OPEC’s second-largest oil producer, Iraq, has less than two months before it loses the key means to export its crude, with the agreement to move its product through two pipelines into Turkey expiring on 27 July. These routes have become vital to Iraq’s ability to monetise its oil flows since the effective closure of the Strait of Hormuz from 28 February. Up until then, around 95% of Iraq’s crude was shipped through that route to key export destinations in Asia, including China. The blockade of the Strait meant Iraq’s domestic oil storage tanks filled quickly to maximum capacity, and because it has very limited options for transporting its crude elsewhere, it has been forced to shut down production wells. The longer that goes on, the more likely it is to result in permanent damage to Iraq’s oil production through a loss of reservoir pressure, water infiltration, and corrosion, among other factors. For Iraq, this poses an existential risk, as over 90% of its annual budget historically still comes from oil. So, how has it come to this, and what are Iraq’s options now?
The genesis of the current nightmare for Iraq lies in the March 2023 ruling by an international arbitration court that Turkey pay the Baghdad US$1.5 billion in damages for breaching the 1973 ‘Crude Oil Pipeline Agreement’. This resulted from Ankara allowing the semi-autonomous northern Iraqi region of Kurdistan’s government (the KRG), based in Erbil, to bypass the Baghdad-based Federal Government of Iraq (FGI) and export oil independently. According to a separate agreement struck between the FGI and the KRG in 2014, the KRG was obliged to send the oil produced in its region (around 550,000 barrels per day at the time) to the FGI for sale through the state-owned State Organization for Marketing of Oil. In exchange, the FGI would send the KRG a percentage of central budget revenues each month (about 17% at that point). The KRG was explicitly not allowed by the FGI to sell oil independent of this agreement, as Baghdad believed the potentially enormous income from this would be used by the KRG as a war chest to help secure the region’s full independence from Iraq, which was true, as fully analysed in my latest book on the new global oil market order. After the arbitration court’s verdict in Baghdad’s favour in March 2023, Turkey triggered a clause in the contract in July 2025, giving a mandatory one-year notice that it was terminating the 52-year-old pact permanently, effective as of 27 July 2026. With the Strait shut, April saw Iraq’s crude oil production fall to an average of 1.389 million barrels per day (bpd), compared to 3.47 million bpd from January 2002 to the end of March this year and over 4.1 million bpd in the three months leading up to 28 February. The last time oil production fell to the current level in Iraq was immediately following the 2003 U.S.-led invasion. In response, Baghdad began to move oil for export, however it could, mostly on tanker trucks overland. Iraq has since reached around 500 trucks per day (each truck contains, on average 200 to 250 barrels of oil).
Related: Kuwait Offers First Crude Cargoes to Asia since Iran War Started
However, these volumes are nowhere near enough to ensure Baghdad’s economic survival, so at the same time, it has been working on the full repair of its old oil pipeline that ran from the disputed, federally-controlled Kirkuk province, adjacent to Iraq’s Kurdistan region to the Turkish port of Ceyhan. It ran northwest from the Kirkuk K1 field through federal territory (the Salahaddin and Nineveh provinces, near Mosul) up to the border town of Fishkhabur. This ‘original’ Kirkuk-Ceyhan Pipeline or Iraq-Turkey Pipeline (ITP) consisted of two pipes, which theoretically had a nameplate capacity of 1.6 million bpd combined and was split into 1.1 million bpd for the 46-inch (1,168-mm) diameter pipe and 500,000 bpd for the 40-inch (1,016-mm) line. This FGI-controlled pipeline’s export capacity reached between 250,000 and 400,000 bpd when running normally, but even before Islamic State entered the picture in 2014, the pipeline was subject to repeated and ongoing attacks by various Sunni militant groups operating in the region.
