cubic metres per day (mcm/d) so that ethane can be extracted on a reliable basis, providing sufficient volume for a viable petrochemicals plant of this scale. Ethane is preferable in this regard to naphtha (as Iraq’s Oil Ministry has often suggested) given that associated gas streams have a high concentration of ethane and when it is processed it yields the very-bankable ethylene with few by-products (mainly fuel gas) to process and manage. Additionally, the use of ethane would reduce the capital required for construction and minimise the complexity of the logistics and distribution requirements. Ethane was used in the development of Saudi Arabia’s master gas system that was also founded on associated gas, which was then fractionated and supplied as primary feedstock to the flagship Jubail Industrial City. The minimum volume required to lay the foundation for the advancement of Nebras was achieved as early as 2019/2020 in Shell’s gas project with the Basrah Gas Company. However, concerns over a lack of transparency in the contracts from various international oil companies interested in advancing the project over the years has hampered progress on the site. Nonetheless, according to several feasibility reports, a world-class petrochemicals sector in Iraq would require around US$40-50 billion to develop but would yield exponentially more than that in pure profits over the years.

The third good reason for Iraq to develop its associated gas rather than flare it off is that it will reduce its energy dependence on neighbouring Iran and encourage a surge of investment from U.S. firms into the bargain. As part of its relationship reconstruction efforts in Iraq as local resistance to its extended military presence in the country increased, the U.S. granted Iraq rolling exemptions to continue to use Iranian energy supplies. These continued even after Washington imposed further sanctions on such supplies following the U.S.’s unilateral withdrawal from the ‘Joint Comprehensive Plan of Action (colloquially, ‘the nuclear deal’) in May 2018. Iraq’s exemptions were granted on the very specific understanding between Washington and Baghdad that it would gradually taper down its energy imports from its sanctioned neighbour, as also fully detailed in my latest book on the new global oil market order. However, from 2018 to now, Iraq has continued to import around 40% of its power needs through gas and electricity from Iran and last year even recently signed the longest ever deal (five years) to keep doing so.

The U.S.’s response to these continued breaches of trust on Iraq’s part have ranged from anger to fury, with a notable recent example at the time of the signing of the five-year deal being the imposition of a raft of sanctions on Iraq itself. Washington cited several Iraqi persons and institutions as being instruments in the funnelling of money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force, which was true. It added that the 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. And it concluded that it 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.

Having said all of this, and despite the presence of several Western firms still in Iraq – notably TotalEnergies and BP – the recent focus of Iraq’s discussions on further exploiting its gas resources has been on Russia, a source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com last week. The main reason for this is not just because it continues to allow Iraq to play the Global North off against the Global South for its own benefit, but also because of the synergies that would become available with Russia’s huge gas (and oil) presence in neighbouring Iran. In the context of Tehran, over four weeks running from the middle of last September, a flurry of high-level meetings between very senior Russia and Iranian figures occurred, including Russian Prime Minister Mikhail Mishustin, and Secretary of the Russian Federation Security Council Sergei Shoigu. The focus of these was to ratify key elements of the 20-year deal -- ‘The Treaty on the Basis of Mutual Relations and Principles of Cooperation between Iran and Russia’ – which in several key respects develops key policies of enhanced cooperation laid down in previous agreements between China and Russia on the one side and Iran -- and Iraq -- on the other, as analysed in full in my latest book on the new global oil market order.

A key part of the energy element of the new Russia-Iran deal that has application in neighbouring Iraq as well is the greater coordination of efforts on exploration, development, production, and marketing of gas (and oil) as delivered through regional pipelines and in LNG form. Russia will continue to split the first right of refusal on all Iran’s key gas (and oil) sites with China according to each country’s broader strategic interests in the region in which each site is located. The same would occur on a formalised basis in Iraq, although it has effectively been taking place in recent years albeit on a more ad hoc level. In fact, China alone currently manages over a third of Iraq’s proven reserves and two-thirds of its production, according to industry figures. A broader motive to increase the day-to-day synergies of Russia’s and China’s operations in Iran to Iraq is to greater coordinate the marketing and sales efforts for gas and oil produced in the two neighbours under the auspices of the Gas Exporting Countries Forum (GECF). Long-touted as a potential ‘Gas OPEC’, the GECF already controls about 71% of global gas supplies, 44% of its marketed production, 53% of its gas pipelines, and 57% of its LNG exports.

By Simon Watkins for Oilprice.com