Iraq’s Oil Lifeline Reopens — But Can Baghdad Trust Turkey for Even One Year?

With over 90% of Iraq’s annual budget still coming from oil exports and historically around 95% of that crude shipped through the Strait of Hormuz, securing an alternative export route while the Strait remains effectively blockaded has become an existential matter for Baghdad. Aside from the billions lost in immediate oil revenues for OPEC’s second-largest oil producer, the blockade meant Iraq’s domestic oil storage tanks filled quickly to maximum capacity, forcing the shutdown of several production wells. The longer that continued, the more likely it would permanently damage Iraq’s oil production because of a loss of reservoir pressure, water infiltration, and corrosion, among other factors. Although historically about 80% of Iraq’s oil exports have gone to key Asian buyers, especially China, the next-best alternative export route was through northern Iraq into Turkey. The problem here was that the key agreement for Baghdad to move its oil through two pipelines into Turkey expired on 27 July. So, where are we now on this? On 1 August, Baghdad and Ankara officially signed a one-year interim deal allowing Iraq to move its oil through the Iraq-Turkey Pipeline (ITP) corridor – comprising two separate oil pipelines but treating it as a single, unified mechanism, in line with the original 1973 Crude Oil Pipeline Agreement. The deal signed in Ankara between Turkish state energy firm Boru Hatlar? ile Petrol Tas?ma Anonim Sirketi (BOTAS) and Iraqi state oil entities the State Organization for Marketing of Oil (SOMO) and the North Oil Company (NOC) implements a transit target of 750,000 barrels per day (bpd) of Iraqi crude -- way higher than the current 170,000-200,000 bpd level, although still only half of its 1.5 million bpd total capacity. Following the signing of the deal, tanker operations resumed swiftly, with Valpiave loading over 600,000 barrels of crude at Ceyhan on 3 August, according to industry data. The focus of these shipments will not be Asia, but on European and American buyers who can access the oil without it having to pass through a single maritime chokepoint. Demand for Iraqi crude remains extremely strong in Western markets through this route, partly to replace Black Sea and Russian crude barrels (Iraq’s Kirkuk blend is a medium sour oil, which serves as a great substitute for these barrels) and partly due to the broader dearth of other supplies due to the effective blockade of the Strait of Hormuz. Related: BofA: Hormuz Needs 10 Times More Ships to Stabilize Oil Markets That said, this new one-year deal may have solved Iraq’s major problem for now, but there is little reason for optimism that it will last. For two and a half years from March 2023 to September 2025, oil flows from Iraq to Turkey had been halted, following the International Chamber of Commerce’s (ICC) international arbitration ruling that Turkey must pay Baghdad US$1.5 billion in damages for breaching the 1973 Crude Oil Pipeline Agreement. The breach centred on Ankara allowing the Erbil-based semi-autonomous Kurdistan Region of Iraq (KRI) to circumvent the Baghdad-based Federal Government of Iraq (FGI) and export oil independently. In retaliation for the ICC ruling, Turkey then stopped the flow of oil from Iraq through the northern Iraq pipeline route, which at the time regularly exported approximately 450,000 bpd of crude from the Kirkuk region to Ceyhan. This standoff between Baghdad and Ankara over independent oil sales from Iraq’s Kurdistan Region in the north highlights another deep fault line running through the new one-year agreement between Baghdad and Ankara, and all related agreements since 2014. Indeed, the prohibition on the Kurdistan Region selling oil independently from Baghdad had been a core condition of the 2014 agreement between Baghdad and Erbil: to wit, the Kurdistan Region would funnel the crude produced in its territory – roughly 550,000 barrels a day at the time – to the federal authorities in Baghdad SOMO. In return, it would receive a fixed slice of the national budget, then about 17% each month. Baghdad’s fundamental unwillingness to allow the Kurdistan Region to sell oil independently arose from its fear 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 well founded. Specifically, 23 April 2013, saw Kurdistan’s regional government pass 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 Federal Government 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. The KRI region was producing around 350,000 bpd – out of a total 3.3 million bpd across Iraq – at that point 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 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. All these deep fissures still run through relations between the Federal Government of Iraq and the Kurdistan Region of Iraq, and between the Federal Government of Iraq and Turkey. Yet another further complicating factor is the vital geopolitical strategic importance that north and south Iraq have to the West on one side, and China and Russia on the other. In broad 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. There is little doubt that the U.S. and the European Union (E.U.) of 27 member countries played key roles in facilitating this latest one-year deal between Iraq and Turkey. “The 750,000 barrels per day flow requirement for Iraq is not as high as had been expected from Turkey, although it’s interesting to see that TPAO [Turkiye Petrolleri Anonim Ortakl?g?] has been able to acquire a 15% interest in BP’s Kirkuk holding, despite the long-running hostility between the Turks and The Kurds,” a senior source in the E.U.’s energy security complex exclusively told OilPrice.com last week. “That [holding] will give it [TPAO] exposure to a partnership that covers over three billion barrels of oil equivalent from the Baba and Avanah domes of the Kirkuk oil field, as well as the Bai Hassan, Jambur and Khabbaz fields in Federal Iraq -- a nice deal for the Turks,” he added. There may be more benefits to come for Turkey, according to a senior energy source who works closely with Iraq’s Oil Ministry. “It’s asked for other 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 said. “And if 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. By Simon Watkins for Oilprice.com More Top Reads From Oilprice.com