Iran seeks respite from sanctions in Iraq

The Wall Street Journal

Iran has agreed to supply Iraq with natural gas in a four-year, $14.8 billion deal that offers Tehran a respite from sanctions and Iraq a needed energy source, and has already prompted concerns in Washington.

The deal would double Iran's natural-gas exports and require expanded production from a gas field whose development has been hindered by international sanctions, according to a senior Iranian oil and gas official.

The U.S. has asked the Iraqi government about the deal, a U.S. State Department spokeswoman said Monday. Baghdad "has been receptive to these discussions in the past and has expressed its desire to remain compliant with U.S. sanctions," she said. "We would, of course, make clear the implications were any activity to be deemed as at variance with U.S. sanctions."

For Iraq, the natural-gas supplies from Iran would offer a needed fuel source, helping ease electricity shortages by feeding two power plants in a suburb of Baghdad, said Mussab al-Mudaris, a spokesman for the Iraqi ministry of electricity.

Power outages have prompted antigovernment demonstrations in the past few weeks in Shiite-dominated areas of southern Iraq, where summer temperatures can exceed 120 degrees.

For Iran, the Iraq deal would create an important regional export market as Western sanctions aimed at pressuring Tehran over its nuclear program shrink the number of international destinations available for its energy supplies.

Under the four-year deal, signed in Baghdad on Sunday by Iraqi electricity minister Kareem al-Jumaili and Iranian oil minister Rostam Qasemi, Iraq will buy 850 million cubic feet a day of Iranian natural gas at a price of $10 million a day, starting in around two months, according to Iraqi and Iranian officials.

The deal, adding up to $3.7 billion a year to Iran, promises vital export earnings for a country whose oil-export revenue fell by more than $26 billion last year because of Western sanctions, according to the U.S. Energy Information Administration.

Baghdad and Tehran have developed close ties under the Shiite-led government of Iraqi Prime Minister Nouri al-Maliki, despite concerns by his opponents and Washington and its Arab allies, including Saudi Arabia, about Iran's expanding influence in the region.

The Obama administration has been increasingly concerned about Baghdad's relations with Iran, senior U.S. officials said.

The U.S. is particularly concerned about Iran's repeated use of Iraqi airspace to ship what Washington believes are arms and cash to Syrian President Bashar al-Assad's regime.

U.S. officials said they have repeatedly asked Iraq to stop the shipments, but that Baghdad hasn't complied. "We know the Iranian flights continue," said a senior U.S. official.

Iran has the world's largest natural gas reserves but is a relatively minor exporter. It exported around 800 million cubic feet of gas a day in 2012, mostly to Turkey, according to the BP Statistical Review of World Energy. More than 97% of the country's production was consumed domestically, the data showed.

Turkey's government has said it intends to continue buying natural gas from Iran despite Western pressure.

The deal with Iraq would double Iran's natural-gas exports. To do so, Iran would increase production from the giant South Pars field in the Persian Gulf, the senior Iranian official said.

The development of export projects at South Pars has been hindered by international sanctions. French oil company Total SA FP.FR -0.77% in 2009 pulled out under U.S. pressure of the 11th phase of South Pars, which was supposed to develop liquefied natural gas export capability. Total was succeeded by China National Petroleum Corp., but over the next three years the company made little progress and its contract was terminated in April.

Iran's efforts to continue development of the huge gas resource through its own state-owned oil companies have had mixed success. In January, an offshore gas platform sank in the Persian Gulf as Pars Oil and Gas Co. Ltd. attempted to install it on the South Pars field.

The exports to Iraq under the new deal will be transported via a pipeline in Iraq's Diayla province that is 90% complete and should be ready in two months, said Mr. Mudaris, the ministry spokesman.

Iraq doesn't produce enough natural gas to feed its own power stations and produces only half its power needs—while already importing over 6% of those needs from Iran.