Iraq's Oil Lifeline Has Been Saved, But For How Long?
Iraq's Oil Lifeline Has Been Saved, But For How Long?.
The clock that was ticking down to economic disaster for Iraq on 27 July has been paused, with Turkey agreeing to a one-year temporary arrangement that ensures the continuation of critical oil exports running via pipelines from northern Iraq into the Turkish port of Ceyhan. The new one-year protocol covers the entire Iraq-Turkey Pipeline (ITP) corridor – comprising two separate oil pipelines – treating it as a single, unified mechanism, in line with the original 1973 'Crude Oil Pipeline Agreement'. These routes were made even more vital to Iraq's ability to monetise its oil flows following the effective closure of the Strait of Hormuz on 28 February and ongoing disruptions since then. Before that, around 95% of Iraq's crude was shipped through that route to key export destinations in Asia, including China, with over 90% of Baghdad's annual budget historically coming from those oil exports. As a result of the Strait's blockade, Iraq's oil storage tanks filled quickly to capacity, and with highly limited options for transporting its crude elsewhere, it was forced to shut down production wells. That, in turn, dramatically increased the risk of permanent damage to Iraq's oil production through a loss of reservoir pressure, water infiltration, and corrosion, among other factors. But how secure is this new arrangement with Turkey and what are the chances that a permanent solution will be agreed?
How does the Strait of Hormuz closure affect Iraq's oil exports?
How have geopolitical shifts influenced Iraq's oil export arrangements?
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As it stands, according to a statement by Khazal Hostani, director general of contracts at the Kurdistan Region of Iraq's (KRI) Ministry of Natural Resources, the temporary protocol will keep more than 200,000 barrels per day (bpd) flowing through the Ceyhan pipeline corridor, in line with the volumes going through it immediately prior to the onset of the Strait of Hormuz crisis. That said, these flows through northern Iraq into Turkey had been significantly reduced – and for two and a half years, from March 2023, halted completely – following an international arbitration ruling by the International Chamber of Commerce's (ICC) on 13 February that year. The ICC had judged that Turkey pay Baghdad US$1.5 billion in damages for breaching the 1973 'Crude Oil Pipeline Agreement' by allowing the Erbil-based semi-autonomous KRI northern Iraqi region's government (the KRG) to circumvent the Baghdad-based Federal Government of Iraq (FGI) and export oil independently. Turkey then halted the flow of oil through the northern Iraq pipeline route, which at the time regularly exported approximately 450,000 bpd of crude from the Kirkuk region to Ceyhan. The prohibition on the KRG selling oil independently from the FGI had been a core condition of the 2014 agreement between Baghdad and Erbil, as laid out in a simple trade?off: the KRG would funnel the crude produced in its territory – roughly 550,000 barrels a day at the time – to the federal authorities for marketing through the state-owned State Organization for Marketing of Oil (SOMO). In return, it would receive a fixed slice of the national budget, then about 17% each month.
The key reason for Baghdad's unwillingness to allow Erbil to sell oil independently was that it feared that any large, unmonitored revenue stream could be turned into a financial base for an eventual Kurdish breakaway – a concern that, as fully analysed in my latest book on the new global oil market order , was not unfounded. On 23 April 2013, Kurdistan's regional government had passed a bill that would allow it to independently export crude oil from its fields and those of Kirkuk if Baghdad failed to pay its share of oil revenues and exploration costs. A corollary bill to create an oil exploration and production company separate from the FGI in Baghdad and a sovereign wealth fund to take in all energy revenue was approved at the same time by the KRG's cabinet under then-Prime Minister Nechirvan Barzani. At that point, the KRI region was producing around 350,000 bpd – out of a total 3.3 million bpd across Iraq – and planned to increase this to 1 million bpd by the end of 2015. In sum, the KRG intended the 2013 bill to give Kurdistan complete financial independence from the rest of Iraq as a precursor to total political independence shortly thereafter. The next phase after independent oil sales had been assured by the KRI was a planned referendum on independence, as also thoroughly detailed in my latest book on the new global oil market order . The Federal Government correctly saw this as an existential threat to its future, given the U.S.'s promise to the Kurds regarding the defeat of Islamic State. As it transpired, despite over 90% of the KRI's population voting in favour of independence in a 2017 referendum, the move failed to support meaningful U.S. support and instead sparked a major clampdown on the region from Baghdad and from other neighbouring countries with sizeable Kurdish populations, including Iran and Turkey.
From that point, Baghdad had moved further into the sphere of influence of China and Russia, while the KRI continued to maintain its distance, although it had still maintained an underlying alliance with the West on the basis that it was still the best option to securing independence at some point in the future. In broad geopolitical terms, Russia and China – as exclusively revealed to OilPrice.com some time ago by a very high-ranking official from the Kremlin – took the view that: "By keeping the West out of energy deals in Iraq, [Russia and China will see] the end of Western hegemony in the Middle East will become the decisive chapter in the West's final demise." At that stage, Baghdad's view on any KRI independence was made extremely clear when then-Prime Minister Mohammed Al-Sudani stated that the new unified Oil Law – run, in every way that mattered, by the FGI out of Baghdad – would govern all oil and gas production and investments in both Iraq and the Kurdistan region and would constitute "a strong factor for Iraq's unity". On the other side of the equation, the U.S. and its allies continued to push their own agenda in the KRI based on the idea of using it as a base to expand their footprint in the south of the country, at the expense of Beijing and Moscow. The U.S. and Israel also had a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran.
Having said all of this, Baghdad's posture towards the West has markedly shifted since U.S. President Donald Trump's second term in office began, characterised as it has been by a no-nonsense approach to Iraq's previous double-dealings with Washington , as analysed recently by OilPrice.com. The U.S.-led removal of President Bashar al-Assad in Syria, President Nicolás Maduro in Venezuela, and Supreme Leader Ali Khamenei in Iran, also appears to have discouraged further moves into Iraq by China and Russia to add to the foothold they had already established there. As a result, multiple major deals have been announced in the oil and gas sector in favour of Western firms, rather than those of Beijing and Moscow, and this should portend more favourably in its dealings with the KRG in future. Crucially as well in the matter of the northern Iraqi pipeline flows into Turkey, even Ankara has tilted back toward the West recently, driven primarily by a pragmatic alignment with Washington and growing military reliance on NATO, although it continues to pursue strategic autonomy. "This is why the one-year agreement's been done, although Ankara's still looking to optimise its own benefits from the deal over the longer term with Iraq," a senior energy source who works closely with Iraq's Oil Ministry exclusively told OilPrice.com. "It's asked for multi-layered joint ventures across the energy sector – with the emphasis 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 wants a big 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 highlighted. "If it [Turkey] doesn't get what it wants, then it could well fail to extend the deal or even break the one-year term," he concluded.
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Sinergia Empresarial continuará el seguimiento de esta información sobre iraq's Oil Lifeline Has Been Saved, But For How Long? y ampliará la cobertura conforme se confirmen nuevos elementos relevantes para el ecosistema empresarial.
