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Iraq Turns to Washington for Help as Chinese Funding Decreases

by Krystal

Last week, Iraq’s Deputy Petroleum Minister, Hamid Younes al-Zobai, visited Washington to seek increased investment from U.S. energy firms. His primary argument centered on the idea that more Western investment would help Iraq reduce gas flaring and increase gas production. This annual plea, echoed by various Iraqi leaders for over two decades, carries an implicit warning: without U.S. support, Iraq may strengthen its ties with Iran and China, both of which are crucial for its gas supply and economic partnerships.

Iraq has compelling reasons to curb its gas flaring and boost production. In 2017, the country joined the “Zero Routine Flaring Initiative,” committing to end the practice of burning off associated gas during oil drilling. At that time, Iraq ranked second globally for gas flaring, wasting about 17.8 billion cubic meters (Bcm) annually. Although it burned off 17.7 Bcm in 2023, it fell to third place, surpassed by Iran. Additionally, relying on imported gas from Iran burdens Iraq’s finances, leading to direct U.S. sanctions and prompting Western companies to withdraw from planned projects. Iraq’s energy shortfalls have resulted in frequent power outages, sparking public protests and unrest. Increasing domestic gas supply could also facilitate delayed petrochemical projects, generating substantial revenue.

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Despite having significant gas reserves—estimated at 3.5 trillion cubic meters (Tcm), or about 1.5% of the world’s total—Iraq has not made substantial progress in reducing flaring or enhancing production. Approximately 75% of these reserves consist of associated gas from oil fields. While Iraq has not updated its gas reserve figures since 2010, the International Energy Agency (IEA) estimates the recoverable resources could be as high as 8.0 Tcm.

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Iraq continues to import gas from Iran to meet about 40% of its energy needs, recently securing a five-year deal, much to the displeasure of the U.S. Additionally, Iraq has deepened its cooperation with China through agreements that grant preferential treatment to Chinese companies in future oil and gas contracts. Currently, over a third of Iraq’s proven oil and gas reserves and more than two-thirds of its production are managed by Chinese firms.

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However, Chinese financial support for such partnerships has decreased since the onset of COVID-19 in late 2019. Although China continues to purchase discounted oil from Iraq, investment in Belt and Road Initiative (BRI) projects has diminished. A senior oil industry source informed OilPrice.com that while Iraqi officials continue to visit Washington with promises, the expectations for funding have increased this time.

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The U.S. has a well-established approach for engaging with countries of strategic interest that often mislead it. It tends to reiterate its conditions for cooperation and waits to see if they are met. A source involved in U.S. sanctions regarding Iraq and Iran revealed that U.S. officials expressed a willingness to collaborate with Iraq in oil and gas, contingent upon certain conditions.

Key factors include ensuring project completion regardless of government changes, guaranteeing security for U.S. personnel and solid legal practices, and streamlining decision-making processes. As a result, any agreements involving major U.S. firms in Iraq will require thorough review and approval from U.S. legal and accounting firms, as well as ongoing monitoring by U.S. security organizations.

According to Transparency International, Iraq ranks among the worst countries for corruption. Issues such as embezzlement, bribery, and lack of political will hinder effective governance. Political interference in anti-corruption efforts and insufficient resources further complicate the situation.

Iraq’s strategic choices in energy partnerships and investments will have significant implications for its economic future and regional stability.

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