OPEC’s second-largest oil producer, Iraq, has less than two months to lose key crude oil export routes, with a deal to transport its output via two pipelines to Turkey expiring on July 27. These routes have become critical to Iraq’s ability to monetize oil flows since the effective closure of the Strait of Hormuz on February 28. Until then, about 95% of Iraq’s crude was shipped through that route to key export destinations in Asia, including China. The blockade of the Straits meant that Iraq’s domestic oil storage tanks quickly filled to capacity, and because it had limited options for transporting its waste elsewhere, production wells were forced to shut down. The longer it continues, the more likely it will cause permanent damage to Iraq’s oil production through loss of reservoir pressure, water intrusion, and corrosion, among other factors. For Iraq, this poses an existential risk, as more than 90% of its annual budget historically still comes from oil. So, how did it come to this, and what are Iraq’s options now?
The beginning of the current nightmare in Iraq lies in the March 2023 decision of the international arbitration court that Turkey pay Baghdad US$1.5 billion in damages for violating the 1973 ‘Crude Oil Pipeline Agreement’. This led Ankara to allow the northern Iraqi semi-autonomous Kurdistan region (KRG), based in Erbil, to bypass the Baghdad-based Government of Iraq (FGI) and export oil independently. According to a separate agreement reached between FGI and the KRG in 2014, the KRG was obliged to send oil produced in its region (about 550,000 barrels per day at the time) to FGI for sale through the State Oil Marketing Corporation. In exchange, the FGI will send the KRG a percentage of the average budget revenue each month (about 17% at the time). The KRG was clearly not allowed by the FGI to sell oil outside of this agreement, as Baghdad believed that the potential revenue from this would be used by the KRG as a war chest to help secure full regional independence in Iraq, which was true, as fully analyzed in my recent book on the new order of the global oil market. After the arbitration court’s decision in favor of Baghdad in March 2023, Turkey opened a contract clause in July 2025, giving a mandatory one-year notice that it is permanently terminating the 52-year-old agreement, effective July 27, 2026. By closing the Strait to 38 million oil production in Iraq. barrels per day (bpd), 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 leading to 28 February. The last time oil production fell to current levels in Iraq was following the US-led invasion in 2003. In response, Baghdad began moving oil for export, however much it could, mostly in tanker trucks that landed on land. Iraq has reached about 500 trucks per day (each truck contains, on average, 200 to 250 barrels of oil).
Related: Kuwait Delivers First Crude Exports to Asia Since Iran War
However, these volumes are not close enough to ensure Baghdad’s economic survival, so at the same time, it has been working on fully rehabilitating its old oil pipeline from the disputed, state-controlled Kirkuk province, adjacent to Iraq’s Kurdistan region, to the Turkish port of Ceyhan. It ran northwest from the Kirkuk K1 area through the state territory (Salahaddin and Nineveh provinces, near Mosul) up to the border town of Fishkhabur. This ‘real’ Kirkuk-Ceyhan Pipeline or Iraq-Turkey Pipeline (ITP) consisted of two pipes, believed to have a nameplate capacity of 1.6 million bpd combined and divided into 1.1 million bpd with a 46-inch (1,168-mm) diameter pipe of 500,004-inch bpd and 500,004-inch bpd 104 mm bpd. The export capacity of the FGI-controlled pipeline reached between 250,000 and 400,000 bpd when it was operating normally, but even before the Islamic State entered the picture in 2014, the pipeline was under repeated and sustained attacks by various Sunni groups operating in the region.
Regardless of the peace agreement between Iran and the US/Israel alliance, Baghdad is now moving forward with the Kirkuk-Nineve pipeline as part of the Iraq-Turkey crude oil pipeline that goes to Ceyhan Port on the Mediterranean Sea, independent of the KRG. In addition, the Kirkuk-to-Nineve line is not an independent project, but it is an important northern leg of the fixed state network, proving the physical pipeline needed to carry oil from the KRG region and deliver it directly to the Fishkhabur border. The 350,000-bpd design capacity of this Kirkuk-to-Nineve 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 the 350,000-bpd pipeline allows Baghdad to easily handle an initial trial target of 150,000 to 250,000 bpd of Kirkuk crude next month. Furthermore, once the southern Basra-to-Haditha tunnel is built, it will connect to the newly opened Kirkuk-Nineve-Fishkhabur line, creating a seamless, high-volume flow from the Persian Gulf to Turkey — at least, that’s the idea. On the other side of the regional energy balance equation, since the problems with the FGI pipeline, the KRG has continued to maintain its single-track pipeline, from the Taq Taq area through Khurmala, joining the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur. This had a nameplate 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 FGI is that both pipelines are covered by a 1973 agreement with Turkey, both of which will be closed on July 27, unless an agreement can be reached with Ankara. But the Turks are well aware that they have a strong hand now in negotiations like this and are seeking “every concession they can think of”, a senior energy source close to Iraq’s Ministry of Oil told OilPrice.com exclusively over the weekend. “It called for a multi-layered partnership in the energy sector — which is responsible for Iraqi investment — in oil, gas, petrochemicals, and electricity, and demanded that an arrangement be made that would eliminate all of the US $1.5 billion that was fined by the arbitration court and technically still owed to Baghdad,” he added. “More than that, of course [Turkey] he wants a big increase in the fixed income [currently US$1.00 and US$1.25] for each barrel of oil pumped through a pipeline controlled by Baghdad and wants Iraq to commit to a higher, sustained daily supply [hundreds of thousands of barrels per day] by using the pipe, with a penalty for one person if that volume is not fully used,” he emphasized.
All this brings us to what pressure and conclusion the supporters of the great powers on each side – the West in terms of the KRG, and China and Russia for the FGI – will try to cooperate with Turkey, and Ankara’s cooperation with both sides has historically been characterized more diplomatically as ‘fluid’. Despite its NATO status, Turkey has always defied Western foreign policy, the main example being its purchase of Russian S-400 missile defense systems, which led Washington to exclude Turkey from the F-35 fighter jet program. Recently, Turkey used its NATO powers as a veto before allowing Finland and Sweden to join the alliance. It is tolerated in NATO for its important geostrategic position between the West and the East, it controls the Turkish Straits (Bosporus and Dardanelles), the only sea gate from the Black Sea fleet of Russia. Also, Turkey and Russia are historical rivals who support different sides in conflicts such as Syria, Libya, and Azerbaijan, and Turkey views the northern Iraqi region controlled by the KRG as a breeding ground for Kurdish terrorist organizations operating across the country. Instead, it may be that Turkey is finally moving in its own best interests, including the signing of the multi-layered agreements discussed earlier, which also happen to benefit China. This is because one of these important agreements that Turkey is pursuing is the ‘Road Development Project’, as it is also fully analyzed in my recent book on the new global oil market system. This US$17 billion project will not only connect Iraq and Turkey to the west but also connect it to the east with China’s ‘Belt and Road Initiative’. This will create a seamless transport corridor from Iraq’s deep-sea Al Faw Grand Port (which is due to be completed with Chinese assistance this year) to its key oil export hub at Basra in the Persian Gulf, through several major oil and gas fields, and finally into Fishkabur on the Iraqi-Turkish border. From there, it will extend with road and rail links across Europe.
By Simon Watkins of Oilprice.com
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