Iraq’s lingering power crisis costing $40 billion a year
It will take longer than the government hopes to fix the country’s electricity problem
If the Iraqi government’s provision of basic energy to its people were to be a factor in April’s parliamentary election, you wouldn’t blame voters for just sitting at home in the dark. Generation capacity is rising and things are better than they were. But even in Baghdad and Tikrit, the two towns given preferential access to electricity under Saddam Hussein, supply is poor and brownouts common. Most of Iraq still doesn’t have adequate connection to the dilapidated grid. Outside Kurdistan, only Iraqis rich enough to afford a private diesel-fired generator can guarantee a full day’s supply.
On top of the violence and terrorism still hurting parts of the country, the lack of electricity provision is another daily reminder that for all Iraq’s potential, it remains mired in post-war mess - and the federal government seems unable to solve it. It is a drain on the economy, too. Hussein Al-Shahristani, the deputy prime minister with oversight of the energy sector, said recently that poor power supply was costing Iraq $40 billion a year.
With parliamentary elections scheduled for the end of April, and the brutal summer heat approaching, the government has pledged to fix the problem. Karim al-Jumaili, the minister of electricity, told a conference of investors in Dubai earlier this year that his ministry would tender for 21 gigawatts (GW) of new generating capacity by the end of next year. Most of this is capacity is already under review, he said, and 6 GW has been approved.
This is part of a broader plan, published as the Integrated National Energy Strategy (INES) last year, to build 40 new plants and add 22 GW of capacity by 2016. Demand for power is rising quickly thanks to soaring oil production and a swelling population. Iraq posted a 35-year oil-output high of 3.6 million barrels a day (b/d) in February. Production dipped in March, says the International Energy Agency (IEA). But as infrastructure bottlenecks ease in the south the government expects output capacity to hit 4m b/d by the end of the year. A longer-term goal is for 9m b/d by 2020. Oil production growth is supporting expansion of the economy - the IMF said in March that GDP would rise by more than 6% this year - and, in turn, spurring demand for power.
Electricity supply is growing, too, but not quickly enough to keep up with the need. Generation capacity has reached almost 13 GW (including about 4 GW in Kurdistan), but remains about 30% beneath demand of around 15.5 GW, says Luay Al-Khatteeb, head of the Iraq Energy Institute and a fellow at the Brookings Institute, a think tank.
There are also big gaps between capacity and output. Last September, a report for the Special Inspector General for Iraq Reconstruction, a US body established to assess post-war Iraq’s rehabilitation, estimated that lack of fuel and other problems meant actual supply at the point of generation was just 7.8 GW, while losses along the transmission and distribution networks took the total to just 5.5 GW. This gap between supply and demand - about 10 GW - is equivalent to almost the entire generation capacity of Singapore.
Plugging it is difficult and expensive. Private diesel generators can cost a family up to a $1,000 a month, or a sixth of the average annual income. Despite its hydrocarbon wealth, Iraq has been forced to import gas from Iran at European prices to feed power stations and electricity from Turkish barges in the Gulf. Iran is also exporting some electricity directly.
For all the ministry of electricity’s (MoE) bold intent, including a target of 18.6 GW of capacity by the end of this year, those familiar with it say the ministry remains in chaos -- casting doubt on its ability to oversee the capacity expansion. Efforts to fix things have repeatedly failed, not helped by three ministers having held the post in as many years or by recurring accusations of corruption. Attempts to reform the ministry run into opposition from vested interests. The latest draft legislation, calling for some privatisation and changes to the ministry, is unlikely to gain the necessary support in Iraq’s parliament.
Administrative confusion delays things, too. A large deal in 2008 saw the MoE buy more than 70 turbines (with capacity of 10 GW) from GE and Siemens. But approval of engineering, procurement and construction (EPC) contracts can take longer than it takes to build plants, noted the IEA in 2012. Many of those turbines remained in warehouses until some of them were deployed in new plants last year, including one built by Turkey’s Calik Enerji. Most of the kit is still gathering dust.
Adding the capacity Iraq needs will be expensive – investment of about $140bn by 2035 will be required, reckons the IEA. Getting private firms to fund this would make sense. But the debacle of a botched attempt in 2010 to bring in independent power producers (IPPs) still hangs over the sector. That plan, calling for bids to install 2.75 GW of capacity, was scrapped within months. An advisor involved in the process said the programme was too ambitious, the timeline too short, and the government failed to offer assurances about feedstock for the power stations. The government signed two smaller IPP contracts this year, and the method has been relatively successful in Kurdistan. But hopes of larger scale IPP programmes in federal Iraq have ended. With much more benign conditions available for investors elsewhere in the Gulf, Iraq isn’t an attractive investment destination even within the region.
Instead, the government will have to fund the initial stages. In theory, capital is not an obstacle, thanks to burgeoning oil revenue. Yet coordination between the Ministry of Finance and other branches of the government has been poor. No one can really say how much money the MoE will have to spend on power generation. When this year’s budget was decided, the ministry asked for $12bn to spend on existing and new projects, but was allocated $4.7bn. It recently signed about $1.7bn worth of contracts, for one $895m, 330 megawatt (MW) plant to be built by Samsung in Mosul and another $818m, 230 MW plant in Yousifiya, though the timeline for both is unclear.
