Iran cuts natural gas export to Iraq due to debt repayment delays
ERBIL, Kurdistan Region — Iran has substantially reduced its natural gas exports to Iraq, threatening to plunge part of its western neighbor into darkness as a two-year debt repayment agreement appears to have borne little fruit for Tehran.
“Iraq's electricity ministry is in debt of more than five billion dollars,” the National Iranian Gas Company (NIGC) said in a statement on Monday.
“Despite several contractual warnings, unfortunately ignored by the Iraqi side… this company has resorted to reducing the volume of gas exported,” the statement said.
Iraq is also in debt of more than one billion dollars in contractual fines, the NIGC added, bringing the total debt to more than 6 billion dollars.
The statement comes after the spokesperson for Iraq’s electricity ministry said on Sunday that Iran had slashed its natural gas exports from 50 million cubic meters (mcm) a day to just three mcm – cutting the amount of electricity Iraq can produce by up to a third. According to the International Energy Agency, the peak demand in Iraq was 27.3 gigawatts (GW) in 2018, but the maximum grid supply was 16.4 GW.
In February 2019, Iran Central Bank Governor Abdolreza Hemmati signed a trade exchange agreement with his Iraqi counterpart Ali Alaq in Baghdad to settle the accumulated debts and facilitate the transfer of future payments for exports.
But this financial mechanism appears to have failed, with Iran unable to access three billion dollars’ worth of Iraq’s debt repayments deposited in the Trade Bank of Iraq (TBI), according to the NIGC statement. More than two billions dollars of debt is also overdue.
Iran is unable to access the funds deposited in the TBI due to US banking sanctions, which were re-introduced in 2018 after Washington withdrew from the 2015 Iran nuclear deal.
Washington has granted Iraq repeated waivers that allow it to import natural gas and electricity without it being subject to the sanctions that other countries face if they trade with Iran. However, it appears that Baghdad could incur sanctions if it sends Iran debt repayments.
Iran has also been placed on the “high-risk jurisdiction” list of the Paris-based Financial Action Task Force (FATF), the top international watchdog on money laundering and financing of terrorism since February for failing to enact the appropriate legislation to fight money laundering and financing of terrorism.
As a member of the FATF regional body in the Middle East and North Africa (MENA) region, Baghdad is obliged to “apply enhanced due diligence, and in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation financing risks emanating from the country.”
Iran’s energy minister Reza Ardakanian arrived in Baghdad on Tuesday to meet with Iraqi electricity minister to discuss the reduction of natural gas exports, among other issues.
Prior to the gas export reduction, Iraq could generate 19,000 megawatts (MW) at its peak from its national grid, with the rest of Iraq’s electricity needs met by private generators. However, the reduction of natural gas exports from Iran has cut national grid capability by 6,550 MW, threatening to plunge part of Iraq into darkness while prime minister Mustafa al-Kadhimi is under acute financial pressure due to the COVID-19 pandemic and drop in oil prices.
The electricity system in Iraq is split into two with Kurdistan Region operating its own system. The Kurdistan Region’s national grid electricity provisions stood at around 15 hours daily in October; in southern parts of federal Iraq, it was 5-8 hours daily.
Despite the contention over debt repayments and natural gas supply, Iran is currently in the process of constructing a 590-kilometre natural gas pipeline to export around 110 mcm to Iraq per day.