With the scorching summer months just around the corner, Iraq is facing a major energy crisis. The Donald Trump administration on Mar. 8 declined to renew the sanctions waiver permitting Baghdad to buy Iranian electricity. Iraqi natural gas imports from Iran may soon also be targeted under Washington’s “maximum pressure” campaign against Tehran. These steps will create significant challenges for a US partner already struggling with severe power shortages. Beyond the waiver issue, Iraq has also faced difficulties in paying Iran for its energy imports due to US sanctions—leaving major Iranian assets frozen in Iraqi banks.

Washington is hoping that the pressure will push Baghdad to seek alternative suppliers. But the reality is that Iraq has already been exploring partnerships with Gulf Arab states, Jordan and Egypt. Finding a solution has proven complicated and requires extensive infrastructure investments. Additionally, potential schemes such as importing Qatari gas entail navigating geopolitical tensions given Doha’s strained relations with other Gulf capitals.

Amid these challenges, a gas swap arrangement involving Iran, Iraq and Turkmenistan has emerged as a practical alternative—offering a way for Baghdad to meet its energy needs without engaging in direct financial transactions with Tehran. Importantly, there is precedent in the latter respect: under the previous Joe Biden administration, understandings struck between Tehran and Washington led to a portion of Iranian funds held in Iraq being transferred to Turkmenistan to settle bills for gas imports.

Importantly, impetus to secure a win-win solution may be aided by the upcoming Iran-US diplomatic engagement in Oman, where Tehran will enter “indirect” nuclear talks with the Trump administration for the first time.

 

Iraq’s dependence on Iranian energy

Iraq heavily relies on Iran to meet its energy needs. Electricity makes up a relatively small portion of imports, but the contracted gas import volume of 50M cubic meters (mcm) per day could be used to generate up to 7 gigawatts (GW) of electricity—up to a third of Iraqi supply.

The two neighbors have a contract under which Iran exports gas to Iraq through two main pipelines—one from Naft Khana in the center and another from Basra in the south. These pipelines have a combined capacity to transport up to 70M mcm of gas per day, though actual imports have never exceeded 45 mcm at peak levels.

At times, imports have dropped to as low as 10 mcm per day, causing serious disruptions. This dynamic is expected to intensify this summer as Iran is confronted with its own domestic energy crisis.

Additionally, Iraq has on average directly imported 1.2 gigawatts (GW) of electricity from Iran, making up a minor but nonetheless important contribution to a struggling grid. Altogether, at maximum import levels, Iraq depends on Iran for up to 40% of its total electricity consumption.

 

Impact of US sanctions and energy shortages

The growing US pressure on Iraq to reduce its reliance on Iranian energy has significantly disrupted this trade—pushing it to its lowest level in history. The instability in gas imports from Iran has led to frequent and unpredictable electricity shortages, affecting millions of Iraqis. Power production often drops suddenly, causing widespread disruptions in households, industries and agriculture. Iraqi power plants also suffer technical damage due to fluctuations in supply.

Several factors have contributed to the inconsistent supply of Iranian gas.

First and foremost, rises in Iran’s domestic energy demand—particularly in winter—have led to periodic reductions in gas exports to Iraq. This situation is expected to intensify in the coming months as Iran faces a potential 30 GW shortfall, already compelling the authorities in Tehran to restrict supply to local industry.

Moreover, there is a major lack of infrastructure development. Due to years of western sanctions, Iran’s gas industry has struggled with underinvestment, limiting its ability to meet both domestic and export demands.

Lastly, Iranian supplies have been impacted by payment issues. Iraq has faced challenges in settling its bills due to US banking restrictions, leaving billions of dollars in Iranian export revenues frozen in Iraqi banks. Even though arrangements under the previous Biden administration involved the transfer of some of these funds to third countries, including Oman, Saudi Arabia and Turkmenistan, Iran continues to hold significant assets in Iraq.

 

Iraq’s search for alternatives

Given the prevailing challenges, Iraq has been actively exploring alternative energy sources to reduce its dependence on Iran. However, progress has been slow for a variety of reasons.

Ahead of the summer months, Iraq has been working on a crisis plan to diversify supply. This has included arrangements for electricity grid interconnections with Turkey—anticipated to provide up to 600 megawatts, while it has never exceeded 300 so far—as well as Egypt, Jordan and Saudi Arabia. Baghdad is also seeking to link with the Gulf Cooperation Council (GCC) grid. However, these projects face logistical and political delays and have yet to reach full implementation.

