Iraq is running out of time to move its oil - and every option is dangerous

 With over 90% of its annual budget historically coming from oil and around 95% of that black gold having to pass through the Strait of Hormuz before it is monetised, Iraq has at least as big a problem from the waterway’s closure as any country in the world. The temporary agreement it reached on 17 March with Iran that secured safe passage through the Strait for Iraqi ships has not provided the quick fix many might think. Despite the diplomatic agreement, most global shipping firms still refuse to send their vessels into the Gulf because of the sky-high insurance premiums and threat from sea mines. And Iraq’s lack of a large national fleet means it remains reliant on third-party owners. As such, despite the understanding with Iran, this lack of shipping options has led to an 80% fall in Iraq’s oil production, as its facilities to store drilled oil are now full. In short, it needs to move a lot of oil, fast. So, what are its options?

In the current febrile geopolitical landscape, Iraq’s choice on how to move its oil is even more charged with potentially dire ramifications for it than usual. The most palatable choice from the jumpy U.S. right now is that Iraq send more oil through the Iraq Kurdistan Regional Government (KRG)-controlled Iraq-Turkey Pipeline (ITP). To this effect, an agreement was reached between the Federal Government of Iraq (FGI) in Baghdad and the KRG, allowing the south to export more of its oil through the north. The initial phase of this will be up to 250,000 barrels per day (bpd), with plans to scale up to 500,000 bpd to help offset southern export losses, while all revenue from these exports is currently earmarked for return to the federal treasury in Baghdad. However, this arrangement may not last for long because the ITP has long been the focus of the broader power play between East and West, as exercised on the ground respectively by the FGI and KRG. This is because it is the financial lifeline for the KRG, providing its primary economic leverage by which it can continue to function as a semi-independent region. Up until very recently, Baghdad had done everything in its power to prevent the KRG from utilising the ITP to its maximum potential through crude oil sales done independently of Baghdad, as documented by OilPrice.com.

A more geopolitically mixed option on Iraq’s part would be to expand its export routes to the global markets via Syria. This was one direction of travel for Iraqi oil over many years during the long-running presidency of Bashar al-Assad, fully backed by Russia after its full-scale military intervention on 30 September 2015. The principal method for much of that time was through massive overland tanker truck convoy systems -- a method being utilised again now.  Shortly after the initial closure of the Strait of Hormuz, the first few phases of these operations involved around 300 tanker trucks a day, but Iraqi officials last week said they expect this to reach a minimum of 500 per day within the coming week. On average, a standard lorry tanker used in these convoys contains between 200 and 250 barrels of oil. The Al-Waleed border crossing has 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 Banias, the oil is unloaded into storage tanks and transferred to maritime tankers for export to global markets, especially to Europe. Talks have also been resumed for the revival of the Iraq-Syria oil pipeline -- a plan which, up until Trump gained his second presidential term, had been backed by Beijing and Moscow, with pledges of funding and technical assistance. At that time, senior officials of Iraq’s state-owned North Oil Company in Kirkuk said that plans to resuscitate the 825-kilometre Iraq-Syria oil pipeline linking the Kirkuk region with Banias were well advanced, and had covered the required work, timetables and cost of rebuilding, with a view to an initial nameplate capacity of 300,000 barrels per day. This option would be more concerning for Washington than the option to increase exports through the Kurdistan-controlled pipeline to the north because China’s and Russia’s intention was always to extend this Iraq-Syria pipeline route backwards, linking it to Iran and to Russia, as part of Beijing’s, Moscow’s and Tehran’s efforts to build a long-sought ‘Land Bridge’. This would have allowed Iran and Russia to exponentially increase weapons delivery into southern Lebanon and the Golan Heights area of Syria, dramatically increasing the ability of Iran and its proxies to launch attacks on Israel as part of a broader rolling plan to further destabilise the Middle East, as also analysed in my new book on the new global oil market order.

The final option would mark a decisive shift back into the sphere of Chinese and Russian influence: this would be doing a deal with Tehran that would allow Baghdad to move tankers bearing its oil freely through the Strait of Hormuz. Iraq would certainly try to pitch this to the U.S. as a temporary solution only, in line with its previous diplomatic template of lying to Washington where necessary to maintain some relations with it, while pursuing a broadly pro-Iran geopolitical stance. However, early in his second term, Trump made it clear that he knew exactly what Baghdad was up to and would not put up with it anymore. To this effect, last April saw the ‘No Iranian Energy Act’ introduced to U.S. lawmakers. The proposed Act sanctioned the importation of Iranian natural gas to Iraq, which has for many years formed the foundation of the country’s domestic power sector. Indeed, gas and electricity imports from Iran have historically comprised around 40% of all of Iraq’s energy needs. An adjunct piece of legislation – the ‘Iran Waiver Rescissions Act’ -- would permanently freeze Iranian-sanctioned assets everywhere, including Iraq, and prohibit any standing or future U.S. president from using any waiver authority to lift the sanctions.

Now, as then, if Iranian oil exports were still sanctioned by the U.S. and its allies, the resumption of a close alliance between neighbouring Iran and Iraq would allow Tehran to continue to export its oil -- regardless of any sanctions in place -- by disguising it as non-sanctioned Iraqi oil instead, as also detailed in my new book on the new global oil market order. The start of the process involves Iranian oil easily being labelled as Iraqi oil by dint of the fact that the oil production of both neighbouring countries comes from oil fields that sit atop the same oil reservoirs. These shared fields include Iran’s Azadegan (the same reservoir as Iraq’s huge Majnoon site), Yadavaran (Iraq’s Sinbad), Azar (Iraq’s Badra), Naft Shahr (Iraq’s Naft Khana), Dehloran (Iraq’s Abu Ghurab), West Paydar (Iraq’s Fakka), and Arvand (Iraq’s South Abu Ghurab). From the point when it is re-branded as Iraqi oil, Iranian oil can then be shipped where it is required, which is still mainly China. Iran’s own former Petroleum Minister, Bijan Zanganeh, publicly highlighted how this is done in 2020. He said: “What we export is not under Iran’s name -- the documents are changed over and over, as well as [the] specifications.” A further layer of obfuscation is undertaken when the oil cargoes are at sea, such as tankers disabling the ‘automatic identification system’ on ships that carry Iranian oil rebranded as Iraqi -- this makes tracking such vessels extremely difficult. Compounding this – particularly useful for oil being moved to China -- is the common practice of at-sea or just-outside-port transfers of Iranian oil onto tankers flying the flags of a local Asian country, with Malaysia and Indonesia having long been favoured by Iran and Iraq in this regard.

All in all, Iraq’s immediate crisis may be logistical, but the greater danger lies in the geopolitical choices it can no longer postpone. Each export route now doubles as a declaration of alignment, and Baghdad’s long?practised ambiguity is collapsing under the weight of full storage tanks and throttled production. Leaning on the KRG keeps Washington calm but risks reigniting internal fractures; turning to Syria binds Iraq more tightly to Moscow and Tehran; and relying on Iran for Hormuz access would confirm the very tilt the U.S. is now legislating against. With every option carrying strategic costs, Iraq is being forced into a decision that will reverberate far beyond its oil sector. The path it chooses in the coming weeks will shape its alliances, its leverage, and its place in the regional order for years ahead.