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Source: Financial Times

May 14, 2023

How Iran will profit from Shell’s Iraqi gas project

Tehran-based company receives most of the revenues from the power plant used by UK group’s joint venture in Iraq

BY Tom Wilson in London and Raya Jalabi in Beirut

An Iranian company is the biggest beneficiary of a power plant poised to supply a Shell-backed gas project in Iraq, showing the pervasive presence of Tehran’s business interests in its neighbour and putting the UK group at odds with the west’s shifting geopolitical priorities in the Middle East.

Basrah Gas Company, which is 44 per cent-owned by the London-listed energy major, will become a major consumer of power from Rumaila Independent Power Plant in southern Iraq when the gas company’s new facility starts operations in June.

The Rumaila plant is owned by Jordan-based Shamara Holding but was built by Tehran-based Mapna Group, which is entitled to 78 per cent of the revenue from electricity sales, according to documents seen by the Financial Times and three people involved in the contracts.

Shell’s joint venture, which has received World Bank funding, has been widely praised for its role capturing gas that was previously flared at Iraq’s oilfields and processing it for use in local power generation, cooking or export.

Iraq’s state-owned South Gas Company owns 51 per cent of the project and Japanese trading house Mitsubishi owns 5 per cent. Shell and Basrah Gas both said they had no dealings with Mapna.

There is no indication that payments from Basrah Gas for power from the Rumaila plant, made via Iraq’s ministry of electricity, will violate US or European sanctions on dealing with Iran.

However, Mapna’s role in the power plant reflects the extent to which companies close to the Iranian regime have become embedded in the fabric of the Iraqi economy.

“Iran’s interests and influence run deep into the Iraqi state and its ministries,” said Renad Mansour, director of the Iraq initiative at Chatham House. “Its long-term investments and networks ensure it remains the most influential foreign power.”

Iran’s reach is especially entrenched in energy, where 20 years after the US-led invasion, chronic under-investment and corruption has left Iraq heavily reliant on imports of Iranian gas and electricity, which provide more than a third of its power needs. This is not only an issue for Shell.

Several international oil companies, including BP and ExxonMobil, run oilfields in Iraq that pull power from Iraq’s national grid. Mapna’s construction of the Rumaila plant is perhaps the best example of Iran’s penetration of the sector.

It also reflects how the west has vacillated on its rules of engagement with Tehran over the past decade, complicating operations for foreign investors in Iraq. When Mapna was selected to help build the Rumaila plant in 2015, Iran was about to sign a nuclear deal with western powers, and relations were improving.

Three years later US president Donald Trump pulled out of the deal and reimposed sanctions. The contract to develop the 3,000 megawatt Rumaila plant was awarded to Shamara in 2014, backed by a power purchase agreement with Iraq’s ministry of electricity.

The company initially hoped to work with a US or European partner but struggled to generate interest as Isis fighters swept across parts of Iraq and Syria that summer, prompting western investor interest to cool, according to a person familiar with the early stages of the project.

At the same time, two years of negotiations between western powers and Iran on a nuclear deal had opened the possibility for renewed engagement with Iranian companies, the person said. Mapna was ultimately awarded a $2.05bn contract to build and deliver the key technology for the Rumaila plant, backed by an Iraqi government payment guarantee signed on July 9 2015 — days before the west’s nuclear deal with Iran.

Mapna, a power and infrastructure group founded in 1993, is one of Iran’s most successful companies and the investment in Rumaila was championed by the Iranian regime. The plant received support from the Export Guarantee Fund of Iran in the form of a $300mn political risk insurance policy and is described on Mapna’s website as the company’s “largest international power project”.

The Shell joint venture agreed to take power from the Rumaila plant in 2019, signing a $35mn contract to build an 18km power line to a natural gas liquids (NGL) facility it was building nearby, according to documents shared with the FT by Unearthed, an investigative journalism group backed by Greenpeace.

The Basrah NGL plant is due to start operations in June and will pull up to 70MW of power from Rumaila, which could increase to 200MW as the NGL facility is enlarged. The Rumaila plant has been producing up to 1,500MW of power since 2020.

The ministry of electricity is the sole provider of power in Iraq, meaning it acts in effect as a middleman at the Rumaila plant, paying Shamara and Mapna for the power produced and selling it to customers such as Basrah Gas. Shamara collects 22 per cent of the revenues, while the rest flows to Mapna as repayment for its work on the project, according to the documents and the three people involved in the contracts.

Shamara declined to comment. Shell stressed that it had “no dealings with Mapna or any Iranian entity”, adding that it could not comment on the ministry of electricity “infrastructure, flow of funds or their commercial arrangements with third-party suppliers or offtakers of power”.

It also defended its participation in the Basrah Gas joint venture, saying that it was “founded as part of the solution to enhance Iraq’s energy self-sufficiency and reduce dependence on gas imports”. Mapna, South Gas Company and Iraq’s ministry of electricity did not respond to requests for comment. Mitsubishi referred questions to Basrah Gas.

Basrah Gas said it only paid the ministry of electricity for power and had no dealings with Mapna and no contract with Shamara other than the agreement in 2019 to build the power line. “BGC’s integrity due diligence on Shamara Holding did not highlight any concerns related to sanctions or trade compliance laws,” it said. But Mapna’s role in the project is contentious.

A former prime ministerial adviser and another person familiar with the matter said that Iraq, under US pressure, had frozen the Iraqi account into which Mapna receives funds since 2021. As a result, Mapna has delayed finishing the plant, which was designed to generate 3,000MW once complete.

The US has been concerned, among other issues, with the role that Hassan Danaeifar, a former Iranian ambassador to Baghdad and former member of the country’s Revolutionary Guards, has played in lobbying Baghdad on behalf of Mapna, the people said. Danaeifar could not be reached for comment.

“The US and Iraq are working together to modernise Iraq’s financial system, combat corruption, and prevent manipulation of the financial system,” the US State Department said in response to questions about Mapna.

It added that the US was focused on “enhancing Iraq’s energy security” by supporting the country to advance gas capture projects to reduce emissions and generate power, construct regional interconnections and modernise electricity infrastructure.

The transfers to Mapna’s account are not the only energy-related payments between Iraq and Iran to have encountered problems. US sanctions waivers allow Iraq to import gas and power directly from Iran but Baghdad’s payments can only be used by Tehran to fund purchases of food or medicine or for other authorised international transfers.

This arcane arrangement helps Iraq to meet domestic power demand but means its payments to Iran are often delayed, prompting Tehran to occasionally turn off supply. “The sanctions have created a Catch-22 for Iraq,” said Yesar Al-Maleki, Gulf analyst at Middle East Economic Survey.

“Washington understands that [Iranian gas and power imports] are crucial for the country’s political and social stability and continues to allow import waivers. But the limitations on transferring the payments to Iran mean that they are building up in Iraq.”

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