Tehran and Washington have been vying for influence in Iraq since the U.S. invaded it 17 years ago. The U.S. assassination of powerful Iranian military commander of the elite Quds Forces, Qassem Soleimani, in Baghdad on January 3, almost dragged Iraq into a conflict between the two powers. Already embroiled in domestic violence and anti-government protests since October 2019, Iraq has found itself in new turmoil as the U.S.-Iran tensions escalated this winter. 

Shortly after Soleimani’s murder, the Iraqi parliament voted to expel American troops from the country. A prominent Iraqi Shi’a cleric, militia leader, and an opponent of foreign influences in Iraq, Muqtada al-Sadr urged his compatriots to mount a “million-strong” march against the U.S. presence in Iraq. 

While anti-government protesters in Iraq saw the million-strong march as perpetuation of the current political system, hundreds of thousands of their fellow citizens crowded the streets of Baghdad to demand that U.S. troops leave their country. The administration of President Donald Trump not only refused to do so, it also threatened to impose sanctions on Iraq and freeze its oil revenue account at the Federal Reserve Bank in New York – which holds nearly 90 percent of Iraq’s national budget, if Baghdad insisted on the withdrawal of American forces. 

Freezing Iraq’s account would lead to a collapse of the Iraqi economy and plunge it into a bigger turmoil.

Freezing the account would lead to a collapse of the Iraqi economy and plunge it into a bigger turmoil. Baghdad does not have the luxury to risk its oil export revenue, which is the country’s only economic lifeline. And butting heads with Washington also threatens the future of its oil sector, which has been growing despite serious structural problems and years of wars and chaos.

With only a small percentage of the estimated 143 billion barrels of proven oil reserves currently in development, Iraq already rivals major oil producers in the Organization of the Petroleum Exporting Countries (OPEC), aided by low production costs and easy geology. As the second-largest oil producer in OPEC after Saudi Arabia, Iraq’s oil production has doubled over the past decade from 2 million barrels per day (mbpd) in 2005 to 4.5 mbpd in 2017.

Now, the Iraqi Oil Ministry is aiming to raise the output to 8 mbpd in the next 20 years, which may be a challenging task given the severe shortages of water and electricity needed for oil production and recurring political crises that lessen foreign investors’ enthusiasm. These factors are fundamental barriers to the oil sector’s future growth, while geopolitics threatens to roll back its current progress. 

The country’s energy sector heavily relies on water injection into oilfields to maintain reservoir pressure and boost production. An option to inject natural gas for pressure maintenance in oilfields is not currently possible in Iraq due to the lack of necessary infrastructure. The long-anticipated Common Seawater Supply Facility (CSSP), which would treat seawater from the Arabian Gulf and send it for oil extraction via pipelines, is still not built. 

CSSP’s future is uncertain as investors have been reluctant to take on the project due to unfavorable contract terms with the Iraqi government. Water needed for oilfield injection is in highest demand in southern Iraq, which produces two-thirds of Iraq’s oil and where water is also the scarcest. Without CSSP, Iraq will be unable to increase its oil production from the current levels of 4.5 to 4.7 mbpd. 

Since major increases in oil production and exports depend on electricity use, power shortages have prevented oil from being pumped into tankers, sometimes stopping the operation of export terminals. Often, oil companies must produce their own electricity to continue their operations. 

Without a reliable power supply, Iraq will not be able to rebuild its economy and energy infrastructure, including oil transportation and distribution systems, let alone maintain social stability.

Without a reliable power supply, Iraq will not be able to rebuild its economy and energy infrastructure, including oil transportation and distribution systems, let alone maintain social stability. Prolonged power outages have periodically caused unrest across Iraq’s major cities and contributed to the current protests. 

While the ongoing political crisis has not yet impaired Iraq’s ability to produce oil, despite routine disruptions of traffic by protesters to access southern oil fields, the growth prospects of the oil sector now look less than certain. 

First, the violent crackdown on protesters, political paralysis, and the scope of Iran’s influence in its neighbor’s affairs have already pushed away foreign investors in Iraq’s energy sector. Corruption, red tape, and poor access to basic services, such as electricity and water, have been sources of frustration for Iraq’s street protesters and foreign investors alike. The sluggish deliberations to form a new government, following the November 2019 resignation of Prime Minister Adel Abdul-Mahdi, have also contributed to investor skepticism in Iraq. 

On top of this, Baghdad’s decision to expel American troops and the possibility of retaliatory U.S. sanctions and freezing of Iraq’s New York-based bank account are likely to reduce Western investments, which Iraq desperately needs to rebuild its energy sector and overall economy. 

Second, some oil majors, such as Chevron and Exxon, started to withdraw their American personnel from Iraq following the death of Soleimani and the growing tensions between Baghdad and Washington. So far, the limited withdrawal of American staff has not affected the production of oil in Iraq. But if the ongoing protests escalate into more violence, international oil majors may further scale back their presence in the country, where they have already been grumbling about unfair oil production contracts for years. 

Foreign energy companies may wonder if doing business in Iraq is worth the risks. According to a January 2020 projection of the International Energy Agency, “in the medium term, heightened security concerns make it more difficult for Iraq to build production capacity.”

To survive its economic and political crises, Baghdad may not have any choice but to get on the good side of Washington.

To survive its economic and political crises, Baghdad may not have any choice but to get on the good side of Washington. On February 10, the U.S. agreed to extend its waiver for Iraq to import natural gas from Iran for another 120 days. Its electricity crisis would be worse without importing Iranian gas. And without the waiver, Iraq would face American sanctions for illegally buying Iranian energy. 

Under pressure from the U.S., Iraq may finally be able to add more domestic power generation capacity and reduce Iranian gas imports, as it is scrambling to build infrastructure to capture flared gas from oil production sites and use it to produce electricity. 

At the end of the day, the potential of Iraq’s oil production appears to hinge on the interplay of Iran’s actions in Iraq and Washington’s reactions as much as on solving internal problems. Unfortunately, the future of its oil sector is now more than ever deeply entangled in geopolitics.