The end of a waiver: Iraq's struggle for energy independence

Shafaq News/ Iraq is on the brink of an energy crisis as the expiration of a crucial US waiver threatens to cut off its access to Iranian gas, a vital fuel that powers nearly 30% of the country's electricity.

With summer temperatures soaring and electricity demand peaking, the government's scramble to find alternative energy sources has never been more urgent. As US sanctions tighten and Iran’s financial support becomes increasingly unreliable, experts warn that Iraq could face widespread blackouts, economic instability, and social unrest unless immediate, innovative solutions are found.

Red Lines: US and Iranian Gas

The expiration of Iraq's waiver on March 8, 2025, has significantly altered Baghdad’s energy landscape, cutting the country off from a natural gas supply. For years, Iraq has depended on Iranian imports to meet around 40% of its gas needs, which powers plants responsible for generating nearly 30% of its electricity. However, this latest development marks a pivotal shift, as Iraq can no longer rely on US waivers to secure energy supplies.

The US State Department confirmed the decision, linking it directly to President Donald Trump’s "maximum pressure" campaign against Iran. This policy, initially introduced in 2018, aims to cripple Iran’s economy by severely restricting its ability to generate revenue from oil and gas exports. Washington insists that its broader objective is to compel Tehran to abandon its nuclear ambitions, curb its ballistic missile program, and reduce its support for armed groups throughout the region.

In light of these changes, Prime Minister Mohammed Shia Al-Sudani engaged in a phone call with US National Security Advisor Michael Waltz to discuss ways to mitigate the consequences of the waiver’s termination. The two reaffirmed their commitment to strengthening bilateral relations, with Waltz emphasizing that "the end of the Iranian electricity waiver is tied to the Maximum Pressure Policy." He added that the expiration "highlights the need for a stronger coordination between our two nations to avoid any negative impacts on Iraq’s stability."

Iran, unsurprisingly, has strongly condemned the US move. Iranian officials argue that Washington is using economic coercion to destabilize the region. Spokesperson Nasser Kanaani from Iran’s Foreign Ministry labeled the decision as "a violation of Iraq’s sovereignty and energy security," and assured that Tehran would "explore alternative ways to continue supplying gas to Iraq despite US pressure."

Iranian Foreign Minister Abbas Araghchi condemned stated, “It is extremely deplorable that the US administration has decided to target the innocent people of Iraq by attempting to deprive them of access to basic services such as electricity, especially ahead of the coming hot months of the year."

He further expressed his country's unwavering commitment to standing with the Iraqi people and government in addressing US decisions, which he described as “unlawful actions.”

US Sanctions Bite

The US has repeatedly warned that financial transactions with Iran, including energy imports, could trigger secondary sanctions targeting banks and businesses engaged with sanctioned entities.

The expiration of Iraq’s waiver highlights Washington’s commitment to tightening restrictions on Tehran, despite concerns about the potential economic fallout for regional partners. Brian Nelson, Under Secretary for Terrorism and Financial Intelligence at the US Treasury, reaffirmed this stance, emphasizing that “any entity facilitating payments to Iran, directly or indirectly, risks exposure to sanctions. Iraq must ensure its financial institutions remain compliant with US regulations.”

The enforcement of these sanctions has already had a significant impact on Iraq’s financial landscape. In 2024 alone, the US imposed sanctions on six Iraqi banks over alleged ties to Iran’s financial networks, further complicating Baghdad’s ability to process energy payments.

According to the Iraq Private Banks League, these restrictions have caused a 20% decline in dollar liquidity within Iraq’s banking system, which in turn has placed increased pressure on both businesses and consumers. This strain extends beyond just financial institutions, as Iraqi companies reliant on US dollar transactions have faced delays and intensified scrutiny from the Federal Reserve Bank of New York, which monitors Iraqi dollar transfers.

As the US sanctions tighten, Iraq’s reliance on Iranian energy imports continues to pose a challenge. Iranian energy officials report that Iraq still owes approximately $3.1 billion in unpaid gas dues, a figure that has grown due to bureaucratic hurdles, US sanctions, and Iraq’s fragile financial situation. Payments have often been delayed because of the complexities surrounding transactions with Iran under sanctions, particularly as Iraq has depended on US waivers to avoid penalties.

