Iraq Pivots To Washington for Support as Chinese Money Dries Up

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 is seeking more U.S. investments to reduce gas flaring and boost gas production.
• Despite abundant gas reserves, Iraq continues to rely on Iran for gas imports, frustrating the U.S., while deepening its ties with China through preferential oil and gas agreements.
• China’s largesse when it comes to throwing money at its client states such as Iraq and Iran has markedly diminished.

Iraq’s Deputy Petroleum Minister, Hamid Younes al-Zobai, spent last week in Washington spearheading his country’s latest attempts to inveigle more money out of the U.S. The focal point of his efforts was the perennially-used pitch that increased investment from Western energy firms would finally enable Iraq to reduce its level of gas flaring and boost its gas production. Implicit within the same spiel that has been used every year for more than two decades by the various prime ministers and oil ministers of Iraq is the threat that if such money is not forthcoming then Iraq will continue to deepen its already extremely close relationship with Iran (upon which it remains dependent for gas supplies for its power needs) and China (with which it has already firmly aligned itself through a series of all-encompassing cooperation agreements). In short, it’s a good ole-fashion’d shakedown, folks – yeehaw!

Of course, there are several reasons of genuine merit why it is in Iraq’s best interests to reduce its flaring and increase its gas production. First, it signed up to the ‘Zero Routine Flaring initiative’ back in 2017 to stop burning associated gas off while drilling oil. At the time, Iraq was second only to Russia in the amount of gas it wasted in this way, burning off 17.8 billion cubic metres (Bcm) of gas each year. In 2023, it burned 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 the second spot after Russia. Second, not using its own gas for power generation or to monetise by exporting it means draining its treasury to pay Iran for gas imports. Third, this reliance on Iran has caused the U.S. to withhold direct financial flows to the country and has caused several Western companies to cancel planned projects there. Fourth, shortfalls in its own resources to generate power has meant frequent power outages across the country through the years, which have been the spark for popular protests and violence. And fifth, a major increase in gas supplies in Iraq would enable it to finally roll-out long-delayed petrochemicals plans that would generate tens of billions of dollars in revenue from these value-added products.

Related: How Saudi Oil Policies Could Cripple Russia’s War Effort

Moreover, Iraq has plentiful gas supplies which can affect all these changes, as analysed in full in my new book on the new global oil market order. Official estimates are that Iraq’s proven reserves of conventional natural gas amount to 3.5 trillion cubic metres (Tcm) or about 1.5% of the world total, placing Iraq 12^th 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 percent is thought to be non-associated gas.

Nonetheless, despite these abundant resources Iraq has repeatedly decided to do nothing meaningful to change the circumstances relating to reducing its gas flaring or to increasing its gas production. Instead, it continues to make gas import deals with Iran for the same amount each year – equating to around 40 percent of its total requirements – with the most recent one being for a period of five years, much to the fury of the U.S., as reported by OilPrice.com. It also continues to sign addenda to the all-encompassing relationship deals it has with China that enable Beijing to incrementally keep tightening its influence over the largest collective oil and gas resources in the world – Iraq and Iran. With the U.S.’s 2020 end of combat mission in view, China extended the 2019 ‘Oil for Reconstruction and Investment’ agreement with Iraq into the much broader and deeper 2021 ‘Iraq-China Framework Agreement’, as also detailed in my latest book. One element of this was a preference to be given to Chinese firms on all future oil and gas contracts for the sites in which Beijing had an interest, and another element was discounted pricing on Iraqi oil and gas headed to China. As it now stands, more than a third of all Iraq’s proven oil and gas reserves and over two-thirds of its current production are managed by Chinese companies, according to industry figures.

That said, China’s largesse when it comes to throwing money at its client states such as Iraq and Iran – and all the others with which it has initiated such a relationship under the guise of its ‘Belt and Road Initiative’ (BRI) – has markedly diminished since Covid struck it at the end of 2019. Although Beijing is happy to keep taking oil from Iraq at a discount price, the amount of money flowing into BRI projects in Iraq (that can also be ‘redirected’ to other areas that some senior Iraqi politicians see fit) is not what it was, a senior oil industry source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com last week. This is not to say that senior Iraqis would not have made their annual trip to Washington making the same promises that will never be kept – it is just that the amount has been pitched higher this time around.

Washington’s long-running playbook for dealing with countries in which it still has a strategic interest, but which regularly lie to it and cannot be bothered to even change the basics of the deception – as with Pakistan and its relationships with various terror groups in the past – is to simply restate its list of conditions upon which it will meaningfully cooperate and then see what happens. According to a senior figure working closely with the U.S.’s sanctions complex for Iraqi and Iranian issues exclusively spoken to by OilPrice.com last week, the most recent Iraqi visitors to the city were told that the U.S. would certainly consider meaningfully working with Iraq in the field of oil and gas provided that certain conditions were met. “We apply a risk/reward matrix centred on three factors to ensure that our [U.S.] guys [firms] are not compromised either through association with corrupt practices or through unfair business practices that may lead to negative outcomes for them [the firms] and us [the U.S.],” he underlined. Indeed, as repeatedly highlighted by the independent non-governmental organisation, Transparency International, in its ‘Corruption Perceptions Index’ Iraq has been described as: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” It added: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery.” It concluded: “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.”

The first of the factors central to Washington is ‘cohesion’, which is aimed at ensuring that the Iraqi state itself guarantees that each key element in a project will be completed in full and in order, regardless of whether there is a change of government during the lifetime of a project. The second factor is ‘security’, which relates not just to the safety of any U.S. personnel on the ground but also to the clear legal and accounting soundness of the basic business and legal practices involved in any agreement. And the third factor is ‘streamlining’, which means that the core decision-making and work-implementation processes involved in completing any project function seamlessly throughout the lifetime of a project. As such, added the Washington source, any major agreements signed by big U.S. oil and gas firms in Iraq will have to be agreed in full by U.S. lawyers, all accounts will have to be checked by U.S. accounting firms, working processes will have to be checked by U.S. project consultancy firms, and security issues of any nature will have to be worked through and then monitored on an ongoing basis with U.S. security organisations.

By Simon Watkins for Oilprice.com

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