In parallel, Iraq has made investments in solar energy, but the sector is still in its early stages and has not yet contributed significantly to the national grid. Additionally, potential gas imports from sources such as Qatar have been explored. However, lingering political tensions among Gulf Arab states make such a solution both complex and uncertain.

As such, Iran remains Iraq’s most reliable energy provider—either directly through electricity exports or via natural gas used for power generation. As a result, Iraq is reported to be continuing to import energy from Iran despite the non-renewal of the US waiver, underscoring the country’s urgent need for a sustainable and long-term energy strategy.

 

A win-win arrangement

Both Iraq and Iran have strong incentives to find a way to continue their energy trade, and there are ways to achieve that objective without confronting the Trump administration. One practical solution is a three-way gas swap involving Turkmenistan.

Under this arrangement, Iraq would purchase gas directly from Turkmenistan and pay for it without involving Iran in the financial transaction. The gas would then be transferred to Iran via an existing pipeline, with Iran retaining up to 30% of the supply as a swap fee—using it for domestic consumption in its northern regions instead of pumping gas from the south. The equivalent of the remaining 70% of the Turkmen gas would be shifted to Iraq from Iran’s southern gas fields.

Much of the legwork to implement such an arrangement has already been carried out. In 2023, Ashgabat and Baghdad signed an agreement to plug the gap caused by a disruption in Iranian supplies. Last year, Iran reportedly agreed to act as a swap agent for the supply of up to 10B cubic meters of Turkmen gas to Iraq per year. To facilitate the energy transfers, Turkmenistan is said to have given its consent for the construction of additional pipelines and three gas pumping stations to expand its capacity to export gas to Iran.

The outlined swap mechanism offers multiple economic and strategic benefits for all parties, and allows Baghdad to effectively diversify suppliers in line with US objectives.

For Iran, the dividends include a barter advantage by securing a steady gas supply without direct financial transactions vulnerable to sanctions; supply flexibility to maintain exports to Iraq during peak domestic demand; market positioning for future opportunities in Iraq's gas market if new fields are developed; regional expansion potential into Syria and Jordan through gas re-export via Iraq; and, infrastructure optimization by reducing strain on pipelines between its northern and southern provinces, cutting operational costs and energy losses.

To Iraq, a swap deal would provide a stable gas supply from Iran, ensuring consistent energy for electricity production and avoiding disruptions; cost efficiency by utilizing existing infrastructure, thereby avoiding expensive investments in alternative supply routes; enhanced energy security through diversification of gas sources, reducing reliance on a single supplier; and strengthened regional cooperation by enhancing diplomatic and economic ties with Iran and Turkmenistan, contributing to regional security.

 

Challenges and obstacles

While a gas swap deal between Iraq, Iran and Turkmenistan presents a practical solution, it also comes with challenges that require diplomatic and logistical efforts to overcome.

The primary challenge is potential objections by the Trump administration. However, since the swap model does not involve direct financial transactions with Iran, it technically does not violate US sanctions. Iraqi gas payments would go directly to Turkmenistan, ensuring compliance with Washington’s “maximum pressure” policy against the Islamic Republic. This provides Iraq with a diplomatic argument to justify the arrangement while requiring negotiations with the US to prevent political or economic pushback.

Another key challenge is Iran’s current gas export contract with Turkey, which requires Tehran to prioritize its existing commitments. As such, any swap with Iraq and Turkmenistan would need to be aligned with Iran’s contractual obligations to Turkey. This means that Tehran might have to either ensure that the volume of the trilateral swap is equal to its Turkey contract, or reduce gas fees to Ankara to match the Iraq-Turkmenistan arrangement. While these adjustments present difficulties, the strategic benefits of the swap make it a worthwhile effort for Iran.

Lastly, it should be emphasized that much of the work required to get the swap off the ground has already been carried out. The scheme was previously addressed under the administration of former Iraqi prime minister Mustafa Al-Kadhimi (2020-22). At that time, Baghdad and Tehran agreed on the initial step of Iraq settling Iran’s outstanding debt to Turkmenistan by using Iranian export revenues frozen in Iraqi banks. The two countries would then work toward a trilateral agreement to facilitate a long-term gas swap arrangement.

With growing energy needs and ongoing US pressure, now seems to be the right time for all involved countries—Iraq, Iran and Turkmenistan—to implement the swap model. The unfolding of Iran-US diplomacy only provides further impetus for a win-win approach.