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This month, the last waiver the United States granted to Iraq to continue purchasing gas and electricity from Iran is set to expire. When it does, Iraq will no longer be able to pay Iran in US dollars for gas imports crucial to Iraq’s electricity grid. Iran has refused payment in Iraqi dinars, and Iranian gas exports to Iraq have already fallen far below the 25 million cubic meters per day they agreed upon for 2019 and 2020. In the past few weeks, Iran only sent around 3 million cubic meters per day.
In a country where power outages lead to protests, the issue is a serious one for Baghdad. Iraqi leaders in the post-2003 era also remain embarrassed that Iraq’s electricity grid still does not function widely or well, despite billions of dollars spent on it. Most of that money appears to have disappeared into the vortex of corruption within Baghdad’s various ministries and fiefdoms.
The government in Baghdad as a result has begun looking for alternatives to Iranian gas imports. Gulf Arab countries could alleviate part of the demand, but liquefied gas imports are more costly than pipelines and infrastructure takes a long time to lay. The Kurdistan Region of Iraq can and does provide some gas to the rest of Iraq, but not enough to fill demand.
The irony of all this is that Iraq, with one of the world’s largest petroleum reserves and very large amounts of oil production, should not need to import gas from anywhere. The giant oil wells in Basra and other parts of southern Iraq currently flare the gas from the wells – burning it away for nothing but more pollution. Iraq never invested in the infrastructure needed to capture the gas produced at its many oil wells.
The Kurdistan Region did not invest in such technology either, yet enjoys more than enough gas production to meet its domestic needs. The difference stems from contrasting approaches to oil and gas contracts in Kurdistan versus the rest of Iraq.
In Baghdad, nationalists insisted on service agreement contracts with multinational oil companies (MNCs). In these highly controlled contracts, Baghdad’s Ministry of Oil offers the MNCs an agreed upon fee to prospect and extract oil. The terms of the contract are often very limiting to the MNCs, detailing everything they can and cannot do in the oil fields. The interest of MNCs under such conditions are limited to delivering the agreed upon (and paid for) amount of oil to Baghdad and no more.
Whether due to incompetence, negligence, or other factors, officials in Baghdad never bothered to include gas production in their service agreements with MNCs. As a result, the gas sector in Iraq never came to life and one can see the flares from every oil well when driving across the country.
In the Kurdistan Region, by contrast, authorities in Erbil took advantage of their constitutional right to manage their own newly developing oil sector and pursue a different approach to the issue. Kurdistan signs “production sharing agreements” with MNCs, in which the Kurdistan Regional Government (KRG) and the MNCs share the profit from oil and gas production. Such an arrangement is usually more beneficial to the oil and gas companies and allows them more flexibility in how they operate their fields, which is why nationalists do not like them.
In this case, however, the production sharing agreements turned out to be more beneficial to the host government than Baghdad’s service agreements. Most of the service agreements were signed at a time when oil prices were quite high, leading to high service fees. As international oil prices have remained at rock-bottom levels since 2014, Baghdad has lost a lot of money and seen no investments in its gas sector.
Companies in the Kurdistan Region, by contrast, not only saw fit to develop the gas sector as well as oil, but continue to invest in new infrastructure and techniques to maintain their profits. Without all the squandered billions lost in the electricity program in Baghdad, the electricity grid in Kurdistan functions much better than in the rest of Iraq, thanks to companies like Dana Gas that invested in the sector and supply Kurdistan’s generating stations.
The lesson here seems to clearly support free market models over central planning. This appears especially true when the central planning ministries, like those in Baghdad, remain hopelessly mired in corruption and fiefdom politics.
There is a caveat to the lesson, however: free market models must remain genuinely free. The Kurdistan Region’s model could have performed even better without its own variant of corruption, in the form of large side-payments made to key politicians when negotiating production sharing contracts or any time MNCs need a new permit for something.
Last week another problem arose when a company that won the bid from Dana Gas to deliver propane to factories in Erbil and Duhok came under pressure from local Peshmerga forces in the Garmian region to limit distribution. The resulting limit of supply saw household propane double in price, with a windfall of monopoly profits for the company in question (which presumably pays a share of these profits to the Peshmerga “protecting” its delivery network). Luckily, after a public outcry, KRG authorities appear to have now stepped in with a series of laws and police measures to put a stop to this attempt at crony mafia marketing.
In the end, the free market can deliver, but it also needs some effective, well intentioned protection and support from government authorities.
David Romano has been a Rudaw columnist since 2010. He holds the Thomas G. Strong Professor of Middle East Politics at Missouri State University and is the author of numerous publications on the Kurds and the Middle East.
The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.
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