Many of the same problems that plagued the abandoned IPP programme still afflict the sector. The plan for 22 GW of new capacity is too ambitious, says George Sarraf, a partner at Strategy& (formerly known as Booz & Company) who led a team that helped prepare Iraq’s INES. “Even a normal ministry not facing the challenges Iraq is faced with would be challenged by this,” he says.
Institutional incapacity is another problem. Although the MoE employs around 110,000 people - making it one of the world’s most inefficient electricity sectors in terms of GW per employees - it doesn’t have enough qualified personnel to deal with a rapid tendering process. So bottlenecks will inevitably stall the bidding, EPC and even the operating stages, says Sarraf. Nor does the ministry have the qualified people needed to manage an expanded generation network or run so many plants if they get built. Many of Iraq’s engineers emigrated and others were sacked during the post-Saddam de-Baathification, which ousted the cadre of former regime officials - including those at state-run energy facilities. Iraq will find it hard to attract back the engineers that left.
Feedstock for all the new generation Iraq needs shouldn’t be an obstacle but is. While the country struggles to provide electricity to its people, Iraq is still flaring about 1.2bn cubic feet a day (cf/d) of natural gas from the oil megaprojects near Basra, or more than countries like Austria and Hungary consume. It’s enough, says Al-Khatteeb, to meet the shortage of electricity supply, given around 3 GW of gas-turbine capacity (in Rumaila, Mansuriya, Akkaz and Alekiarp) is idle. Many of the plants are left to run on expensive fuel oil, which Khatteeb says costs around $20 per million British thermal units (Btu), compared with gas costs in the region of around $4-5/m Btu. This inefficient method to generate electricity is made worse by inadequate fuel oil supply. Regular meetings between the electricity and oil ministries are held to coordinate feedstock supply, but the numbers are said to change each time the sides meet.
This colossal natural gas waste will get worse before it gets better. Basrah Gas Company (BGC), established under a 25-year contract in 2011 as a joint venture between state-owned South Gas Company, Shell and Mitsubushi, was commissioned to harvest the associated gas flared at the Rumaila, West Qurna 1 and Zubair oilfields near Basra. Yet production from the projects is growing quickly and BGC’s progress has been slow. It is gathering about 500m cubic feet a day (cf/d) and should reach 1bn cf/d by 2016, an official from the company told a conference in Dubai recently. But the three oilfields are already flaring 1.1bn cf/d. People familiar with BGC’s project say it has struggled to get adequate access to the fields to install the infrastructure to connect them, including at the BP-led Rumaila field, BGC’s main source of gas so far. (Shell did not answer questions about BGC put to it by Petroleum Economist.)
In any case, the volume of flared gas will dwarf BGC’s own short-term targets. The government says flaring must end by 2015, but another 700,000 b/d this year of oil production will add yet more surplus gas to be burnt. Some models suggest Iraq will be flaring up to 4bn cf/d within the next few years.
There are other concerns about the BGC project. The companies hoped to use some of the gas it gathers to export liquefied natural (LNG) gas from Iraq. Indeed, given low prices in the region, some analysts believe the project only makes commercial sense if the gas finds more lucrative markets in Asia - hence Mitsubishi’s stake in BGC. The contract - still maligned by Iraqis because it was settled by direct negotiation, not open tender - allows for such exports only after Iraq’s domestic market is satisfied. But some Iraq officials and analysts doubt this will never happen, given expectations for rising demand. The INES plan calls for gas to supply almost all Iraq’s power generation by 2030 of about 45 GW (including Kurdistan) by then. Unless significant non-associated gasfields are found and developed in the meantime this new capacity would account for all of Iraq’s production of associated gas (based on 9m b/d of oil output). Previous bidding rounds to kick-start non-associated gas exploration have been unsuccessful.
Exports of the south’s associated gas would in any case depend on oil production. But the megaprojects are supposed to reach a production plateau in 2020. So if power generation demand, helped by low domestic prices, rises as expected, the excess gas will dwindle during the oil-output plateau period. Exports of liquid petroleum gas could add some value to BGC’s project, says Sarraf, and it will still make money from a model that sees BGC buy gas from the projects and sell back to the government for a higher price. But if the BGC partners are in it for the LNG they could be disappointed. Even if any associated gas is left over, Iraq might be better off using it for petrochemicals to diversify its economy away from dependence on oil-export revenues, argues Al-Khatteeb.
Talk of excess gas is academic for now, anyway. BGC first needs to expand the project and Iraq needs to overcome its electricity bottlenecks before anyone knows how much power capacity really exists and how much gas the turbines need. As long as the gas is unavailable in the quantities necessary to meet the latent power generation needs, the growth in electricity capacity will take longer than the MoE expects.
In the meantime, Iraqi politics isn’t helping. The run-up to the election has brought decision-making to a standstill. Many of the people in positions of power don’t know if they’ll still have influence after the parliamentary elections this month. Most analysts expect prime minister Nuri Al-Maliki to remain the country’s leader, but forming a government could take months. Violence and deterioration along sectarian lines will muddy the waters still further. Progress on electricity provision will remain slow. The coming summer, with its peak demand for electricity, will not be the last one Iraqis have to struggle through without adequate access to power.