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9 December 2021

Iraq: A decade or two left to rebuild before oil money disappears

Population: 41.18 million (+2.38% vs 2020)

GDP per Capita (PPP): $10,038 (+2.8% vs 2020)

Debt to GDP: 68.3% (+22.4% vs 2019)

Power Per Capita: 1100 kWh

Everyone knows that Iraq is a devastated country, but one might be forgiven for forgetting just how many devastations there have been.

To get a view of what the country was like last time it had peace and stability, you have to go back all the way to the 1970s – before the war with Iran, the Gulf War, US sanctions, the Western invasion and insurgency, and ISIS’ brief explosion. Counting ISIS, that’s four wars in four decades. Even the global economic recession caused by Coronavirus lockdowns has been very harsh on Iraq because of high oil dependency.

Besides war and rebellion, Iraq’s very high reliance on oil exports made sanctions and blockades another source of economic disaster: during the war with Iran, Syria cut off the pipelines which allowed export to the Mediterranean, leaving a fiscal gap which the Gulf monarchies plugged to the tune of $60 billion a year.

Some recovery since the defeat of ISIS

Peace has settled over Iraq, but even so the people are not the same as before. The population has gone from 26 million to 42 million since 2003. The number of Christians and Yazidis has shrunk dramatically for obvious reasons, while the proportion of Sunnis has grown; they have a higher birthrate than the Shia due to living in the more devastated parts of the country with more Islamism and higher mortality salience. Emigration has struck disproportionately at Iraq’s lettered classes – consider for example that Christians, over 5% in 1990, were a mostly urban population.

Iraq has time and peace now; but it does not have much time. Iraq’s original economic development in the 70s and 80s, and its ability to briefly become regional military power with one of the largest armies in the world, was entirely funded by oil, which is 90% of government revenue and some 40% of GDP. So the ability of Iraq’s government to spend money is nearly directly proportional to the oil price.

Iraqi oil production was 4.4 million barrels per day in 2013, and rose to 4.7 million barrels per day in 2019; of this less than 1 million barrels were used domestically with the rest exported.

The oil price collapse of 2020 hit Iraq’s finances hard, but that short-term problem has been solved by the subsequent OPEC+ supply cuts and high prices. In the course of this year Iraq’s output has gradually crept back up to 4 million barrels per day, with November exports reaching 3.272 million barrels a day, worth $7.59 billion.

As one of the economically weakest OPEC+ members Iraq is naturally supporting faster lifting of the supply cuts, notwithstanding that the price rises are also necessary for Iraq in the broader picture. A World Energy Outlook report from the IEA in 2019 saw Iraq reaching 6 million barrels a day in 2030, one of only three countries to expand production by over 1 million barrels, but things have very much changed since the pandemic. Oil and gas investments were the easy and obvious route and they are still being pursued, but global trade realities will hamper them.

If Iraq remains an undeveloped country when the viability of oil exports is destroyed through the 2030s, another social disaster beckons, considering the large and growing population in a desert and the potential for violent Islamism.

The mind boggles to think how this state can outlive oil, until one remembers that global and neighboring states including the wealthy and organized Gulf monarchies have a vested interest in preventing a collapse. Fortunately 2021 has been a massive year for renewable investment announcements in Iraq – so perhaps along with the Gulf states Iraq will have a future as some kind of green hydrogen exporter.

Electricity grid patchy after decades of abuse

The war with Iran took a terrible toll on Iraq but at the same time, the fundamental potential for growth and development saw per capita electricity consumption continue to grow until 1986, near the end of the war. From 1986 to 2014, consumption stagnated at around 1300 kWh per capita, notwithstanding the dip from the US invasion and the insurgency.

By the time of the official US withdrawal in 2011 only half of grid demand was met by generation, and now it is more like two-thirds – demand and capacity are both at 30 GW, but only two-thirds of capacity is functional, with distribution losses of around 50% in 2008-2018 due to theft and old designs.

Grid infrastructure such as cabling is being vandalized, pillaged (occasionally by politicians), and is targeted by the occasional ISIS remnant for sabotage – with three power lines blown up in Nineveh in August. In 2018, 55% of the generation mix was natural gas according to a Ministry of Electricity report, with 32% being “thermal” – i.e. diesel and other fuel burning, and only 2% hydroelectric, despite the country nominally having 2 GW of hydro capacity.

