Iraq pledges to end $4 billion gas imports from Iran by 2028 as it races to diversify beyond oil
News Summary
Iraq's Prime Minister Mohammed Shia Al-Sudani has pledged to end the country's $4 billion reliance on Iranian gas by 2028, aiming to diversify the economy. Decades of mismanagement, underinvestment, and corruption have strained Iraq's power grid, with Iranian gas fueling nearly a third of its electricity generation. To address this, Baghdad has signed deals with TotalEnergies, Chinese, and Emirati firms to invest in capturing flared gas, estimated at $4-5 billion annually, with a goal of zero gas flaring by early 2028. Iraq is also courting Western firms like Chevron, Exxon Mobil, Halliburton, and SLB, alongside over $5 billion in investments from Qatar, Saudi Arabia, and the UAE, to improve its power infrastructure and develop renewables. Despite Iraq's "multi-pronged" diplomatic approach, renewed "snapback" sanctions on Iran (triggered by European powers in August 2025) pose an ongoing risk, potentially driving Tehran to use Iraqi banks for illicit dollar transactions. The U.S. Treasury has already banned several Iraqi lenders from dollar transactions earlier this year. The IMF notes that corruption remains a significant hurdle for growth. Ahead of parliamentary elections on November 11, Al-Sudani's government is grappling with high youth unemployment. He claims the government has taken steps to reduce unemployment and is encouraging the private sector, digital economy, and AI development to create more jobs and restore public trust.
Background
Iraq is OPEC's second-largest oil producer, yet its power infrastructure has long been plagued by mismanagement, underinvestment, and corruption. Iranian gas is a critical component of its electricity production, fueling nearly a third of the nation's power. Geopolitically, Iraq balances its relationship between the United States, a key defense partner, and Iran, a significant source of influence in the region. The 2003 U.S.-led invasion toppled Saddam Hussein's regime. In 2019, Iraq experienced mass protests, dubbed the "October Revolution," demanding an end to corruption and Iranian influence. In August 2025, European powers triggered the "snapback" mechanism, restoring sanctions on Iran that were lifted in 2015. Notably, during President Trump's first term, the U.S. had issued exemptions for Iraq to import Iranian electricity despite implementing a "maximum pressure" campaign on Tehran.
In-Depth AI Insights
What are the underlying geopolitical drivers and opportunities for foreign investors in Iraq's energy sector beyond the stated diversification goals? - Iraq's commitment to energy diversification is not just an economic imperative but also a strategic response to U.S. pressure. Under the Trump administration, sanctions on Iran are tightening, and reducing reliance on Iranian energy helps Iraq mitigate the risk of secondary sanctions and secure greater U.S. political and economic support. - This diversification also aligns with Iraq's long-term goal of enhancing national sovereignty and reducing external interference. By attracting diverse investments from the U.S., China, Europe, and Gulf states, Iraq can dilute the undue influence of any single external power over its economy and politics. - Cooperation with China is particularly noteworthy, representing a potential hedge against U.S. influence within Iraq's "multi-pronged" strategy. Chinese investments in infrastructure and energy offer Iraq alternative development pathways beyond those primarily offered by the U.S. and its allies. What are the second-order effects of Iran's "snapback" sanctions on Iraq's economy and international investment climate? - The re-imposition of Iranian sanctions will place continuous pressure on Iraq's financial system. Previous U.S. Treasury actions against Iraqi banks suggest that more Iraqi financial institutions could face scrutiny or sanctions for alleged involvement in Iranian money laundering, hindering dollar liquidity and international banking relations. - This could increase compliance costs and reputational risks for international companies operating in Iraq, especially those involved in energy transactions, as they will need to vet counterparties more rigorously to avoid links with sanctioned Iranian entities, potentially impacting foreign direct investment inflows. - Despite Iraq's stated pursuit of economic independence, Iran's structural influence, including via political proxies, may still impede reform processes or exploit Iraqi economic vulnerabilities (e.g., smuggling, informal trade) to circumvent sanctions, making it challenging for Iraq to fully attract Western investment. How will Iraq's domestic political stability and youth unemployment issues impact the long-term sustainability of its energy and economic reforms? - While Prime Minister Al-Sudani emphasizes political stability and reform progress, high youth unemployment and entrenched corruption remain significant long-term risks. The upcoming elections, if they fail to adequately address these deep-seated socio-economic issues, could trigger renewed social unrest, undermining investor confidence and the execution of long-term projects. - Government-backed digital transformation and AI strategies, while aimed at job creation, may take time to show tangible results and require robust governance and infrastructure support. If these initiatives are slow or ineffective, youth disillusionment could deepen, challenging the government's legitimacy. - Investors will closely watch the post-election political landscape and whether the new government can sustain the current reform momentum, particularly in combating corruption and ensuring transparency in energy projects. Any political deadlock or power struggles could lead to policy reversals, disadvantaging Iraq in attracting and retaining foreign investment.