OPEC’s second-largest oil producer, Iraq, has lower than two months earlier than it loses the important thing means to export its crude, with the settlement to maneuver its product by way of two pipelines into Turkey expiring on 27 July. These routes have change into very important to Iraq’s potential to monetise its oil flows because the efficient closure of the Strait of Hormuz from 28 February. Up till then, round 95% of Iraq’s crude was shipped by way of that path to key export locations in Asia, together with China. The blockade of the Strait meant Iraq’s home oil storage tanks stuffed shortly to most capability, and since it has very restricted choices for transporting its crude elsewhere, it has been compelled to close down manufacturing wells. The longer that goes on, the extra possible it’s to lead to everlasting harm to Iraq’s oil manufacturing by way of a lack of reservoir stress, water infiltration, and corrosion, amongst different elements. For Iraq, this poses an existential threat, as over 90% of its annual funds traditionally nonetheless comes from oil. So, how has it come to this, and what are Iraq’s choices now?
The genesis of the present nightmare for Iraq lies within the March 2023 ruling by a global arbitration courtroom that Turkey pay the Baghdad US$1.5 billion in damages for breaching the 1973 ‘Crude Oil Pipeline Settlement’. This resulted from Ankara permitting the semi-autonomous northern Iraqi area of Kurdistan’s authorities (the KRG), primarily based in Erbil, to bypass the Baghdad-based Federal Authorities of Iraq (FGI) and export oil independently. In line with a separate settlement struck between the FGI and the KRG in 2014, the KRG was obliged to ship the oil produced in its area (round 550,000 barrels per day on the time) to the FGI on the market by way of the state-owned State Group for Advertising of Oil. In change, the FGI would ship the KRG a share of central funds revenues every month (about 17% at that time). The KRG was explicitly not allowed by the FGI to promote oil unbiased of this settlement, as Baghdad believed the possibly huge revenue from this may be utilized by the KRG as a battle chest to assist safe the area’s full independence from Iraq, which was true, as absolutely analysed in my newest guide on the brand new world oil market order. After the arbitration courtroom’s verdict in Baghdad’s favour in March 2023, Turkey triggered a clause within the contract in July 2025, giving a compulsory one-year discover that it was terminating the 52-year-old pact completely, efficient as of 27 July 2026. With the Strait shut, April noticed Iraq’s crude oil manufacturing fall to a mean of 1.389 million barrels per day (bpd), in comparison with 3.47 million bpd from January 2002 to the top of March this yr and over 4.1 million bpd within the three months main as much as 28 February. The final time oil manufacturing fell to the present degree in Iraq was instantly following the 2003 U.S.-led invasion. In response, Baghdad started to maneuver oil for export, nevertheless it may, totally on tanker vans overland. Iraq has since reached round 500 vans per day (every truck accommodates, on common 200 to 250 barrels of oil).
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Nevertheless, these volumes are nowhere close to sufficient to make sure Baghdad’s financial survival, so on the similar time, it has been engaged on the complete restore of its previous oil pipeline that ran from the disputed, federally-controlled Kirkuk province, adjoining to Iraq’s Kurdistan area to the Turkish port of Ceyhan. It ran northwest from the Kirkuk K1 area by way of federal territory (the Salahaddin and Nineveh provinces, close to Mosul) as much as the border city of Fishkhabur. This ‘authentic’ Kirkuk-Ceyhan Pipeline or Iraq-Turkey Pipeline (ITP) consisted of two pipes, which theoretically had a nameplate capability of 1.6 million bpd mixed and was cut up 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 capability reached between 250,000 and 400,000 bpd when working usually, however even earlier than Islamic State entered the image in 2014, the pipeline was topic to repeated and ongoing assaults by numerous Sunni militant teams working within the area.
