Iraq says to pay for Iranian gas with crude oil

“The agreement aims to address the gas supply crisis for power plants, while tackling payment issues and complications arising from US sanctions,” said the statement from the prime minister’s office.

Iraq is reliant on Iranian gas for a third of its energy needs, but is unable to directly pay for it as a result of US sanctions on Iran, forcing the country to resort to a complicated mechanism for transferring funds.

According to the mechanism, payments were to be held in a bank account and – following approval from Washington – be used by Tehran to fund imports of food and medicines, a method which left Iraq in heavy arrears.

Earlier this month, Iran halved its supply of gas to Iraq because of unpaid bills of more than $12 billion, according to Sudani.

Speaking in a televised address on Tuesday, he stated that “as the American side did not give the necessary permission for the transfer of funds… the supply of Iranian gas was stopped.”

“Because of the transfer mechanism and its complexity, we were unable to obtain authorisation to transfer these outstanding payments so our Iranian neighbour could continue to supply us” with gas, he continued.

He added, however, that a recent payment to Iran of around $1.9 billion had been made and that as a result of Tuesday’s agreement “we will be able to guarantee that the gas will continue to flow.”

In recent years, Iraq has seen widespread unrest and demonstrations, triggered in large part by failing energy supplies during intensely hot summers.

Corruption, crumbling infrastructure and continuing instability after decades of conflict and sanctions have left the country’s energy sector in a dire state, despite having some of the world’s largest oil reserves.

Baghdad has recently also been exploring several possibilities for reducing reliance on Iranian gas, such as imports Qatar and recovering flared gas from oilfields.

There has also been criticism of Washington for its refusal to allow the release of funds to Iran.

On Sunday, The Coordination Framework – a coalition of Iran-linked Shia parties that form the largest bloc in parliament – called on the government in a “to contact the US side and urge the immediate unlocking of the unpaid bills related to Iranian gas imports”.