Regardless of any peace deal between Iran and the U.S./Israel alliance, Baghdad is now pushing ahead with the Kirkuk-Nineveh pipeline as part of the Iraq-Turkey crude oil pipeline extending to Ceyhan Port on the Mediterranean Sea, which is independent of the KRG. Moreover, the Kirkuk-to-Nineveh line is not a standalone project, but rather is the vital northern leg of the rehabilitated federal network, proving the physical pipe required to carry oil around the KRG’s territory and deliver it directly to the Fishkhabur border terminal. The 350,000-bpd design capacity of this Kirkuk-to-Nineveh segment reflects the Oil Ministry’s cautious, phased approach, as they cannot safely test the entire 1.6 million bpd nameplate capacity of the old system at once. Opening this 350,000-bpd pipeline allows Baghdad to easily handle the initial trial target of 150,000 to 250,000 bpd of Kirkuk crude next month. Moreover, once the southern Basra-to-Haditha corridor is built, it will plug into this newly opened Kirkuk-Nineveh-Fishkhabur line, creating a seamless, high-volume flow from the Persian Gulf to Turkey — at least, that is the idea. On the other side of the regional power balance equation, ever since problems emerged with the FGI’s pipeline, the KRG has continued to maintain its own single-track pipeline, from the Taq Taq field through Khurmala, which joins the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur. This had a nameplate capacity of 700,000 bpd, which was then increased to 1 million bpd, although it has so far reached only 900,000 bpd.
The problem for both the KRG and FGI is that both these pipelines are covered by the 1973 treaty with Turkey, with both due to be shut down on 27 July, unless a deal can be reached with Ankara. But the Turks are well aware of the exceptionally strong hand it now holds in such talks and are pressing for “every possible concession it can think of”, a senior energy source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com over the weekend. “It’s asked for a multi-layered joint ventures across the energy sector — with the onus on Iraqi investment — in oil, gas, petrochemicals, and electricity, and has demanded that an arrangement is made that offsets the entire US$1.5 billion that it was fined by the arbitration court and technically still owes Baghdad,” he added. “Additionally, it [Turkey] wants a huge hike in the fixed tariff [currently US$1.00 and US$1.25] on each barrel of oil pumped through the Baghdad-controlled pipeline and it wants Iraq to commit to a high, continuous daily volume [hundreds of thousands of barrels per day] through the pipeline, with one-for-one fines if that volume is not fully used,” he underlined.
All of which brings us to what pressure and to what end the superpower backers of each side — the West in terms of the KRG, and China and Russia for the FGI — will try to exert on Turkey, and Ankara’s dealings with both sides have historically been most diplomatically characterised as ‘fluid’. Despite its NATO status, Turkey routinely defies Western foreign policy, with a prime example being its purchase of Russian S-400 missile defence systems, which led to Washington kicking Turkey out of the F-35 fighter jet program. More recently, Turkey used its NATO veto power as leverage before finally allowing Finland and Sweden to join the alliance. It is tolerated in NATO for its crucial geostrategic position between the West and the East, controlling the Turkish Straits (Bosporus and Dardanelles), which is the only maritime gateway out for Russia’s Black Sea fleet. Then again, Turkey and Russia are historical rivals who have backed opposite sides in conflicts like Syria, Libya, and Azerbaijan, and Turkey regards the KRG-controlled northern Iraq region as a breeding ground for the Kurdish terrorist organisations operating across the mainland. It may instead be that Turkey ultimately goes the way that best benefits itself, which includes the signing of the multi-layered agreements mentioned earlier, and which also happens to benefit China. This is because one of these key deals that Turkey is pushing for is the ‘Strategic Development Road Project’, as also fully analysed in my latest book on the new global oil market order. This US$17 billion project will not just link Iraq to Turkey westwards but will backlink eastwards to China’s ‘Belt and Road Initiative’. This, in turn, will create a seamless transport corridor running from Iraq’s flagship deepwater Al Faw Grand Port (due to be finished with Chinese help this year) in its key oil export hub of Basra in the Persian Gulf, all the way through several of its biggest oil and gas fields, and finally into Fishkabur on the Iraqi border with Turkey. From there, it will extend via road and railway links into the rest of Europe.
By Simon Watkins for Oilprice.com
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