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    Iraq Needs to Push Ahead with Energy Reforms: IEA


The IEA has pledged to increase its support for Iraq in the energy sector, where gas flaring is rife.

by: Joseph Murphy

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Iraq Needs to Push Ahead with Energy Reforms: IEA

The International Energy Agency (IEA)'s head Fatih Birol spoke on the phone with Iraq's newly appointed leader Mustafa al-Kadhimi on May 14, pledging increased support for Iraq in the energy sector. The Paris-based organisation has also called on Iraq to push ahead with gas and power reforms.

Iraq's parliament approved a new government on May 6, after lacking one for six months because of squabbling between parties. Al-Kadhimi, a former intelligence chief, was appointed as the country's prime minister.

The new government faces tough choices, as the Covid-19 pandemic and resulting collapse in oil prices have left Iraq struggling to pay for public sector spending. The country relies on oil sales for 90% of its government revenues.

"We discussed the central role of energy sector reform in revitalising the Iraqi economy. The Prime Minister and I agreed that the IEA will step up its support for Iraq on various energy issues, notably electricity and gas," Birol said in a post on his LinkedIn page on May 15. "One of the main issues for a fiscally-constrained Iraq is the need to revisit its investment frameworks to ensure critical infrastructure projects don't grind to a halt for lack of funding."

If current oil prices persist, Iraq will see net revenues from oil slump by at least 70% in 2020, causing the country to run a $3.5bn deficit just by paying salaries and pensions and covering essential expenditure for government operations, the IEA said. The World Bank estimates that Iraq's economy will contract by almost 10% this year.

Iraq is yet to pass a 2020 budget and there are signals that its ministry of electricity will indefinitely defer much-needed investment in grid improvements, the IEA said in a statement following talks between Birol and Kadhimi. The country suffers from some of worst transmission and distribution losses in the world.

Cancelled investments will affect some 7 GW of generation capacity planned to be built, including more than 5 GW of combined-cycle gas-fired output and a further 1.7 GW of renewables. The IEA also noted that budget constraints raise doubts about Iraq's plan to capture and use more gas. The country signed deals last year to capture up to 10bn m3/yr of gas to fuel power stations.

"These projects would have gone a considerable way to reducing the huge volume of natural gas that is currently allowed to scape unused from the country's oil industry," the IEA said. "But any available capital will now almost certainly go towards investment in oil production operations, which are the priority because of the immediate revenues they generate."

The inability of Iraq's power grid to fully meet demand has significantly impeded economic development, with power cuts being a major source of social tensions for years. It also needs a regular waiver from the US to allow it to import Iranian gas. 

The IEA called for Iraq to reform its electricity tariffs, as subsidies  cost the state $12bn every year, or equal to its total net revenues during five months at current prices. Reform would unlock revenues for a sector that has been insolvent for years and curb demand growth, which is  increasing at a rate of 10%/yr. Iraq could also consider new incentives in spur private investment in gas projects.

"The current model, which favours government financing of large infrastructure projects across the sector, is prohibitively burdensome at times of depressed oil revenues and risks indefinite delays to projects that are crucial to Iraq’s economic development," the IEA said. 

Iraq could look at mechanisms allowing investors to market and export liquids that are separated from gas captured at oilfields, the IEA said. Most of this associated gas is flared or left in the ground. Monetising these liquids would increase appetite for investment, particularly when domestic gas prices are likely to remain low.

"There has scarcely been a more urgent time for Iraq to pursue crucial reforms in its energy sector to ensure that investment continues even when government revenues have been decimated by low oil prices," the agency said. "The alternative of continuing to rely on direct state financing of large projects only increases the risk that these projects are delayed. Given how essential both natural gas and electricity are to economic prosperity in Iraq, such delays should be avoided at all costs. They hold the key to the diversification that would make Iraq more resilient to oil price movements in the future." The IEA "stands ready" to support the country in enacting energy sector reforms, it said. 

Kandhimi's government has set out a number of energy-sector priorities, but these primarily relate to the oil sector. In a programme published on the parliament's website, it called for Iraq to open "serious negotiations" to restore the country's oil exports, which slumped in April because of low fuel demand and a lack of storage space, which forced refineries to cut processing.

The government also wants to "form a negotiation delegation to discuss the issue of amending the licensing contract rounds with oil companies." The government also plans a new law for its national oil company and work with international financial institutions like the IMF and World Bank "to develop programmes to minimise the impact of the economic crisis."

But Iraq's cabinet is still lacking some key appointments, as proposals have been blocked by parliament. These include the post of oil minister, which is being temporarily filled by Ali Allawi.