Iran and Iraq have signed a five-year deal that will see Iran pump up to 50 million cubic meters of natural gas per day according to the needs of Iraqi power stations in exchange for oil and gasoline.

Iraq's Ministry of Electricity Ziad Ali Fadhel and the CEO of the National Iranian Gas Company, Majid Chegeni, finalized the contract to extend Iran’s gas exports to Iraq in Baghdad on Wednesday.

After decades of electricity shortages because of war, corruption and mismanagement, oil-rich Iraq is heavily reliant on imported Iranian gas to meet its electricity needs. Iran has been supplying energy to Iraq for the past 10 years under an agreement signed in July 2013.

With an aging electricity grid unable to match the growing demand, Iraq suffers frequent power outages. However, Iran itself is in dire need of natural gas for its domestic electricity production as well as keeping its steel, petrochemical and other heavy industries afloat.

Iran’s insists on gas exports despite the huge deficit in production and growing domestic demand that has severely damaged the country’s industrial sector. Tehran might have various motivations driving this policy, including keeping Iraq dependent.

Last year, Iraq imported about nine billion cubic meters of natural gas from Iran, meaning that Tehran supplied about 25 million cubic meters per day. The new deal has envisioned twice that amount but only for periods when Iraq needs it. Iraq’s Ministry of Electricity said the deal would "ensure the sustainability of the work of power plants and keep pace with the peak loads and the increasing demand for electric energy."

Iran’s Oil Ministry’s press service, Shana, claims that Iran’s gas exports has increased to nearly 50 million cubic meters (mcm) per day in recent months after Iraq settled part of the debts it owed to the NIGC.

Over the past five years, there has been a notable disparity between electricity generation and the domestic demand in Iraq. Electricity consumption has increased by nearly 30%, outpacing the government's efforts to meet the surging demand. Imports from Iran are especially vital during the sweltering summer months when Iraqis are forced to pay for private diesel generators or suffer through temperatures that often top 50 degrees Celsius (122 degrees Fahrenheit). The crisis usually comes back amid severe cold weather in winter.

The new agreement with Iran is viewed as a stopgap solution to help Iraq fulfill its electricity requirements while it works on developing its own gas fields. Baghdad is under increasing pressure from the US to wean itself off electricity and gas imports from Iran, under US sanctions since 2018.

In addition to gas supplies, Iraq also relies on Iran for nearly a third of its electricity. However, cash-strapped Iran switches off its electricity and gas exports to put pressure on Baghdad to urge Washington for waivers. Iran only prioritizes its local consumers when Iraq seems unable to transfer the funds.

The US has issued Iraq a series of sanctions waivers to continue importing Iranian energy but has warned the waivers could end if Baghdad does not make serious progress toward finding other fuel and power sources. Although Baghdad has sought to diversify its electricity supply through overtures to countries such as Saudi Arabia, Turkey, Jordan, and Kuwait, no significant progress has been made on these fronts.

The waivers issued by the US every 120 days are reportedly limited to non-sanctioned goods, stressing Tehran could only use the funds for humanitarian trade and seeking to blunt criticism of giving Iran the money that can be used to fund terrorism. However, since July 2023, the US has started allowing Iraq not only to make payments into restricted Iranian accounts in Iraq but also for the funds to be sent to similarly restricted accounts in third countries.

In July, Tehran and Baghdad also agreed to barter oil and gas after Iran cut its gas supply by over 50% due to Iraq’s unpaid debts which worsened the electricity crisis in the country.

In late 2022, the United States tightened measures on Iraq's access to its foreign reserves held in the Federal Reserve due to suspicions of money being transferred to Iran, Syria, and other sanctioned entities.