In light of these challenges, Majid Chegeni, head of Iran’s National Gas Company, acknowledged Iraq’s role as a reliable consumer but noted the significant constraints in processing payments. He added, “The accumulated debt affects our ability to maintain and expand gas exports. We expect Baghdad to find a solution that allows for timely payments.” In response, Iraq has attempted to settle part of its dues through non-dollar transactions, such as payments in Iraqi dinars and barter agreements. However, these efforts have faced their own logistical hurdles and banking restrictions, making it difficult to resolve the situation effectively.

This ongoing financial strain has not gone unnoticed in Tehran, where Iran’s Minister of Oil, Javad Owji, recently warned that “if payments are not resolved soon, Iran may be forced to reconsider its gas export commitments to Iraq. Tehran cannot continue supplying gas without securing its financial interests.” Iranian officials also pointed out that past disruptions in gas exports due to payment delays have resulted in temporary reductions of up to 50% in gas flows to Iraq, which has had a significant impact on Baghdad’s power supply.

Iraqi officials, on the other hand, are increasingly concerned that excessive US pressure could destabilize the country’s economy and energy sector.

Diyaa Hindi Al-Hassnawi, a member of the Iraqi Parliament’s Investment and Development Committee, described the situation as “sensitive and complex,” cautioning that “Iraq cannot afford to jeopardize its access to electricity, nor can it risk financial isolation.” He further urged the Ministry of Electricity to develop long-term energy independence strategies, noting that “continuing to rely on imports without alternative plans will keep Iraq trapped in a cycle of repeated crises.”

Al-Hassnawi suggested that Iraq explore more flexible payment approaches, including deferred payment agreements, barter deals involving crude oil or agricultural products, and expanded regional energy partnerships.

Dark Days Ahead

With nearly 40% of Iraq’s power generation dependent on Iranian imports, any power disruption could trigger severe blackouts, especially during the scorching summer months when temperatures soar past 50°C and electricity demand surges beyond 34,000 megawatts (MW).

The potential impact is staggering. Officials from the Iraqi Ministry of Electricity warn that losing Iranian gas could result in the loss of at least 7,000 MW of power, plunging major cities such as Baghdad, Basra, and Mosul into darkness.

Ministry spokesperson Ahmed Musa underscored the gravity of the situation, explaining that "Iraq currently imports 50 million cubic meters of gas per day from Iran. Losing this supply would create an unprecedented crisis, particularly in hospitals, water treatment plants, and industrial zones." He added, "Without urgent solutions, we could see large-scale service failures affecting millions."

Beyond immediate power shortages, the implications extend to social and political stability. Energy experts caution that past electricity crises have fuelled mass protests, particularly in southern provinces like Basra and Dhi Qar, where prolonged blackouts have historically triggered unrest. "We have seen this pattern before," said Iraqi energy analyst Ali Al-Tamimi. "When power outages become unbearable, people take to the streets, demanding change."

The summer of 2024 exemplified these risks, as Iraq grappled with a power deficit of 12,000 MW, leaving some areas without electricity for up to 12 hours a day. With public frustration mounting, the threat of renewed demonstrations looms large.

Adding to the complexity is Iraq’s financial vulnerability. The country’s foreign reserves, estimated at approximately $120 billion, are largely held in US financial institutions, making Baghdad highly susceptible to American financial oversight.

Deputy Governor of the Central Bank of Iraq, Ammar Khalaf, warned that "if the US tightens restrictions further, we may see a spike in exchange rates, a 20-30% increase in commodity prices, and liquidity shortages that could affect everything from government salaries to food imports." He further stressed, "A financial squeeze could have ripple effects far beyond the energy sector, hitting ordinary Iraqis the hardest."

A similar scenario played out in late 2023 when restrictions weakened the Iraqi dinar beyond 1,600 per US dollar, fuelling economic instability and public discontent.

Diversify or Die: Iraq's Plan B

As Iraq faces a looming energy crisis, the government has been working on contingency plans to prevent catastrophic supply disruptions. Ahmed Al-Abadi, spokesperson for the Ministry of Electricity, assured that "authorities have developed a comprehensive strategy ahead of the peak summer season, focusing on easing network bottlenecks, establishing new feeders, and installing additional power stations."

