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Iraq’s bounty risks bitter taste

After US-led mission helped to largely banish Islamic State from Iraq in 2018, the country has fast become a battleground for power in the region

Growing oil production should be a major win for oil-weary Iraq. But the country's increasingly lucrative share of global crude output has served to sharpen the appetites of Iran, the US, and other Middle Eastern neighbours to keep or extend a foothold in Iraq, seeing potential both for further oil production increments and strategic importance in a territory that has long borders with Iran, Saudi Arabia, Syria and Turkey.

Iraq has long been in an uncomfortable position straddling the diplomatic divide between the US and Iran. With tensions at their highest in years, how Iraq’s position stuck between the two opposing powers plays out in the coming months could have an impact even beyond its borders.

An abrupt stop of Iranian imports would plunge Iraq into a power crisis and almost certainly into further civil unrest

“The Iraqis are caught between two really difficult positions: wanting to maintain good ties with the US and wanting to avoid an escalation in US-Iran conflict,” Sajad Jiyad, managing director of the Baghdad-based Bayan Center tells Petroleum Economist.

The past 12 months have seen both powers fight for Iraqi influence through a combination of energy deals, investment, military aid, and existing electricity supply contracts. But the US killing of Iranian general Qasem Soleimani marks a turning point in Iraq’s role in the two countries’ conflict. 

Game changer 

The general was assassinated on Iraqi soil without Iraq’s consent. That resulted in Iraq's parliament voting to expel US military forces, which could be a harbinger of the US could be losing its grip in the country. “The US doesn’t seem to have much of a strategy for Iraq, except for as a place to push back against Iran,” warns Jiyad.

The Iraqi vote sends a political message, although, in practical terms, it would take time for a host to negotiate the departure of troops from a country that was reluctant to voluntarily withdraw them. But there is strong evidence that a significant proportion of the Iraqi people are unhappy with the way the US behaved in the Soleimani affair—viewing the killing as crossing a line beyond the remit of the US’ official reason for being in the country: to combat Islamic State. While there remains understandable support for the security this mission provides, an Iraqi majority, if probably a slim one, appears to want foreign troops gone.

Iraq has in the past been a master at playing both sides—keeping the US sweet by agreeing to decrease its reliance on Iranian cross-border assistance and awarding US companies billion-dollar energy deals, while at the same time falling short of denouncing neighbouring Iran. And, going forward, it is actually in both the US and Iran’s interests for Iraq to continue having alignment with both sides, says Jiyad.

“The US doesn’t seem to have much of a strategy for Iraq, except for as a place to push back against Iran” Sajad Jiyad

But the Iraqi domestic situation threatens to engulf politicians who want to continuing playing both sides. Even normally pro-US voices inside Iraq have been publicly critical of the US airstrikes, aware of the anger of lack of consultation and an Iraqi green light. For those wanting licence to govern in Baghdad, “it is really about how much control Iraq has over politics, sovereignty, its own actors”, says Jiyad. “There could be a huge impact if they [are not seen to] have this control.”

But Iraq’s political leaders need to be smart in how much they play to the domestic crowd. Angered by the Iraqi vote, the notoriously thin-skinned US president Donald Trump threatened fresh sanctions on the country. 

Power puzzle 

At present, Iraq relies on neighbour Iran for some 25pc of its electricity imports, with US sanctions’ waivers for the past 12 months on these flows, allowing it payment access through the dollar-clearing system. There is real concern that Trump’s threats could solidified into a non-renewal of these waivers, which have been dependent on Iraq’s ability to show that it is making attempts to decrease its reliance on Iranian imports.

Despite plentiful associated gas production, Iraq’s ability to its swiftly increase gas-fired generation capacity would be hugely challenging for a variety of payability, contractual and infrastructural reasons. An abrupt total stop of Iranian imports would plunge the country into a power supply crisis and, almost certainly, into further civil unrest.

Ongoing socio-political protests in Iraq have already caused around 600 deaths in four months, albeit none of the action seems to have had much material impact on altering the Baghdad political scene. But they have disrupted oil production on three occasions in the past three months, according to Niamh McBurney, risk consultancy Verisk Maplecroft’s head of Middle East and North Africa. Threats to oil infrastructure make it even less likely hat the US would agree to an explicitly narrower Iraqi mission statement where their forces were limited to help Iraq with fighting Islamic State but nothing else. 

Ripple effect 

And what happens in Iraq will likely have a significant impact on the wider Middle East. Firstly, from a security perspective, any loosing of the US military grip on Islamic State fighters could wreak havoc in Iraq and elsewhere where the group has a presence—in turn rattling international oil companies (IOCs) active in the region.

There is also the threat of further Iranian action in response to the Soleimani incident. Iran-linked militants active in Iraq and beyond remain likely to target US or US-ally infrastructure in the region in the coming months, several analysts have suggested to Petroleum Economist.

And even the anticipation of potential security problems could be enough to affect IOCs’ behaviours, despite no evidence yet that the US has any intention of throttling make and materially changing the Iraqi security situation, McBurney and Jiyad agree.

600 deaths in Iraq's protests since last October

“It is definitely going to impact on production growth—we have already seen that with western companies in Southern Iraq Integrated Project (SIIP),” says McBurney. The project calls for the development of several oil fields in southern Iraq, as well water injection programmes and gas capture. “Some bits have ground to a halt and other bits have been parcelled off to ensure there is some momentum,” she adds.

Last year, firms including ExxonMobil pre-emptively chose to pull some workers out of Iraq after warnings. But McBurney feels that for IOCs to consider pulling more employees out there would likely need to be two or three more escalatory events in the country. While Iraq has become more violent and incidents more frequent, the style of attacks has not changed to become more of a threat to foreign oil workers, the analyst reasons. Nor is there any sign of the area where Islamic State remains active growing again, which would be a major red light. 

Production gap 

The previously improved security situation obviously played a key role on Iraq’s increasing oil production— as it reached output highs in 2019 not seen in many years. But it will be difficult to maintain, never mind grow further, this level without continued investment in maintaining critical infrastructure. And with current tensions as they are, IOCs are unlikely to pump millions of dollars into Iraq. BP announced in January that it was pulling out of the Kirkuk field after poor results from a field study carried out by Iraq’s North Oil company.

“I think Iraq’s energy industry will not make as much progress as it should make. Then output starts to fall and other issues start to kick in—export outlets, pipelines, water injection; costly projects for which Iraq does not have the money,” warns Jiyad. “Foreign investors will look at the situation out there, and see how the US is viewing the situation, and that will eventually have an effect on [the Iraqi energy] industry.”

Saudi Arabia and other Mid-East Gulf producing nations have similar worries that escalating tensions between Iran and the US could risk affecting their attractiveness to investors, given them too a stake in maintaining a tolerable Iraqi security situation.

“Countries like Saudi [Arabia] need foreign investment in specific sectors to meet deadlines and targets they have set themselves,” says McBurney. “If the security situation were to deteriorate in Iraq, I think that would have immediate ramifications for other countries in the Gulf.” 

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