Iraq Rebuffs U.S. Demands to Stop Buying Energy From Iran

Even with that, Iraq has a shortfall of three gigawatts of power.

Last May, around the time Mr. Trump announced the withdrawal from the Iran nuclear deal, Iraqi officials stopped paying Iran for natural gas and electricity. That was in part because they feared the United States was about to impose sanctions, and their lawyers wanted to look at Iraq’s exposure, said a State Department official, who discussed details of the sensitive diplomatic issue on condition of anonymity.

Last July and August, having not been paid, Iran stopped electricity exports to Iraq. That contributed to widespread blackouts in the southern city Basra, already common during the summer, and helped ignite protests. Iran restarted exports on Aug. 20, but the protests continued, and some residents burned the Iranian Consulate in September.

Iran has since continued its exports of natural gas and electricity to Iraq and expects to be paid. Officials from both countries are negotiating how to make payments, given the American sanctions. The Trade Bank of Iraq could have sanctions placed on it by the United States if it buys natural gas or, under the temporary electricity waiver, pays for electricity in United States dollars, the State Department official said.

Iraqi officials met with Treasury Department officials in Washington twice in late 2018 to discuss how to legally make payments. A critical period will come this summer, when electricity demand will surge again. If Iran cuts supplies because of nonpayment, more protests could occur, destabilizing the country.

For a long-term solution, the Trump administration is urging Iraqi officials to connect their grid to Saudi Arabia, Jordan or Kuwait.

They are also pushing Baghdad to sign contracts with foreign companies for natural-gas capture, processing and transport to use gas that is lost during crude oil production. Iraq has 1.7 billion cubic feet of gas flaring per day across 30 fields. The World Bank has worked with the Oil Ministry for two years to improve legal and regulatory foundations for gas contracts.

But that is not a short-term fix for energy shortfalls, and Iraq has been slow in signing contracts. Last year, Iraq signed a single natural-gas processing contract, with Baker Hughes and General Electric. The product would equal only a fraction of the imports from Iran, and it would take at least two years to come online.