A key component of this strategy involves reducing dependence on Iranian gas. To achieve this, the government has begun exploring alternative sources. Ali Shaddad, spokesperson for the Parliamentary Oil and Gas Committee, revealed that "the government is considering gas imports from Gulf countries and has prioritized a major infrastructure project in Basra." This includes the construction of an LNG terminal capable of handling "1.5 billion cubic feet per day," expected to come online in late 2025.

In parallel, Iraq has pursued agreements with other suppliers to bridge the gap. In October 2024, Baghdad signed a deal with Turkmenistan to import "20 million cubic meters of gas per day" via Iranian pipelines through a swap mechanism. However, implementation has been delayed due to technical challenges, including outdated pipeline capacity and inadequate compression stations.

Regulatory complications, such as pricing disputes, payment mechanisms, and transit fees between Iraq, Iran, and Turkmenistan, have further stalled progress. Despite these obstacles, officials remain engaged in negotiations to resolve outstanding issues and operationalize the agreement.

Beyond Turkmenistan, Iraqi officials have also explored potential deals with Qatar, Turkiye, and the UAE. However, infrastructure limitations and pricing concerns make an immediate shift unlikely. According to data from the Iraqi Oil Ministry, "fully replacing Iranian gas imports would require at least $10 billion in infrastructure investments. This includes developing domestic gas fields such as Akkas and Mansuriya, expanding LNG import capacity, and modernizing Iraq’s power grid." With domestic gas production still underdeveloped and project timelines stretching five to seven years, Iraq remains reliant on Iranian supplies for the foreseeable future.

Recognizing the urgency of enhancing domestic production, Iraq has embarked on a multifaceted strategy to diversify its energy portfolio. The country possesses significant natural gas reserves, estimated at approximately 3.5 trillion cubic meters, the 11th largest in the world. However, much of this gas has historically been flared due to inadequate infrastructure. In 2023 alone, Iraq flared about 17 billion cubic meters of gas, equivalent to $2 billion in lost revenue.

To address this inefficiency, Iraq has initiated several projects aimed at capturing and utilizing associated gas from oil fields. The Basrah Gas Company, a joint venture between the Iraqi government, Shell, and Mitsubishi has been working to capture flared gas to supply power plants, reducing both waste and environmental impact.

Additionally, the Ministry of Oil plans to import approximately 600 million standard cubic feet of liquefied gas via floating platforms at Iraqi ports, expected to generate around 4,000 megawatts of power before next summer.

Efforts to enhance power generation efficiency have also gained momentum. Iraq is investing in combined-cycle power plants, which utilize both gas and steam turbines to produce more electricity from the same fuel input. Notable projects include the expansion of the Rumaila and Bismayah power plants, which are expected to add "3,000 megawatts of capacity by 2027."

Simultaneously, the government is advancing its renewable energy initiatives, including solar power installations across public buildings. As part of this effort, over 540 government buildings are set to transition to solar energy, with one-third expected to be equipped before the summer.

Despite these efforts, experts warn that Iraq’s power deficit remains substantial. Energy expert Kofand Shirwani estimated that "Iraq currently faces a shortfall of nearly 26,000 megawatts. The cessation of Iranian gas would add another 8,000 megawatts to this deficit, potentially pushing the shortfall to as high as 70%." Shirwani argued that "this crisis could catalyze the Iraqi government’s acceleration toward natural gas investment and achieve self-sufficiency to avoid reliance on foreign suppliers."

Given these challenges, Iraq may still need to maintain Iranian gas imports in the short term. Economic expert Mustafa Farraj predicted that "Iraq may continue importing Iranian gas through new financial arrangements, such as deferred payments or barter, to avoid a severe electricity crisis." He further emphasized that "the most likely solution is for Iraq to continue importing Iranian gas through new financial arrangements, especially since a sudden disruption in supply could lead to a severe electricity crisis."

However, not everyone is convinced that the government has done enough to prepare. Political analyst Saif Al-Saadi criticized Iraqi authorities for "failing to find an alternative to replace Iranian gas to cover the shortage." Al-Saadi noted that "the US has repeatedly threatened and warned about sanctions, and therefore the Iraqi government should have anticipated sanctions on Iran and found alternatives."

He predicted that "a problem will arise next summer, with the country facing scorching temperatures, similar to the impact of the sanctions imposed by Trump against Iran and the political actors within Iraq helping Tehran evade these sanctions."