Trump may target Iraq's oil sector with sanctions to counter Iranian influence: sources

US President-elect Donald Trump's planned maximum pressure sanctions campaign on Iran may extend to neighboring Iraq, according to three sources familiar with the discussions, targeting OPEC's second largest crude producer and a known oil smuggling hotbed.

Putting full secondary sanctions on Baghdad, as the US has imposed on Iran, would threaten Iraq's more than 4 million b/d of crude oil production and roughly 3.6 million b/d of exports, according to S&P Global Commodity Insights data.

But Bob McNally, who heads the Washington-based consultancy Rapidan Energy, said the measures may target specific Iran-linked entities and individuals, including at Iraqi state oil marketer SOMO. Other sources, who spoke on condition of anonymity, said Iraq's sanctions waivers to import Iranian gas and power would be terminated at a minimum, which would have dire impacts on Iraq's ability to generate electricity.

The sanctions are aimed at Iran's pervasive influence in Baghdad, with Tehran-aligned political groups and militias controlling swaths of Iraq's government and oil sector, S&P Global Commodity Insights has previously reported.

McNally, a former senior energy director on the US National Security Council during the Bush administration, said he has been advising clients since spring "that a Trump 2.0 government would put Iraq's increasingly pro-Iranian government in the cross hairs for sanctions, though not necessarily restrictions on exports."

Despite having some of the world's largest oil and gas reserves, Iraq suffers from frequent power outages, leaving it dependent on Iran for imports of energy supplies.

On Nov. 24, Iran reduced its gas exports to Iraq from 25 million cu m/day to 7 million cu m/day, causing a 5.5 GW electricity loss in Iraq.

The dependence on Iran, along with a fractured political system and rife corruption, has enabled militias aligned with Tehran to embed themselves into SOMO and Iraq's oil ministry, sources have told Commodity Insights.

That has led to a "gray market" trade in Iraqi crude that has generated millions of dollars of laundered revenues for the Iranian-backed groups, eyewitnesses, US officials and industry sources have said.

The US has urged Iraq for years to extricate itself from Iranian influence, but the incoming Trump administration is likely to stop offering Baghdad any cover and instead use sanctions to pressure Prime Minister Mohammed al-Sudani and his government.

Trump's transition team could not immediately be reached for comment.

In the past decade, Trump has said he wants to "take the oil" from Iraq. In 2011, he told the Wall Street Journal: "I would not leave Iraq and let Iran take the oil."

During his first term, Trump in 2018 famously withdrew the US from the Iranian nuclear deal negotiated by his predecessor Barack Obama.

"Iran has been the leading sponsor of terrorism, and their pursuit of nuclear weapons threatens the civilized world. We will never let that happen," he said in January 2020, adding that the US, the biggest oil and gas producer in the world, doesn't need Middle Eastern oil.

Chinese investment

Punitive measures impacting Iraq's oil flows would hit China and India the hardest.

Iraq pumped 4.14 million b/d of crude in October, according to the latest Platts OPEC+ survey by Commodity Insights.

China and India are the largest buyers of both Iraqi and heavily sanctioned discounted Iranian crude, with China accounting for 41% of Iraqi seaborne crude exports in October, while India took 28% of Iraqi crude shipments, according to data obtained by Commodity Insights.

Iraq's Foreign Minister Fuad Hussein told Commodity Insights on Nov. 23 that the country was looking to send more crude to Europe and Africa, and it is unclear how new sanctions against Iraq would affect export diversification efforts.

Sudani's office did not immediately return a message seeking comment.

Iraq derives the vast majority of its government revenues, 95%, from crude oil exports, according to the International Monetary Fund. In 2022, Iraq's net oil revenues stood at $131 billion.

Any sanctions could put a deep chill on Western investment in Iraq's oil sector, which Baghdad has been courting to hit its crude production capacity target of 7 million b/d by 2027, as well as increasing the capture of associated gas that could be used in power plants to alleviate power shortages.

Sudani traveled to the US in April to drum up investment interest in Iraq's oil and gas sector, resulting in seven deals with American firms to reduce gas flaring and capture gas.

Iraq, one of the world's most wasteful flarers of natural gas associated with its crude oil production, flared 636.8 Bcf in 2022, compared with its domestic gas consumption of 722 Bcf in 2023, according to Commodity Insights data.

Beyond Iran, keen interest from the outgoing Biden administration to encourage western investment in Iraq stems from an American desire to contain growing Chinese influence.

Chinese companies operate 7.27% of current and future licensed oil and gas development projects in Iraq, the biggest slide behind domestic firms, according to Commodity Insights analysis. US companies, on the other hand, own just 1.82% of shares in Iraqi projects.

Trump has already vowed a hardline stance on China, which he sees as the US's main geopolitical and trade rival, and sanctions on Iraq could be another battleground on that front.