Lebanon struggles to secure new fuel sources as Iraq bills go unpaid

Unpaid bills to Iraq are worsening Lebanon's electricity woes, with a delay in fuel shipments, Iraqi officials have told The National. The fuel shortages left Beirut trying to diversify sources after a 48-hour blackout, despite asking Iraq to cancel part of the debt during Lebanon's severe economic crisis.

Lebanon relies solely on a deal with Iraq to supply fuel for its power plants, allowing the state electricity company Electricite du Liban to provide just over four hours of electricity a day. Under the terms of the agreement, seen by The National, Lebanon pays the Iraqi government for the fuel in local currency, which Iraq can spend on “goods and services” in Lebanon, such as medical services.

Because the heavy fuel supplied by Iraq does not meet Lebanon’s specifications, the contract, signed in 2021 and renewed twice, allows Beirut to swap it on the international market for other types suitable for its power plants, either low-sulphur or gas oil. But the deal is fraught with problems and has been described by experts as a “ticking bomb".

Lebanon has no alternative to Iraq to fuel its power plants in case of any financial disagreements, but Baghdad has yet to access the funds kept in an account at the Lebanese national bank, The National previously revealed.

Over the weekend, EDL was forced to shut down its last operating power plant in Zahrani, in southern Lebanon, as it ran out of gas oil, affecting the country’s airport, ports, water pumps, sewerage systems and prisons. A senior Iraqi government official said the delay was because Lebanon had not paid for fuel oil provided under the previous contract.

According to the official, Lebanon requested that Iraq waive the debt. Iraq said it would resume shipments but would not cancel the earlier debt.

Figures from the Lebanese Ministry of Energy, shared with The National, show the bank account assigned to the Iraqis at Lebanon's central bank contains only the value of the first year’s imports, about $550 million. Under the terms of the contract, Lebanon has one year to pay for each fuel shipment. It appears that Iraq has been struggling to obtain its funds for 2022.

A second Iraqi official said a "small" discount was offered for future exports because Baghdad had already agreed to instalment payments, expressing concern that the discount may be damaging because of the loss it would represent to potential earnings. Sources differed on the total amount owed to Iraq, putting the figure between $700 million and $900 million.

Iraq has officially given “technical and logistical reasons” for the shipment delay, renewing its “sincere commitment” to Lebanon.

“Iraq is committed to the agreement signed between Baghdad and Beirut, and more importantly, there is a fraternal, national and humanitarian commitment from the Iraqi government and people towards our brothers in Lebanon during these difficult times,” Iraqi government spokesman Bassem Al Awadi said.

The recent power cut did not affect most Lebanese, who are already relying on back-up generators. These polluting alternatives have been filling the gap left by the state electricity company since the economic crisis dealt the last blow to an already crippled sector in 2019. But key infrastructure, such as water pumps, have been completely paralysed.

“Our power consumption is too high for us to rely on generators. We almost entirely depend on state electricity and we have not been able to provide water for the past few days,” Jean Gebran, the director general of Beirut and Mount Lebanon Water Corporation, told The National.

Diversifying sources

Lebanon's Energy Minister Walid Fayad said the crisis “stems from our reliance on a single source, whereas depending on multiple sources is better". Mr Fayad said a new shipment is due to arrive on August 26, and that Iraq has committed to increasing the oil quantities this month to 125,000 tons (113,400 tonnes) from 100,000 tons.

He said Lebanon is finalising a new deal to swap Iraqi crude oil for fuel suitable for Lebanon's power plants. In a statement, Mr Fayad told of Iraq's “eagerness” to ensure that Lebanon has “multiple sources rather than just one".

Algeria has proposed to help the cash-strapped country overcome the current crisis by “immediately” supplying fuel, after a phone call between Lebanon's caretaker Prime Minister Najib Mikati and Algerian Prime Minister Nadir Larbaoui.

Energy Minister Mohamed Arkab confirmed that Algeria would provide a “donation” of fuel, with the specifics to be finalised in negotiations between the two nations. Neither the government palace in Beirut nor the Ministry of Energy responded to The National's request for comment.

“We hope this will be the beginning of strengthening ties, especially in the energy sector,” Mr Fayad said. "If we can obtain even a small portion of the gas Algeria exports to Europe, we could reduce our electricity costs."

Lebanon's five-time renewed 15-year contract with Algerian oil company Sonatrach ended in late 2020. The suspension followed allegations that a Sonatrach subsidiary had subcontracted delivery to private companies, which were later accused of supplying “adulterated fuel” to Lebanon.

In the meantime, the Zahrani plant has resumed operations at a lower capacity after securing diesel from by nearby oil facilities.

“Kicking the can down the road.”

Experts warn that quick fixes might only postpone the root problems. Marc Ayoub, associate fellow at the American University of Beirut’s Issam Fares Institute, warned against “a temporary fix to buy time until a comprehensive or general solution is found."

Mr Ayoub said that key issues such as payment mechanisms and broader sector reforms still need to be addressed.

This is not the first time that fuel shipments have been delayed by unresolved payments. By November 2024, Lebanon will already owe Iraq about the equivalent of $1.59 billion for millions of tonnes of fuel imported since 2021. This is about 8 per cent of the country's GDP. But even if the entire amount is deposited into the account, the Iraqis will not be able to immediately have access the funds, which are denominated in dollars but supposed to be withdrawn in Lebanese pounds.

The payment mechanisms, including the exchange rates and the exact nature of the services, remain unclear in the contract. Former General Director of General Security Abbas Ibrahim, who brokered the 2021 deal with Iraq, has denounced Lebanon's failure to uphold its “promises” to Baghdad.

“We have not fulfilled our promises to provide services to our dear Iraq, nor to pay the money as we recently renewed the pledge,” Mr Ibrahim said on X.

Commenting on Lebanon's dues to Iraq, Mr Al Awadi told The National that the payment mechanism between the two countries “will be implemented with an understanding of the general situation in Lebanon from the Iraqi side".

How Lebanon, struggling with a deep economic crisis for five years amid stalling reforms, will handle payments remains unclear. The same uncertainty surrounds any new contracts if reforms are not implemented.

Mr Ayoub stressed the need for “transparency” in contract awarding, given the sector’s history, warning that without it, “we’re merely kicking the can down the road".