New power plants so far are natural gas powered – such as the 3 GW Rumaila whose second 1.5 GW will come online in 2022. Another new source of electricity is grid connections with Iran, which account for over 1 GW consistently. In time perhaps the Gulf states will run transmission lines to Iraq as well – if Iranian influence in the government is too weak to forestall that.

Climate change commitments

The potential for another disaster emanating from within Iraq is eye-catching, but nonetheless it has signed up at least outwardly to help address the global threat of climate change, ratifying the Paris Climate Agreement this year. As you might assume, its commitments are very “future-oriented”, with a net-zero target in 2070. Iraqi officials complain that the Green Climate Fund and similar mechanisms didn’t get enough attention over COP26.

The imminently practicable target of ending gas-flaring – currently 45% of output – has been pushed forward again, this time to 2027, though agreements are being made for gas capture infrastructure, such as $2 billion out of the $27 billion with TotalEnergies. Aside from climate concerns this will allow Iraq to produce more gas itself – it imports half of its demand at present.

 

Ambiguous political situation

Iraq’s government and Shia militias welcome Iranian support on the basis of religion, but Iran cannot treat the Iraqi government like a full-blown vassal state. Like the Khuzestani Arabs in Iran itself, Iraq’s Shia Arabs – the majority of Iraq’s population – remain alienated from their Persian coreligionists on ethnolinguistic grounds. Iraq’s Shia have at times protested against the excessive Iranian presence in the country, including blocking a ceremonial funeral procession for Soleimani in Basra last year, and protesting outside the Iranian embassy earlier this year.

Similarly, the Shia government cannot push its luck sidelining the Sunnis too far in the halls of power – a 2011 consolidation of Shia power contributed to the rapid successes of ISIS, which is Sunni, in 2014-2015.

With low socioeconomic development, a literacy rate of only 86%, ethnic and sectarian divisions, and intense corruption, Iraq’s democracy doesn’t amount to much. A horde of minor parties and militias share ill-defined power and influence over the state. Much of the sharing is done according to ethnic-sectarian apportionment, like a crude and informal version of Lebanon’s system. The Iraqi state was too weak to defend even Baghdad against ISIS until foreign help arrived.

The recent upswing in Western news articles decrying the poor quality of Iraqi democracy is presumably because we’re upset about ongoing Iranian influence, but perhaps the country would actually be better off if it really was just a Shia-ruled Iranian vassal state – then at least someone would be in charge and able to curb the abuses at least of the officials outside his own clique.  Right now Iraq’s political power manages to be both decentralized and authoritarian at the same time, the worst of both worlds.

Iraq lies supine, but at least it is relatively peaceful with only a few score civilians killed each month, a thirtieth of the bloodshed in 2014 – the focus of violence has shifted towards political assassinations and suppression of anti-corruption protests instead. That’s the main reason for 2021 being a bumper year for investment plans being made into Iraq – violence is at a record low since 2003, ISIS is still mostly gone, and oil and gas prices have recovered however temporarily.

Sanctions too are mostly a thing of the past. In a sad irony, US sanctions on Iran have inconvenienced Iraq’s imports of natural gas, though waivers are granted for the most part. More recently the bigger obstacle to Iranian imports has been non-payment by the Iraqis and high demand within Iran itself.

As for the Kurds, they remain autonomous but still under the formal sovereignty of Iraq, with most of the legal system being outwardly identical from a foreign investor’s perspective. Like the rest of Iraq, the Kurdistan region is heavily reliant on oil for money.

Foreign Investment from all comers in 2021

One thing Iraq’s government has been able to do is strike deals for desperately-needed investment from multiple parties which are rival to each other – it is able to work simultaneously with the Gulf states and Iran, and with Russia-China and the West.

Expect to hear more investment announcements in 2022, but so far plans include:

  • TotalEnergies $27 billion power sector deal, including 1 GW solar developments, 3 GW worth of natural gas flaring capture, Ratawi field improvements to go from 85,000 bpd to 210,000 for $3 billion, and a seawater treatment facility for injection into southern fields.
  • The UAE’s Masdar has signed up to develop a 2 GW solar complex in the center and south of the country, with 450 MW in Dhi Qar, 350 MW in Ramadi, and 100 MW in Mosul and Amarah each
  • Saudi Arabia’s ACWA Power is in ongoing talks over 1 GW of solar capacity in Najaf
  • General Electric’s $1.2 billion 2 GW gas power plant deal
  • Russia’s Lukoil plans to produce 250,000 to 300,000 barrels per day once the Eridu oil field is developed.

