Iran signals breakthrough on gas supply, payments with Iraq

Iran and Iraq appear to be on the brink of resolving a long-standing dispute over Iranian gas exports and Iraq’s unpaid dues, just as Baghdad battles surging power demand during peak summer months. Iran’s Oil Minister Mohsen Paknejad on Saturday said that both nations are close to settling the issues that have disrupted energy flows and strained bilateral relations, as per Bloomberg.

“We will soon witness the resolution of both issues,” Paknejad said, as quoted by Iran’s state broadcaster IRIB News after meeting with Iraq’s Electricity Minister Ziad Ali Fadhil in Tehran. The statement was cited in a Bloomberg report on the matter.

Electricity shortages plague Iraq

The gas shortfall from Iran has significantly impacted Iraq’s electricity generation, pushing parts of the country into deeper blackouts. Iraq’s Electricity Ministry recently confirmed that reduced Iranian gas deliveries had forced cuts in domestic power output, straining an already fragile grid as temperatures soar above 50°C in several provinces.

As per Bloomberg, Minister Fadhil’s ministry stressed the urgency of restoring Iranian gas flows to meet Iraq’s peak summer energy needs. Iraq depends on Iran for roughly one-third of its power generation, either through direct gas supplies or imported electricity.

Iran juggles domestic power and export commitments

Despite possessing the world’s second-largest natural gas reserves, Iran continues to face a dilemma: balancing domestic energy demand with export obligations. The country’s internal grid has been under pressure, especially during heatwaves, forcing the government to resort to more polluting fuels.

On Tuesday, Saeed Tavakoli, head of the National Iranian Gas Company, said Iran’s power plants had extensively turned to burning mazut, a heavy, sulphur-rich fuel oil, to keep the national grid stable.

As quoted by Bloomberg, Tavakoli noted this substitution could free up additional gas for exports, including to Iraq.

Long-term energy ties, short-term challenges

In 2024, Iran and Iraq signed a five-year extension to their gas export agreement. The deal, reported by Shana, the Iranian Oil Ministry’s official news outlet, allows for seasonal flexibility, giving Tehran leeway to prioritise domestic energy needs during winter or peak demand periods.

However, payment issues remain a sticking point. Iraq has reportedly fallen behind on dues for gas imports, largely due to US sanctions on Iran that complicate cross-border financial transactions. The two nations have used a mix of currency swaps and escrow accounts in third countries to navigate the restrictions.

A political and energy balancing act

A resolution to the current crisis would not only stabilise Iraq’s power sector but also reaffirm Iran’s role as a key regional energy supplier, despite ongoing infrastructure and sanctions-related challenges.

As per Bloomberg, the talks between Tehran and Baghdad signal progress in a region where energy security remains deeply intertwined with diplomacy and domestic pressures. For now, both governments appear committed to a fix, though any sustainable solution will likely require longer-term investments in infrastructure and clearer payment mechanisms.

(With inputs from the agencies)