No country aside from Iran itself has felt the economic consequences of the U.S./Israel-Iran war more than Iraq. Over 90 percent of its annual budget historically comes from oil and around 95 percent of that historically had to pass through the Strait of Hormuz before it could be monetised. When Iran closed the strait on the first day of ‘Operation Epic Fury’, that vital oil transit route was shut to neighbouring Iraq, and its critical financial lifeline along with it. A temporary agreement was reached on 17 March between Tehran and Baghdad that was supposed to have secured safe passage through the strait for Iraqi ships, but it did not provide the quick fix many thought it might. Despite the diplomatic agreement, most global shipping firms still refused to send their vessels into the Gulf because of the sky-high insurance premiums and the threat from sea mines. Moreover, Iraq’s lack of a large national fleet meant it remained reliant on third-party owners. As such, despite the understanding with Iran, the lack of shipping options led to an 80 percent fall in Iraq’s oil production, as its oil storage facilities for drilled oil were full. This led to it having to shut down many production wells entirely, threatening permanent damage to them through a loss of reservoir pressure, water infiltration, and corrosion, among other factors. Recent official figures from Iraq show oil production and exports rebounding, but these numbers are a lot more fragile than they look. So, what exactly is happening in Iraq right now?
October saw Iraq’s nationwide crude production rebound to 4.22 million barrels per day (bpd), with 3.95 million bpd coming from the Federal Government of Iraq region in the south under Baghdad’s direct jurisdiction and 265,000 bpd coming from fields under the administration of Iraq’s Kurdistan Regional Government (KRG) operating out of Erbil in the north. In turn, crude oil exports surged 9.5% month-on-month, averaging between 3.35 million bpd and 3.5 million bpd. Both sets of figures — production and exports — are around the levels seen before the Strait of Hormuz was closed, but the positive picture this paints of an Iraqi oil sector rebound is misleading. On a fundamental level, the lengthy shut-ins at multiple wells from shortly after the strait was closed on 28 February have indeed caused both short-term losses in production capacity at several fields and potentially longer-term permanent damage to others, a senior source who works very closely with Iraq’s Oil Ministry exclusively told OilPrice.com last week. “Because the government’s pushing production everywhere to make up for the [country’s] financial losses, the output drops in key fields are less obvious, but they’re there and they’ll show up increasingly as time goes on,” he said. The impetus to keep pushing oil production to its limits is unlikely to abate any time soon either, with Iraq’s budget deficit having soared 346 percent in the first nine months of the year, driven by a 50.8 percent year-on-year drop in oil revenues. Related: U.S. Traders Weigh the Cost of Taking Trump’s Russian Diesel
On top of that is the logistical nightmare that Iraq is having to run to even reach these export numbers, rather than the relatively seamless export machine that ran smoothly up until comparatively recently. Before the KRG export pipeline was closed on 25 March 2023 due to legal action, around 400,000-450,000 bpd of crude oil flowed through this northern route and into the Turkish port of Ceyhan, as analysed in depth in my latest book on the new global oil market order. The southern route saw about 3.3 million-3.4 million bpd make its way down to the main export hub of Basra and shipped through the Persian Gulf-Strait of Hormuz-Gulf of Oman route to destinations around the world. However, the northern pipeline route was closed due to legal action on 25 March 2023 and only reopened on 27 September 2025, with the shutdown having resulted in structural damage to the infrastructure. Following the onset of Operation Epic Fury, it has been subject to repeated drone and missile attacks, leaving it with even more highly limited capabilities. The southern route, of course, remains subject to enormous disruption from Iran and its proxies, and uncertainty regarding potential future U.S. and Israeli action.
