IEA to step up support for energy projects in Iraq as oil slump hits funding prospects
The International Energy Agency will increase its support for Iraq, Opec’s second-largest oil producer, as it faces possible delays to critical projects due to the fall in oil prices.
“The prime minister and I agreed that the IEA will step up its support for Iraq on various energy issues, notably electricity and gas,” the agency’s executive director Fatih Birol said after a phone call with Iraq’s new leader Mustafa Al Kadhimi.
“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,” he said.
Iraq’s net revenue from oil could collapse by as much as 70 per cent this year, as a result of the slowdown in oil demand from the Covid-19 pandemic and supply restrictions in place to rebalance the oil markets, according to the agency.
“There are preliminary signs that the current downturn in oil prices is already [affecting] capital budgets in the country,” Ali Al Saffar, energy analyst at the agency, said in a note.
“The government has not passed its 2020 budget, and as such, its spending is curtailed at a pro-rated level of one twelfth of realised spending from the previous year.”
All capital investments planned by the electricity ministry for this year have been “indefinitely deferred”, he said.
This puts at risk much-needed investment to rehabilitate the country’s grid, which has some of the world’s highest transmission and distribution losses.
The delay in the formation of a new government by about six months has affected several critical projects.
Rebuilding Iraq’s power infrastructure, damaged by decades of war, is high on the government’s list of priorities.
A crippled utility network has been a key factor behind protests across Iraqi provinces during summer months, when temperatures can easily reach 50°C.
The electricity ministry planned to raise overall power capacity in Iraq to 22 gigawatts by this summer, Iraq’s outgoing electricity minister Luay Al Khateeb told The National in an earlier interview.
The country’s power generation capacity is currently at 19.2 gigawatts.
Iraq’s current predicament affects much-needed funding required for an estimated 7,000 megawatts of planned generation capacity expansion, Mr Al Saffar said.
The agency said Iraq’s best bet for recovery should be tariff reforms rather than hoping for a recovery in oil prices.
Electricity subsidies currently cost Baghdad about $12 billion (Dh44bn) annually.
“Equivalent to around five months of total net revenue at current prices, this burden is particularly acute when the country’s fiscal health is as vulnerable as it is now,” Mr Al Saffar said.
“A carefully studied and well-implemented tariff reform should be an urgent priority for a number of reasons.”
Iraq draws about 90 per cent of its income from oil sales. Baghdad, which has failed to adhere to previous Opec+ agreements, pledged to commit to the current pact in place from May onwards.
Opec+, an alliance of producers, is cutting 9.7 million barrels per day from the markets in May and June. Tapered restrictions on production will remain in place until 2022.
The issue of production cuts has proved contentious in Iraq, where it remains unpopular as the production and sale of oil remains a critical to the country’s economy. Baghdad said last week it remained “fully committed to the terms of the Opec+ agreement”.
Meanwhile, Mr Al Khateeb stressed the need for urgent tariff reforms during a virtual panel discussion this month organised by the American University of Iraq, Sulaimani, which is in the Kurdistan Region.
He singled out power piracy as a thorn in the side of the government, leading to a revenue loss of $12bn alone last year.
“The challenges that we’re referring [to] ... we need to sort out the tariff reform. At the moment, we have four million registered units, [of which] 50 per cent of them thrive on power piracy,” he told the panel.
Iraq’s electricity rehabilitation programme, which relies on multinational companies to rebuild damaged utilities, develop new programmes and tackle persistent gas flaring, has dragged on after geopolitical tensions earlier this year between the US and Iran, in which Baghdad was caught in the crossfire.
“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 revenue has been [hit] by low oil prices,” Mr Al Saffar said.
Baghdad’s reliance on state financing for large projects only increases the risks of delay.
“Given how essential both natural gas and electricity are to economic prosperity in Iraq, such delays should be avoided at all costs,” he said.
The US last month extended a waiver on continued electricity imports from Iran, after an earlier extension by 30 days. The waiver allows for a “credible government” to be formed in Iraq, a US official told Reuters, and expires on May 26. It is shorter than the earlier 90- or 120-day extensions.
Iraq, which is also looking to import electricity from neighbouring Jordan and the GCC Interconnection Authority, is expected to be reliant on Iranian gas for the foreseeable future.
The International Energy Agency said electricity tariff reforms, not an oil price recovery, are Iraq’s best hope for recovery