Lukoil is filling the gap which has been left by Western oil majors – BP, Royal Dutch Shell and Exxon have all reduced their operations over the past several years. They were all deterred by Iraq’s status as one of the most corrupt states on the planet, which ate into the remuneration fees they were entitled to and risked their reputations if they were portrayed as fueling Iraq’s corruption.

Lukoil has had its own issues at West Qurna 2, even threatening to leave. Perhaps Lukoil expects a better deal in future because of influence exerted in its favor via Russia-Iran-Iraq geopolitics? Or perhaps it is because Russia and China, via PetroChina, CNPC, and the like, have been able to seize the commanding heights of Iraq fossil fuel production and limit the western majors’ options. Either way, Russia and even China may wield greater influence over OPEC+ due to their presence in Iraq.

In any case the biggest deal here is the $27 billion from TotalEnergies, the largest investment Iraq has received in decades. While solar power is still only a fraction of this investment surge, there’s enough in there to make Iraq’s 12 GW solar target by 2030 realistic, a target which has been raised from 10 GW lately.

Another source of clean energy that has been mooted is 11 GW from nuclear plants, with preliminary talks having been opened with South Korea’s Kepco and Russia’s Rosatom.

All that said, Iraq is still a bad place to do business. A 2019 law restricting foreign ownership of Iraqi companies has begun to be implemented as of September without the exemptions which were promised when the law was introduced. There’s now a 49% foreign ownership cap on all non-bank companies on the Iraq Stock Exchange.

China’s Ministry of Industry issues green industry plan

China’s Industrial Green Development Plan for the Fourteenth Five-Year period has been issued by the Ministry of Industry and Information Technology. The Fourteenth Five-Year period runs from 2021 to 2025, and this new Plan envisages a carbon intensity reduction of 18% per unit of industrial added value in that time.

More detailed targets include a 13.5% reduction in energy consumption for industrial units above a designated size threshold; a recycling rate of 57% for bulk solid waste, 480 million tons of recycling per year of steel, metals, papers, plastics, and so on; a 16% reduction in water consumption per unit of added value; and 10% reduction in certain pollutant emissions.

The value of the environmental protection industry in the country is planned to reach $1.7 trillion.

The Green Industry Plan has an overall structure of “focusing on one major action, building two significant systems, promoting six key transformations, and implementing eight large projects”. The “one major action” is China’s 2030 peak carbon emissions target, while the “two systems” are low-carbon technology and a support system for green manufacturing.

The vagueness and lack of many sector-specific targets has been criticized including certain Chinese institutions – so really this is more of a draft or proposed policy, which will have detail added in due course. The Ministry of Industry has promised to impose production capacity limits on steel, cement and aluminum for example.

The “six transformations” cover everything from a shift to higher-end manufacturing, low-carbon energy sources, recycling, clean processes, product supply, and digitalization, while the “eight projects” are similarly varied and general, but include water-saving as one of the more specific points.

That is all rather dry, but the country recently had a dramatic and explicit conflict between industrial demand and the green agenda with the power cuts of September and October. At first it appeared that the problem was just a coal shortage, rather like the gas troubles in the US and EU, but it soon became apparent that to a large extent the centrally ordered power cuts were not so much because coal had actually run out – though it was indeed running dangerously low – but rather because more generation meant bringing online older, dirtier coal plants, as well as resorting to using lower-quality coal – and this conflicted with emissions regulations.

The swift end to China’s power supply issues was certainly due to frenetic activity at the heights of its government, securing new supplies at home and abroad, but one also gets the impression that the emissions regulations were held in abeyance as far as practical enforcement goes, at least for a matter of months. Electricity-intensive industries in China could be affected by any future electricity price rises – a 20% rise was permitted – or “orderly use power control orders,” including the solar industry.

China accounted for 27% of global CO2 emissions in 2019, despite being “only” 26% of manufacturing globally, plus 16% of GDP and population. Its emissions and manufacturing shares have probably only risen since 2019, as one of the least affected economies by the pandemic lockdowns. The country’s oil imports have fallen 7.3% year-on-year in the first 11 months of the year, with prices up 39.5%; coal imports have risen 10.6% at a 39.7% cost increase; and natural gas imports are up 21.8%, at a 20.7% cost increase, according to the Customs Administration.