Iraq Power Grid Suffers as Iran Cuts Gas by Half – U.S. company bidding on LNG import facilty

July 2, 2025

Energy News Beat

Iraq’s electricity grid is reeling from a severe energy shock after Iran slashed its natural gas exports by more than half, exposing the country’s fragile dependence on its neighbor’s energy supplies. The reduction, which dropped deliveries to 25 million cubic meters per day from an agreed 55 million, has led to the shutdown of several gas-fired power plants and a loss of approximately 3,800 megawatts—about 15% of Iraq’s electricity generation capacity. This crisis, reported by Bloomberg on July 1, 2025, underscores Iraq’s vulnerability to external energy disruptions despite its vast oil wealth and highlights the ripple effects of geopolitical tensions in the region.

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A Crippling Blow to Iraq’s Power Grid

Iraq’s Electricity Ministry confirmed the sharp decline in Iranian gas imports, attributing the cut to Iran’s increased domestic demand and pipeline maintenance needs. The sudden shortfall forced multiple power plants offline, exacerbating an already strained grid that struggles to meet soaring summer demand. With temperatures climbing above 50°C (122°F), Iraq faces chronic blackouts, leaving households and businesses reliant on costly and polluting diesel generators. The loss of 3,800 megawatts is particularly devastating as peak summer electricity demand exceeds 35 gigawatts, far outstripping the country’s available supply of around 27 gigawatts.

This isn’t the first time Iran has curtailed gas exports to Iraq. Similar reductions have occurred in recent years, often tied to Iran’s own energy shortages, unpaid Iraqi bills, or U.S. sanctions limiting financial transactions. Posts on X from July 1, 2025, echoed Bloomberg’s findings, noting that Iraq’s grid is “hooked on imports” and vulnerable to sanctions, unpaid debts, and now, regional conflicts. One user,@MiddleEast_24 , suggested Iran’s powerful militias in Iraq have long enforced this energy cooperation, but recent setbacks in Iran’s regional influence may be shifting dynamics.

Energy News Beat’s Early Warning

At Energy News Beat, we were ahead of the curve, warning our readers on June 13, 2025, about the looming decline in Iran’s gas exports to Iraq. Our analysis, published on Substack, predicted that Iran’s domestic energy crisis—compounded by Israeli attacks and U.S. sanctions—would disrupt supplies, forcing Iraq to lean heavily on fuel oil to power its plants. We noted, “Iran’s electricity exports to Iraq stopped weeks ago when President Trump refused to extend Iraq’s exemption from Iran sanctions. Major power outages are expected in both countries.” This foresight proved accurate as Iraq now grapples with the consequences of reduced gas flows.

Our June report also highlighted a broader regional impact, emphasizing that the war’s most significant energy market fallout would be felt not in oil but in natural gas markets, particularly in Iraq, Egypt, and Jordan. We predicted that Iraq’s pivot to burning fuel oil would hit record levels this summer, a move that’s now underway but limited by the country’s aging infrastructure and insufficient refining capacity. This shift is already straining Iraq’s oil export potential, as more crude is diverted to domestic power generation.

Check out the article on Excelerate Energy bidding on an LNG import terminal. Excelerate Energy Bids to Power Iraq’s First LNG Terminal: A Strategic Shift Away from Iran

Iraq’s Paradox: Oil Rich, Energy Poor

Despite holding the world’s fifth-largest crude oil reserves (145 billion barrels) and ranking twelfth globally in natural gas reserves (131 trillion cubic feet), Iraq remains heavily reliant on Iranian gas and electricity imports. In 2023, natural gas accounted for 50.4% of Iraq’s electricity generation, with oil at 47.6% and renewables, primarily hydroelectric, contributing just 2%. The country imports 40–50 million cubic meters of gas daily from Iran, alongside up to 1,300 megawatts of direct electricity, to meet its needs. Yet, chronic mismanagement, war damage, and corruption have crippled Iraq’s ability to harness its own resources.

A glaring example of this inefficiency is Iraq’s gas flaring. In 2023, the country flared 18 billion cubic meters of gas—enough to generate 33 gigawatts of electricity—making it the world’s third-largest flarer after Russia and Iran. Capturing this gas could eliminate Iraq’s reliance on Iranian imports and save billions annually, but inadequate infrastructure and political instability deter the necessary investments. Efforts like the TotalEnergies gas capture deal and the Basra Gas Company’s projects are steps forward, but progress is slow, with Prime Minister Mohammed al-Sudani admitting Iraq needs at least three more years to achieve energy independence.

Geopolitical Tensions and Sanctions

The timing of Iran’s gas cut coincides with heightened regional tensions and U.S. policy shifts. The Trump administration’s decision to let a sanctions waiver for Iraqi energy imports from Iran expire on March 7, 2025, has tightened the screws on both nations. The waiver, in place since 2018, allowed Iraq to pay Iran for gas and electricity without violating U.S. sanctions, with funds held in restricted accounts for humanitarian purchases. However, Iran’s frequent supply cuts—often blamed on its own energy crisis—have reduced its leverage. In winter 2024, Iran slashed gas exports to Iraq by 85% and electricity by two-thirds, forcing Iraq to burn more crude and fuel oil.

Iran’s own energy woes are deepening the crisis. Facing a systemic energy meltdown with daily blackouts lasting 3–4 hours, Iran has prioritized domestic needs over exports. Aging infrastructure, mismanagement, and the Islamic Revolutionary Guard Corps’ control over key industries have left Iran’s power plants operating at low efficiency, with some at just 20%. This has led to a 20% electricity deficit and a 25% natural gas shortfall, disrupting not only Iraq but also Turkey’s energy supplies.

Iraq’s Pivot and the Path Ahead

In response to the crisis, Iraq is scrambling for alternatives. The Ministry of Oil is exploring liquefied natural gas (LNG) imports from Qatar and Oman, with plans to lease a floating LNG terminal at the port of Khor al-Zubair by mid-2025. A 45-kilometer pipeline is under construction to deliver this gas to southern power plants. Additionally, Iraq is accelerating plans to import electricity from Saudi Arabia and connect to the Gulf Cooperation Council’s grid, moves that could reduce dependence on Iran.

However, these solutions face hurdles. Iraq’s grid, plagued by 40% transmission losses and outdated infrastructure, struggles to integrate new supplies. Political instability and corruption further complicate reforms, while the country’s $12 billion debt to Iran for past gas and electricity imports remains a sticking point.

Bottom Line: A Record Summer for Oil Use

As Energy News Beat predicted, Iraq’s reliance on fuel oil is expected to reach historic highs this summer, diverting valuable crude from export markets and limiting its ability to capitalize on global oil demand. This shift not only undermines Iraq’s economic potential but also exacerbates local pollution, as the burning of heavy fuel oil (mazut) in power plants increases emissions. With no quick fix in sight, Iraq’s energy crisis serves as a stark reminder of the need for long-term investments in domestic gas capture, grid modernization, and renewable energy.

The broader regional fallout, as we noted in June, extends beyond Iraq. Egypt and Jordan, also tied to the region’s natural gas dynamics, face their own challenges, but Iraq’s grid remains the most vulnerable. As one X user put it, “Iraq’s grid is a house of cards, and Iran just pulled out a key support.” Without bold action, Iraq’s power woes will persist, threatening stability in a country already on edge.

For more insights on global energy markets, subscribe to Energy News Beat at theenergynewsbeat.substack.com.

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