Lebanon could become reliant on a complex arrangement to import Iraqi fuel for its electricity needs, despite the lack of an agreed repayment plan.

The scheme, which experts say is fraught with problems, could lock the country into an unstable arrangement while delaying its transition to renewable or affordable energy sources, new documents and interviews reveal.

Lebanon, a country which has few natural resources and is suffering from an economic crisis, imports heavy fuel oil from Iraq under a swap deal signed in 2021.

Because the heavy fuel supplied by Iraq does not meet Lebanon’s fuel specifications, the deal allows Beirut to swap it on the international market for other types of oil suitable for its power plants, through traders who make a profit.

But three years after the deal was signed, Lebanon has yet to pay Iraq for the oil received. This is partly due to the unclear terms of the agreement.

The contract, seen by The National under a freedom of information request, states that Lebanon will deposit funds in a dollar account that Iraq can withdraw in Lebanese pounds to spend on “goods and services” for its ministries, such as medical services.

But the exchange rates at which Iraq will access the funds as well as the exact nature of services are unclear.

As a result, Iraq has yet to access the $550 million worth of goods or services, the value of the first year’s imports, deposited in Lebanon's central bank.

The deal also leaves Lebanon reliant on fossil fuels as it swaps the Iraqi heavy oil for gas oil and low-sulphur fuel oil, rather than cheaper alternatives such as natural gas, or cleaner renewables.

Despite these issues, new documents suggest that Lebanon plans to rely on the Iraqi fuel deal being renewed for its energy supply until at least 2028.

Stalled reforms

The National has seen Lebanon's National Emergency Plan for the Electricity Sector, written by the Ministry of Energy and Lebanon’s state electricity company, Electricite du Liban.

It was put together as an alternative to the country's 2022 energy plan, which has not yet been implemented amid delays in the wider package of reforms to Lebanon's governance and economy demanded by international lenders in return for vital funding.

The plan reveals that EDL intends to increase the volumes involved in the deal with Iraq to $772 million per year. This is part of its plan to boost capacity production from four hours to eight hours per day by 2028.

According to calculations, this will increase the total bill owed to Iraq to $5.45 billion by 2028, and leave Lebanon mainly reliant on fossil fuels, without guaranteeing 24-hour electricity for residents.

This comes despite the Iraqi government not having committed to extending the contract.

“The Iraqi fuel deal is a ticking time bomb with no alternative fuel source. The contract is due to end in October and the Iraqis will want to know why they haven’t received anything in return,” said a Lebanese energy professional and former ministerial candidate, who did not want to be identified.

Even if Lebanon were able to pay and secure an extension of the deal, experts have expressed concern over the lack of planning to secure alternative, cheaper and greener sources of fuel.

Lebanese households, despite being promised reliable electricity for more than a decade, continue to face daily blackouts and are forced to pay for expensive and polluting diesel generator subscriptions.

'Temporary fix'

The Beirut-Baghdad deal signed in 2021 was initially portrayed by Lebanese authorities as a gift from Iraq – a sign of solidarity towards a fellow Arab country grappling with an unprecedented economic crisis.

At the end of 2020, a tainted fuel scandal over another fuel import agreement shook the country. What Lebanese authorities had presented as a state-to-state fuel import contract with Algeria was shown instead to involve secretive offshore companies charging exorbitant prices for low-quality fuel.

The revelations further exposed a network of corruption involving contaminated fuel shipments, falsified laboratory tests and endemic bribery of state officials. Following the scandal, this fuel supply contract was not renewed and Lebanon was left without a fuel supply contract for the first time since 2005.

Struggling to find a replacement willing to engage with its cash-strapped economy, Lebanon signed the Iraqi deal in July 2021 for one million tonnes of fuel oil, or about seven million barrels.

It was extended in 2023 for one more year for two million tonnes, this time with a small volume of crude to be swapped alongside the heavy fuel oil. Overall, Lebanon receives around half of the original fuel oil exported by the Iraqis, according to official documents from the Ministry of Energy and Water.

“It did help Lebanon at the time as a temporary fix when the government defaulted on its debt and couldn't access international markets,” said Marc Ayoub, associate fellow at the American University of Beirut’s Issam Fares Institute.

However, experts have since expressed concern over a range of issues linked to the deal, especially regarding the absence of an alternative and clear financial arrangements in a country known for its corruption-riddled electricity sector.

