Source: Oil Price, by Simon Watkins
Former senior intelligence operative and now Iraq’s Prime Minister, Mustafa al-Kadhimi, spent last week in Washington trying to maintain his exceptionally dangerous balancing act between Iran and the U.S. On the one hand, Iraq has a multi-layered relationship with Middle East powerhouse, Iran, enforced by Tehran through its ongoing on-the-ground presence of political, economic, and military proxies. On the other hand, Iraq has a shorter but nonetheless highly eventful history with the world’s number one superpower, the U.S., which demands an increase in its own on-the-ground presence in the country, particularly relating to its oil and gas sectors, in return for not sanctioning Iraq and giving it financial support.
The immediate concern of al-Kadhimi is to secure sufficient funding from the U.S. to avert another round of extensive protests, violence, bloodshed, and death. The latest short-but-disastrous oil price war instigated by the Saudis pushed Iraq’s financing firmly into the red, with its oil-related revenues falling by nearly 50 per cent. Its finances were further negatively impacted by the enduring effects of the COVID-19 pandemic and by ongoing arguments with the government of the semi-autonomous region of Kurdistan in the north over oil-for-budget disbursements. These factors forced Baghdad into proposing delaying foreign debt payments, introducing salary cuts of 60 per cent for various state sector employees, and reducing all non-essential spending.
It also pushed Iraq into producing much more oil than its OPEC+ production quota, meaning that it will have to make up for this overshoot by producing less. This, in turn, will reduce its already-decimated state revenues. This cash crunch could not have come at a worse time as, in the coming few weeks, al-Kadhimi needs need to come up with at least IQD12 trillion (US$10 billion) just to pay the next two months salaries of more than four million employees, retirees, state beneficiaries, and the food relief for low-income families. These groups together constitute the majority of households in Iraq and it is believed in senior Iraq government circles that any failure to pay any of these obligations could result in the sort of widespread protests and bloodshed that occurred at the end of last year.
It is little wonder, then, that al-Kadhimi was doing the rounds in Washington last week looking for money and willing to promise the U.S. anything in return. Top of the list is to put more distance – economically, militarily, and politically – between Iraq and Iran. Matters in this regard had reached yet another crunch point for the U.S. only recently, with the flip-flopping of Iraq’s dealings with Iran that brought Baghdad to the brink of being sanctioned by the U.S. itself. Specifically, having looked on as Iran was able to sell its oil in vast quantities through Iraq’s export channels, launch attacks against U.S. military targets in Iraq, and provide financing routes for money into and out of Iran the U.S. had finally had enough in April.
Instead of the rolling 90- or 120- day waivers granted by Washington for Iraq to continue to import Iranian electricity and natural gas in the past, the U.S. granted a waiver of just 30 days, its shortest ever. At the same time, new sanctions were announced against 20 Iran- and Iraq-based entities that were cited as funnelling money to Iran’s Islamic Revolutionary Guards Corps’ elite Quds Force. To avoid wider sanctions at that point, al-Kadhimi promised the U.S. that it would allow a raft of in-principle agreed contracts with U.S. companies to finally go ahead, with a substantial presence of U.S. ‘security personnel’ on the ground to safeguard these interests. This, the argument ran, would help to put distance between Iraq and Iran and this was a key reason why Iraq received a new 120-day waiver in May from the U.S. for its continued importation of electricity and gas from Iran.
Just ahead of al-Kadhimi’s arrival in Washington last week, then, five U.S. companies – Chevron, General Electric (GE), Honeywell International, Baker Hughes, and Stellar Energy, signed agreements with the Iraqi government for deals aimed at boosting Iraq’s energy independence from Iran, worth at least US$8 billion. Among the most noteworthy of these, according to the relevant statements, is that Chevron is to examine the potential for exploration work in the long-sidelined Nassiriya oilfield, estimated to hold about 4.4 billion barrels of crude. GE, meanwhile, said it had signed two new agreements with the Iraqi Ministry of Electricity valued at over US$1.2 billion to undertake maintenance programs across key power plants in the country and to bolster its transmission network. Honeywell also said that it is negotiating with Iraq in a deal that would involve the development of the Ratawi oil field, the construction of a gas processing hub, and new electricity generation.
That this last deal may well involve the participation of Saudi Arabia at an oil field lying just 100 kilometres from the Iranian border is reason enough to conjecture that it will absolutely not go ahead. This is despite the deal apparently being a key condition of the current Presidential Administration for the extension of Iraq’s next waiver on importing Iranian electricity when the current one expires in September. In this context, Iraq has a long history of promising the U.S. one thing and then either completely ignoring what it said or doing the exact opposite, which was the broader reason why the U.S.’s patience ran out in April. As sources in Washington close to the Presidential Administration spoken to by OilPrice.com in April put it: “We’ve been down this road before with Pakistan – [with] the government pretending to help in the fight against AQ [Al-Qaeda] but at the same time the ISI [Inter-Services Intelligence] offering all the help it could to [Osama] bin Laden and we’re not playing that game again.”
The parallels between Iraq and Pakistan from the U.S. perspective go beyond just money, as U.S. President Donald Trump made clear recently. At the beginning of January, after Iranian surface-to-surface missiles hit two Iraqi military bases housing U.S. troops, Trump said that he would impose sanctions directly on Iraq if the U.S. military was forced out of the country by further such incidents. Even after this, though, 30 107-mm Russian-made Katyusha rockets were fired at the U.S. allied Camp Taji military base north of Baghdad, killing three service members. This attack was in the same style as the rocket attacks on 4 January on the U.S.’s Balad Air Base near Baghdad and on the Green Zone, with both reportedly being Iran-sponsored retaliation for the U.S.’s assassination of Iran’s General Qassem Soleimani. There have been at least 15 further attacks on U.S. military and neo-military personnel in Iraq by Iran proxies this year alone, according to U.S. military sources.
For these and other reasons, there is no reason to expect any other of these new deals with U.S. companies to come to fruition, any more than ExxonMobil’s much-vaunted and much-delayed participation did in Iraq’s crucial Common Seawater Supply Project (CSSP). ExxonMobil was brought into the CSSP in 2010 at a time when Baghdad was looking to raise its oil production capacity to 12 million bpd by 2018, to overtake Saudi Arabia’s output. After various false starts, ExxonMobil withdrew from the project but the real reason why is instructive as to why any project by an established U.S. company will not go ahead in Iraq.
“The central problem for ExxonMobil was always that the three key risk/reward elements of cohesion, security, and streamlining in the contract were profoundly unbalanced,” a senior source who works closely with Iraq’s Oil Ministry told OilPrice.com. “Cohesion means that the facilities are completed in full and in order, security relates to the personnel and to the soundness of the business and legal practices involved, and streamlining means that any deal should continue, regardless of any change in government in Iraq,” he added. “Problems first arose for ExxonMobil over the approval of contracts for service work, obtaining visas for workers, and customs clearance for vital technical equipment,” he said. “Historically, in Iraq, such problems could only be fixed by payments to various officials connected to these areas, as has recently been shown up even in something as important as the F-16 program at the Balad Air Base,” he added.
This feeds into the other elements of the risk/reward matrix that are susceptible to corruption, according to the independent group, Transparency International. As summarised in its ‘Corruption Perceptions Index’, Iraq demonstrates: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery…and political interference in anti-corruption bodies and politicisation 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.” ExxonMobil, or any U.S. company of its stature, said the source, simply cannot afford to become involved in this type of environment due to the risk of damaging its own reputation or the reputation of the U.S. as a whole.