Another hot summer in prospect for Iraq
Protests could return this summer, against a background of political fragmentation
Improving electricity supply will be key to the legitimacy of Iraq's new government and to avoiding protests similar to those which roiled the country last summer. But the prospects do not look good.
Iraq's prime minister Adel Abdul-Mahdi — touted as a harbinger of reform — remains weak (a hostage of inter-Shia political competition); public services in oil-rich Basra remain sub-par and current momentum for a referendum on creating a new federal region is gaining pace. And, despite Iraq's parliament passing a record budget this year, funds allocated for investment remain low — a reflection of the drag created by the country's public wage bill.
The scale of the challenge
The summer 2018 protests had several underlying causes: frustration with Iraq's post-2003 political system (as manifest in low voter turnout in the elections); unemployment, water shortages, and most importantly, power shortages. Across 2018 as a whole, power generation met barely half of potential grid demand.
The power supply-demand gap is due to a number of factors. Iraq lost approximately 4.5GW of installed capacity due to Islamic State violence; other supply shortfalls stem from projects being cancelled or declared force majeure due to feedstock issues. In Anbar province, for example, around 1.7GW of capacity remains idle due to a lack of gas feedstock, after South Korea's Kogas declared force majeure at its Akkas field in 2014.
In addition, water shortages in 2018 played a role. Low seasonal patterns of spring rainfall was exacerbated by Turkey starting to bring on-line the hydro-electric project at Ilisu dam, further up the Tigris — both factors leading to the hydro plant at Iraq's Mosul dam producing well below its nameplate capacity of 1.05GW.
Power blackouts and load shedding have encouraged the use of expensive off-grid private diesel generators, increasing Iraqi household expenditure and requirements for energy subsidies. With around 80pc of Iraq's end-user meters more than 30 years old, attempts to improve the electricity industry's balance sheet through improved revenue collection remain unsuccessful.
24GW — expected peak demand this summer
Tariffs average 70pc below cost recovery and attempts to encourage price liberalisation remain politically sensitive. An attempt to do so last year in Basra was met by fierce rebuttals from tribal leaders.
For government finances, the growing use of diesel generators has increased the call on middle distillate imports, landing Iraq with a hefty products import bill. And, despite an improved record this year on reducing gas flaring, co-ordination between Iraq's electricity and oil ministries on gas liquid supply for generation during the summer period has been poor. It has not yet gone down the road pioneered by Saudi Arabia when it faced a similar challenge and integrated both ministries.
The US has granted Iraq waivers for the import of Iranian gas and electricity, with Iranian deliveries accounting for nearly 30pc of Iraq's electricity consumption, as well as 800mn ft³/d of gas. But this dependence on Iran is a geopolitical risk, given that the US could toughen its strategy towards Tehran from May onward.
Beyond generation capacity, irregular maintenance and electricity theft — often overlooked by regional distribution centres — has led to distribution losses, low voltage and disconnections during peak demand. Adding to the complexity, Iraq's new electricity minister Luay al-Khateeb has inherited a ministry seen as a vehicle for rent-seeking and corruption. It has around 120,000 employees with little evidence of productivity levels such staffing might be expected to achieve. Having acknowledged that the electricity ministry requires $20bn over a three-to-four-year period, Khateeb's budget this year was instead cut by $1bn, a reflection of how rhetoric and reality clash in Iraq.
Gas feedstock problems
Iraq's electricity ministry expects to add around 2-3GW of additional capacity this summer, still far from giving it the plant capabilities to consistently meet peak demand. This will be achieved by increasing fuel supply, in particular higher Iranian gas imports and increased liquids burning, and improving maintenance.
Iraq's current generation mix is heavily geared toward gas-fired plants, and committed investment will only increase this dependence. Whilst Iraqi gas deliveries to power stations have been improving over the past year — approximately 1.3-4bn ft³/d (0.9bn ft³/d from the Basra Gas Company [BGC] and 0.4bn ft³/d from other sources) was delivered to the power sector in 2018, a 40pc increase from 2017 volumes — Iraq needs around 3bn ft³/d to meet current electricity demand, as well as capturing significantly more of the gas it currently flares.
To date, significant progress has been made by BGC in processing associated gas from Licensing Round 1 fields — Rumaila (600mn ft³/d ), Zubair (150mn ft³/d ) and West Qurna-1 (150mn ft³/d ) — in the past year. Current processed volumes would be sufficient to fuel just under 3.5GW of Iraqi capacity. Another positive for Iraq's gas sector was BGC's decision earlier this year to take FID to expand processing capacity by 400mn ft³/d (via two 200mn-ft³/d natural gas liquids trains at Ratawi), bringing total capacity to 1.4bn ft³/d.
Despite a record budget this year, funds allocated for investment remain low
Alongside BGC gas volumes, state-run companies produce around 700mn ft³/d of gas. These include fields at Nahr Bin Omar (150mn ft³/d ), Majnoon (100mn ft³/d ), Ammara and Halfaya (100mn ft³/d ), Nassiriyah and other fields such as Ahdab and Badra (which supply the Wasit steam power plant). Despite this, flaring remains intolerably high in Iraq, accounting for around 1.6-7bn ft³/d .
In this light, imports of Iranian gas are both necessary, at least until 2021 when additional processing capacity can be added in Iraq, and commercially more sensible than the more expensive (and inefficient) option of burning liquids. For example, the price of Iranian gas (assuming a Brent crude price of around $65/bl) is expected to reach around $7.2/mn Btu, equivalent to approximately $43/bl. Recent Basra crude sales would equate to an official selling price of around $58/bl, or an opportunity cost of $15/bl. Whilst Iraqi crude burn rates have inched downward in recent years, 2017 still saw average crude burn rates of around 100,000bl/d.
The electricity minister has already faced stiff criticism in parliament, although more related to dismissals he has ordered within the ministry than any impending peak demand shortfall. The absence of a majority political bloc in parliament has created further political uncertainty, with a fragile balance between two rival Shia Islamist parties: Islah, led by Moqtada al-Sadr; and Bina of Iran-backed Hadi al-Ameri. This rivalry is preventing the full formation of Iraq's 22-minister cabinet.
With both blocs failing to command a majority, their current co-operation rests less on electoral unity than being seen to be taking some action, in an effort to prevent a re-run of the 2018 protests of 2018. But internal fragmentation within both blocs is already taking root. Within Bina, Popular Mobilisation Forces (PMF) figures are dissatisfied with Ameri's inability to secure the interior ministry. Likewise, Sadr's decision not to put forward nominees for the same ministry has irked his bedfellows.
Nor are Iraq's political problems solely internal. Iran is keen to use Iraq's energy dependence as a way to counter US sanctions, whereas the US is further toughening its line against Tehran — the recent designation of the Islamic Revolutionary Guard Corps as a terrorist group being a clear signal.
Iraq is caught in the middle and, all the while, public frustration at foreign interference, Iranian in particular, is increasing. With air conditioning demand unlikely to be met, the summer looks unlikely to be a cool one in any respect. And that is not good news for Iraqi stability, or for any reliably sustained increase in oil cargoes out of Basra.
Ahmed Mehdi is a petroleum consultant who advises companies and trading houses in the Middle East