Shortly after the initial closure of the strait, Iraq focused away from the south, instead looking to move oil to the west and northwest of the country by truck. It gradually increased the number of vehicles to over 500 per day as the war ground on, with the standard lorry tanker used in the convoys containing between 200 and 250 barrels of oil. The Al-Waleed border crossing had been reopened on a trial basis for this form of crude transit, with the trucks then travelling across Syria to the Baniyas refinery and oil terminal on the Mediterranean coast. Once at Baniyas, the oil was unloaded into storage tanks and transferred to maritime tankers for export to global markets, especially to Europe. A similar method is now being used to truck a collective 200,000 bpd of crude oil from the south of Iraq to collecting stations at Sarallu (within the wider Kirkuk energy corridor) and Kurdistan’s Khurmala junction, whereupon an additional 175,000 bpd of local Kurdish crude and 125,000 bpd of Kirkuk crude are blended with it. From there, this 500,000 bpd of oil moves north through Turkish territory via the Kurdistan pipeline network directly to Turkey’s Mediterranean port of Ceyhan. As for the southern route, instead of the previous seamless direct tanker oil exports, Baghdad’s State Oil Marketing Organization (SOMO) and international buyers are relying heavily on shuttle-shipping, ship-to-ship transfers in the Gulf of Oman, and smaller vessels operating under heavy military protection to make it through the Strait of Hormuz chokepoint.
Given that the current hotch-potch system is extremely expensive to operate, has multiple structural fragilities, and is highly exposed geopolitically to the whims of Turkey, the KRG, and Iran, it is little wonder that Baghdad is desperately seeking alternatives to roll out as soon as possible. One of these is the Kirkuk-Nineveh pipeline as part of the federal Iraq-Turkey crude oil network extending to Ceyhan Port, independent of the KRG. The Kirkuk-to-Nineveh line will be the vital northern leg of a rehabilitated federal system, designed to carry oil around the KRG’s territory directly to the Fishkhabur border terminal. While an emergency truck-to-pipe workaround currently forces 500,000 bpd through the KRG’s parallel infrastructure, this federal pipeline is structurally complete and undergoing initial system testing. Its 350,000-bpd design capacity reflects the Oil Ministry’s cautious, phased approach, as final pressure tests on the connecting Baiji loops will take a few more months to complete. Full utilisation of this independent federal route remains constrained by the limited capacity of the existing Basra-to-Kirkuk segment. However, once the southern Basra-to-Haditha corridor is built, it will plug directly into this newly operationalised Kirkuk-Nineveh line, creating a seamless, high-volume flow from the Persian Gulf to Turkey — at least, that is the idea.
A longer-term option appears even more intriguing, with Saudi Arabia last week giving its preliminary approval to revive the long-idle ‘Iraqi Pipeline in Saudi Arabia’ (IPSA). Spanning 1,568 kilometres from Iraq’s Zubair oilfield in Basra to Saudi Arabia’s Al-Mu’ajjiz terminal near Yanbu, on the Red Sea coast, IPSA was originally built during the 1980s to bypass the Persian Gulf during the Iran-Iraq War. With a design capacity of 1.65 million bpd, it became operational in 1987 but was permanently shut down in August 1990 following Iraq’s invasion of Kuwait. In 2001, Saudi Arabia officially confiscated the pipeline assets within its borders, later repurposing part of the infrastructure for its own domestic natural gas and East-West oil transit. Riyadh has said it favours building a replacement line, as rehabilitating the existing one would cost nearly as much, and that in any event Baghdad should cover part of the cost. Moreover, as Saudi Arabia has already repurposed the section within its territory to transport its own crude from its east coast to the Red Sea, Riyadh has added that any agreement to revive the joint route would require Iraq to rebuild its own section and the two countries to reach a political understanding. The redirection of all possible oil flows away from the threat of Iranian manipulation in and around the Persian Gulf remains a core focus of Washington’s long-term strategy for the region, as exclusively analysed by OilPrice.com. Another is to decisively shift Iraq out of the sphere of influence of Iran — and, by extension, of China and Russia — as fully examined in my latest book on the new global oil market order. Consequently, knitting these two elements together as part of his foundation-stone foreign policy mechanism of the ‘Abraham Accords’ could provide U.S. President Donald Trump with a positive political move at a time when his domestic political options look to have become more limited following the results of the 3 November midterm elections.
By Simon Watkins for Oilprice.com
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