OPEC’s second-largest oil producer, Iraq, has less than two months before losing key means of exporting its crude, and the agreement to transport its product via two pipelines to Turkey expires on July 27. These routes have become vital to Iraq’s ability to monetize its oil flows since the effective closure of the Strait of Hormuz starting February 28. Until then, about 95% of Iraqi crude was shipped via that route to key export destinations in Asia, including China. The blockade of the Strait meant that Iraq’s internal oil storage tanks quickly filled to capacity, and because it has very limited options for transporting its crude elsewhere, it has been forced to shut in production wells. The longer this continues, the more likely there will be permanent damage to Iraqi oil production through a loss of reservoir pressure, water infiltration and corrosion, among other factors. For Iraq, this poses an existential risk, as historically more than 90% of its annual budget still comes from oil. So how has it come to this and what are Iraq’s options now?
The genesis of Iraq’s current nightmare lies in the March 2023 ruling by an international arbitration court that Turkey would pay Baghdad $1.5 billion in damages for violating the 1973 “Crude Oil Pipeline Agreement.” Federal Government of Iraq (FGI) based in Baghdad and will export oil independently. Under a separate agreement signed between the IGF and the KRG in 2014, the KRG was obliged to send oil produced in its region (around 550,000 barrels per day at the time) to the IGF for sale through the state-owned State Organization for Marketing of Petroleum. In exchange, the IGF would send the KRG a percentage of central budget revenues each month (around 17% at the time). The IGF did not explicitly allow the KRG to sell oil regardless of this deal, as Baghdad believed that the potentially huge revenues from this would be used by the KRG as a war fund to help secure the full independence of the Iraq region, which was true, as I discuss in detail in my latest book on the new global oil market order. After the arbitration court’s verdict in favor of Baghdad in March 2023, Turkey activated a clause in the contract in July 2025, giving a mandatory one-year notice that it would permanently end the 52-year pact, effective July 27, 2026. With the Strait closed, Iraq’s crude oil production fell to an average of 1.389 million barrels per day (bpd) in April, in compared to 3.47 million bpd from January 2002 to the end of March this year and more than 4.1 million bpd in the three months to February 28. The last time oil production fell to the current level in Iraq was immediately after the U.S.-led invasion in 2003. In response, Baghdad began transporting oil for export as it could, primarily by overland tankers. Since then, Iraq has reached about 500 trucks per day (each truck contains, on average, between 200 and 250 barrels of oil).
Related: Kuwait delivers first crude oil shipments to Asia since war with Iran began
However, these volumes are not enough to guarantee Baghdad’s economic survival, so at the same time it has been working on the complete repair of its old pipeline that ran from the disputed province of Kirkuk, controlled by the federal government and adjacent to the Iraqi Kurdistan Region, to the Turkish port of Ceyhan. It ran northwest from the Kirkuk K1 field through the federal territory (Salahaddin and Nineveh provinces, near Mosul) to the border town of Fishkhabur. This ‘original’ Kirkuk-Ceyhan pipeline or Iraq-Turkey Pipeline (ITP) consisted of two pipelines, which theoretically had a nominal capacity of 1.6 million bpd combined and divided into 1.1 million bpd for the 46-inch (1,168 mm) diameter pipeline and 500,000 bpd for the 40-inch (1,016 mm) diameter pipeline. The export capacity of this IGF-controlled pipeline reached between 250,000 and 400,000 bpd when it was operating normally, but even before the Islamic State entered the scene in 2014, the pipeline was subject to repeated and continuous attacks by various Sunni militant groups operating in the region.
Regardless of any peace deal between Iran and the US-Israel alliance, Baghdad is now pushing for the Kirkuk-Nineveh pipeline as part of the Iraq-Turkey pipeline that extends to the Mediterranean Sea port of Ceyhan, which is independent of the KRG. Furthermore, the Kirkuk to Nineveh line is not a stand-alone project, but is the vital northern leg of the rehabilitated federal network, providing the physical pipeline needed to transport oil across KRG territory and deliver it directly to the Fishkhabur border terminal. The 350,000 bpd design capacity of this segment from Kirkuk to Nineveh reflects the Oil Ministry’s cautious and gradual approach, as they cannot safely test the entire 1.6 million bpd nominal capacity of the old system at once. The opening of this 350,000 bpd pipeline will allow Baghdad to easily handle the initial testing target of 150,000 to 250,000 bpd of Kirkuk crude oil next month. Furthermore, once the southern corridor from Basra to Haditha is built, it will connect with this newly opened Kirkuk-Nineveh-Fishkhabur line, creating a smooth, high-volume flow from the Persian Gulf to Turkey; At least, that’s the idea. On the other side of the regional balance of power equation, since problems arose with the IGF pipeline, the KRG has continued to maintain its own single-track pipeline, from the Taq Taq field to Khurmala, which joins the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur. It had a nominal capacity of 700,000 bpd, which was later increased to 1 million bpd, although so far it has only reached 900,000 bpd.
The problem for both the KRG and the IGF is that both pipelines are covered by the 1973 treaty with Turkey, and both must be closed by July 27, unless a deal can be reached with Ankara. But the Turks are well aware of the exceptionally strong hand they now have in such talks and are pushing for “every possible concession they can think of,” a major energy source working closely with Iraq’s Oil Ministry exclusively told OilPrice.com over the weekend. “He has called for multi-level joint ventures across the energy sector – with responsibility for Iraqi investment – in oil, gas, petrochemicals and electricity, and has demanded that a deal be reached that offsets all of the $1.5 billion that the arbitration court imposed on him and that he still technically owes Baghdad,” he added. “In addition, (Turkey) wants a huge increase in the fixed tariff (currently US$1.00 and US$1.25) for each barrel of oil pumped through the Baghdad-controlled pipeline and wants Iraq to commit to a continued high 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 stressed.
All of which leads us to know what pressure and to what end the superpowers backing each side (the West in terms of the KRG, and China and Russia in the case of the IGF) will try to exert on Turkey, and Ankara’s dealings with both sides have historically been diplomatically characterized as “fluid.” Despite its status in NATO, Turkey routinely challenges Western foreign policy, a prime example being its purchase of Russian S-400 missile defense systems, which led Washington to expel Turkey from the F-35 fighter jet program. More recently, Türkiye used its NATO veto power as leverage before eventually allowing Finland and Sweden to join the alliance. It is tolerated in NATO for its crucial geostrategic position between West and East, controlling the Turkish straits (Bosporus and Dardanelles), which is the only maritime exit for the Russian Black Sea fleet. On the other hand, Turkey and Russia are historical rivals who have backed opposing sides in conflicts such as Syria, Libya and Azerbaijan, and Turkey views the KRG-controlled region of northern Iraq as a breeding ground for Kurdish terrorist organizations operating across the continent. Instead, it may be that Türkiye will ultimately take the path that best benefits it, which includes signing the multi-level agreements mentioned above, and that also benefits China. This is because one of these key agreements that Turkey is pushing is the ‘Strategic Development Route Project’, as I also discuss in detail in my latest book on the new order of the global oil market. This $17 billion project will not only link Iraq to Turkey to the west, but will also link to China’s “Belt and Road Initiative” to the east. This, in turn, will create a fluid transport corridor stretching from Iraq’s iconic deepwater Grand Port, Al Faw Grand Port (to be completed with Chinese help this year) in its key oil export hub of Basra in the Persian Gulf, through several of its largest oil and gas fields, and finally to Fishkabur on Iraq’s border with Turkey. From there it will be extended by road and rail to the rest of Europe.
By Simon Watkins for Oilprice.com
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