The US slapped tough sanctions on the Iranian energy sector in late 2018 and initially granted Iraq a 45-day waiver before repeatedly extending it for 90 or 120 days.
Iraq relies on gas and electricity imports from its neighbor Iran to supply about a third of its power grid, crippled by years of conflict and poor maintenance.
“The extension this time will be for just 45 days, with some strict conditions,” the senior Iraqi official said.
The two countries were still in talks over what exactly those conditions were.
US pressure on Iraq
Washington has repeatedly insisted Iraq wean itself off Iran by partnering with American companies to capture natural gas to use for its power plants and to improve transmission of electricity into homes to reduce waste.
Iraq signed a memorandum of understanding with US powerhouse General Electric last year and has been in talks with other energy firms, but contracts have not yet been signed.
Both American and Iraqi officials told AFP the US was frustrated with Baghdad’s slow progress.
The latest waiver was set to expire this week but the US did not want to create additional pressure on prime minister-designate Mohammad Allawi, who is trying to form a new cabinet at a time of turmoil in Iraq.
Failing to renew the waiver could have exposed Iraq to secondary sanctions for dealing with the energy sector and Central Bank of Iran, both blacklisted by the US.
The waiver has allowed Iraq to continue importing about 1,400 megawatts of electricity and 28 million cubic meters (988 million cubic feet) of Iranian gas over the last 15 months.
Baghdad pays for the imports by depositing Iraqi dinars into an account at the state-owned Trade Bank of Iraq (TBI), which Iran is technically allowed to use to purchase non-sanctioned goods.
A few payments have been made, but Iran had been unable to access the funds due to ongoing technical disputes.
TBI chairman Faisal al-Haimus told AFP last month that if the waiver was not renewed, his bank would be forced to stop processing the payments.
In May 2018, the US administration abandoned the 2015 Iran nuclear deal and reimposed sanctions on Iran's energy and finance sectors in November 2018 as part of its “maximum pressure” campaign aimed at forcing it to renegotiate a new deal.
The sanctions have negatively impacted the economy of Iran and many countries in the region, including Iraq.
Gas imports from Iran generate as much as 45 percent of Iraq's 14,000 megawatts of electricity consumed daily. Iran transmits another 1,000 megawatts directly, making itself an indispensable energy source for its Arab neighbor.
Iraq and Iran share a 1,400-kilometer-long border. For their run-of-the-mill maintenance, Iraqis depend on Iranian companies for many things from food to machinery, electricity, natural gas, fruits, and vegetables.
The administration of US President Donald Trump is pressing Iraq to stop buying natural gas and electricity from Iran or at least show signs that it is reducing the imports. The US has also urged Iraq to establish contracts with US companies.