No matter any peace deal between Iran and the U.S./Israel alliance, Baghdad is now pushing forward with the Kirkuk-Nineveh pipeline as a part of the Iraq-Turkey crude oil pipeline extending to Ceyhan Port on the Mediterranean Sea, which is unbiased of the KRG. Furthermore, the Kirkuk-to-Nineveh line will not be a standalone challenge, however moderately is the very important northern leg of the rehabilitated federal community, proving the bodily pipe required to hold oil across the KRG’s territory and ship it on to the Fishkhabur border terminal. The 350,000-bpd design capability of this Kirkuk-to-Nineveh section displays the Oil Ministry’s cautious, phased strategy, as they can not safely check the complete 1.6 million bpd nameplate capability of the previous system without delay. Opening this 350,000-bpd pipeline permits Baghdad to simply deal with the preliminary trial goal of 150,000 to 250,000 bpd of Kirkuk crude subsequent month. Furthermore, as soon as the southern Basra-to-Haditha hall is constructed, it’ll plug into this newly opened Kirkuk-Nineveh-Fishkhabur line, making a seamless, high-volume circulate from the Persian Gulf to Turkey — no less than, that’s the thought. On the opposite facet of the regional energy stability equation, ever since issues emerged with the FGI’s pipeline, the KRG has continued to take care of its personal single-track pipeline, from the Taq Taq area by way of Khurmala, which joins the Kirkuk-Ceyhan pipeline within the border city of Fishkhabur. This had a nameplate capability of 700,000 bpd, which was then elevated to 1 million bpd, though it has to this point reached solely 900,000 bpd.
The issue for each the KRG and FGI is that each these pipelines are lined by the 1973 treaty with Turkey, with each because of be shut down on 27 July, except a deal might be reached with Ankara. However the Turks are effectively conscious of the exceptionally robust hand it now holds in such talks and are urgent for “each attainable concession it will possibly consider”, a senior power supply who works intently with Iraq’s Oil Ministry completely advised OilPrice.com over the weekend. “It’s requested for a multi-layered joint ventures throughout the power sector — with the onus on Iraqi funding — in oil, gasoline, petrochemicals, and electrical energy, and has demanded that an association is made that offsets the complete US$1.5 billion that it was fined by the arbitration courtroom and technically nonetheless owes Baghdad,” he added. “Moreover, it [Turkey] desires an enormous hike within the mounted tariff [currently US$1.00 and US$1.25] on every barrel of oil pumped by way of the Baghdad-controlled pipeline and it desires Iraq to decide to a excessive, steady each day quantity [hundreds of thousands of barrels per day] by way of the pipeline, with one-for-one fines if that quantity will not be absolutely used,” he underlined.
All of which brings us to what stress and to what finish the superpower backers of every facet — the West when it comes to the KRG, and China and Russia for the FGI — will attempt to exert on Turkey, and Ankara’s dealings with each side have traditionally been most diplomatically characterised as ‘fluid’. Regardless of its NATO standing, Turkey routinely defies Western international coverage, with a major instance being its buy of Russian S-400 missile defence techniques, which led to Washington kicking Turkey out of the F-35 fighter jet program. Extra just lately, Turkey used its NATO veto energy as leverage earlier than lastly permitting Finland and Sweden to hitch the alliance. It’s tolerated in NATO for its essential geostrategic place between the West and the East, controlling the Turkish Straits (Bosporus and Dardanelles), which is the one maritime gateway out for Russia’s Black Sea fleet. Then once more, Turkey and Russia are historic rivals who’ve backed reverse sides in conflicts like Syria, Libya, and Azerbaijan, and Turkey regards the KRG-controlled northern Iraq area as a breeding floor for the Kurdish terrorist organisations working throughout the mainland. It might as a substitute be that Turkey in the end goes the way in which that finest advantages itself, which incorporates the signing of the multi-layered agreements talked about earlier, and which additionally occurs to profit China. It’s because one in all these key offers that Turkey is pushing for is the ‘Strategic Growth Street Undertaking’, as additionally absolutely analysed in my newest guide on the brand new world oil market order. This US$17 billion challenge is not going to simply hyperlink Iraq to Turkey westwards however will backlink eastwards to China’s ‘Belt and Street Initiative’. This, in flip, will create a seamless transport hall working from Iraq’s flagship deepwater Al Faw Grand Port (because of be completed with Chinese language assist this yr) in its key oil export hub of Basra within the Persian Gulf, throughout a number of of its greatest oil and gasoline fields, and at last into Fishkabur on the Iraqi border with Turkey. From there, it’ll prolong through street and railway hyperlinks into the remainder of Europe.
By Simon Watkins for Oilprice.com
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