Iran And Iraq Sidestep U.S. Sanctions With New Oil-For-Gas Deal

By Michael Kern

• Iran and Iraq resolved their dispute over payments for earlier gas shipments, which had resulted in Iran reducing gas supply to Iraq and causing power shortages.

• Unable to use regular banking channels due to U.S. sanctions, Iraq and Iran have agreed to trade the gas for Iraqi crude oil, with Tehran having an outstanding $12 billion from Iraq for gas deliveries.

• Despite U.S. pressure for Iraq to develop its own gas resources, Iraq has signed a $27 billion investment deal with French energy supermajor TotalEnergies, part of which will be used to reduce gas flaring and enhance power generation.

The governments of Iran and Iraq have agreed on a gas supply deal that will see Iraq receive more gas from its neighbor for power generation.

The deal also settles a dispute over payments for earlier shipments of natural gas from Iran to Iraq, Bloomberg reported.

Because of this dispute, Iran has cut gas flows to neighboring Iraq, prompting power shortages. Now that the payments due have been settled, the shortages may be over.

Gas payment settlement cannot be done the usual way, with the payment being transferred from one bank to another because of U.S. sanctions on Iran. Iraq tried to convince the U.S. to make an exception for those particular payments, but the U.S. refused, which led to 50% lower Iranian gas volumes for Iraq starting at the beginning of this month.

After the usual way failed to work, Iraq and Iran agreed to exchange the gas for Iraqi crude oil as the only way to skirt U.S. sanctions, which only allow Iran to use payments due for food and medicine. Tehran has some $12 billion in outstanding payments due from Iraq for gas deliveries.

The United States will probably not be happy about the deal: Washington has been urging Iraq to stop relying on its neighbor for its gas supply. The alternative would be developing its own gas resources, of which there are plenty, but this has been challenging due to a lack of funds.

Yet Iraq made a step towards solving this problem earlier this week when it finalized an investment deal worth $27 billion with French energy supermajor TotalEnergies. Part of the money to be invested under the deal would go towards reducing gas flaring at Iraqi oil fields and using the gas for power generation.

Iranian electricity and gas exports account for as much as 40% of Iraq’s electricity consumption, and secure supply is especially important during the summer months when demand for cooling soars.

By Michael Kern for Oilprice.com