Payment issues

Under the terms of the contract, Lebanon has one year to pay for each fuel shipment, but three years since the deal was signed, Iraq has not received anything, and it remains to be seen how Beirut will pay.

Lebanon already owes Iraq about $1.59 billion for millions of tonnes of fuel already imported since 2021, according to figures from the Ministry of Energy and Water.

The bank account assigned to the Iraqis at the BDL contains $550 million, the value of the first year’s imports. The Iraqi government has not yet accessed the funds, which are denominated in dollars but supposed to be withdrawn in Lebanese pounds.

The exchange rate for this withdrawal is unclear under the terms of the contract.

According to the contract, Lebanon would pay Iraq using the market rate at a 15 per cent discount or the Sayrafa platform rate, the exchange rate platform set up by the BDL between 2021 and 2023 to stabilise the Lebanese currency as it depreciated on the black market.

Criticised for its lack of transparency, the platform was phased out with the arrival of the new central bank governor in 2023.

Moreover, the “goods and services” that the Iraqis are supposed to access in Lebanon with these funds have yet to be determined, and Iraq has yet to receive any, despite media reports of medical services being provided.

An Iraqi Health Ministry official told The National that the medical services “are only on paper and nothing has happened in this regard”.

The responsibility for determining payment mechanisms and services provided lies with the Investment Development Authority of Lebanon, the Lebanese investment promotion agency charged with acting as the organisation for working with Iraq.

IDAL did not respond to interview requests from The National.

Energy security

Experts have also expressed concern about the deal’s implications for Lebanon’s energy security.

Mr Ayoub warned against a “fuel dependency” on Iraqi gas oil and fuel oil, currently the only energy source available to Lebanese power plants.

“Maybe the Iraqi government will decide one day to stop the contract, what alternative do we have?” he said.

But the government appears to think that its diplomatic relations with Iraq will outweigh any potential financial disagreements, as the emergency plan relies largely on the assumption that the contract will be renewed.

Asked about a contingency plan should the deal not be renewed, EDL appeared to have few plans beyond repairing its damaged power stations to boost their efficiency.

“[EDL] has put in place a scenario where it will attempt to extend generation as much as possible until the matter of supply is resolved," the company said. "This involves measures for the optimisation of generation efficiency to mitigate any potential disruptions in fuel supply.”

Long-term solutions?

Initially seen as a temporary fix, the Iraqi deal now appears to be emerging as a long-term solution.

Its extension, according to the emergency plan, would see EDL gradually assume responsibility for paying for fuel from Iraq rather than the Ministry of Energy, which has so far covered the cost.

EDL said that the dramatic tariff increases initiated in 2022 would enable it to cover the cost of Iraqi fuel.

Yet experts questioned the rationale behind EDL’s decision.

“Now that EDL has increased its tariff and can pay for its shipments, it could move away from the Iraqi deal and look at cheaper and alternative sources of energy and invest in renewables,” said Rony Karam, president and founding member of the Lebanese Foundation for Renewable Energy.

The emergency plan envisages renewable energy accounting for only 12 per cent of total production by 2028 in its best-case scenario, appearing to revise downwards the Ministry of Energy and Water’s earlier goal of 30 per cent by 2030.

Given current fuel costs, electricity must be produced at $0.20-0.25 per kilowatt hour. Yet Mr Karam highlighted the possibility of generating electricity using natural gas, which is much less polluting and could be produced for a third of the price at $0.07 to $0.08.

“This will make EDL more profitable and more bankable and instil confidence among international donors,” he added.

EDL's chronic losses, averaging $1.5 billion per year, have historically been the result of its expensive fuel supply.

A recent study by the World Bank, the Lebanon Country Climate and Development Report, estimated that replacing fuel with natural gas and large solar installations could reduce the cost of electricity by 66 per cent in Lebanon.

In 2022, Lebanon, Syria and Egypt signed a gas import agreement to import Egyptian gas through Syria in a bid to add four extra hours of power per day to the grid.

The project remains mired in geopolitical challenges, with the emergency plan revealing that Egyptian natural gas is not expected to come online until at least 2028.

Under the original reform plan, Lebanon was supposed to have already begun weaning itself off fossil fuels. In previous statements, caretaker Minister of Energy Walid Fayad blamed the delays on the lack of reform to the country’s financial system's and continuing lack of investment appetite, leaving the Iraqi deal as the only option.