Iraq’s oil export vulnerability exposes the cost of unresolved disputes
Iran’s effective closure of the Strait of Hormuz has exposed Iraq’s dependence on the Gulf for oil exports. But on top of that, it has revealed the cumulative cost of Baghdad’s strategic complacency. The shock to Iraqi supply has laid bare both the fragility of the country’s export architecture and the enduring failure of the federal government and the Kurdistan Regional Government (KRG) to resolve core disputes over oil governance.
Iraq exports approximately 93 percent of its crude—around 3.3 million barrels per day (bpd)—through Basra’s Gulf terminals. Once tanker traffic halted as a result of the war, onshore storage rapidly filled, forcing authorities to shut in production from southern fields. Output fell from about 4.3 million bpd in February to below 1.3 million bpd, exposing the absence of contingency plans to protect the fiscal lifeline of a heavily oil-dependent state.
This was not an unforeseeable risk. Iraq has long recognized the Strait of Hormuz as a strategic chokepoint, dating back to the Iran-Iraq War in the 1980s. Yet unlike other Gulf producers, Iraq failed to immediately operationalize its own bypass capacity through the Iraq-Turkey Pipeline (ITP), whose functioning segment lies within the Kurdistan region. Instead, Baghdad and Erbil remained stymied by long-standing mistrust and unresolved disputes over revenue sharing, resource control, and the management of export infrastructure.
The eventual breakthrough in resolving this impasse, brokered by Washington on March 17, allowed the export of around 170,000 bpd from Kirkuk through the Kurdistan pipeline. While modest in scale, it underscored two realities: First, Iraq’s energy security depends as much on political coordination as on infrastructure. And second, the United States remains indispensable in overcoming deadlocks between Baghdad and Erbil.
A crisis foretold
The strategic importance of the ITP had already been demonstrated during last year’s twelve-day conflict between Iran and Israel. The possibility of a future disruption to the Strait of Hormuz was a factor that led Baghdad to compromise with the KRG and restore access to Ceyhan through a US-brokered agreement in September involving federal authorities, the KRG, and international oil companies.
That arrangement, recently extended until June, ended a two-and-a-half-year standoff that had halted Kurdish exports after Iraq’s partial arbitration victory against Turkey in early 2023 over Ankara’s facilitation of independent Kurdish exports between 2014 and 2018.
Yet this deal did not produce meaningful strategic coordination. Instead of joint contingency planning, deep mistrust between Baghdad and Erbil persisted, even as indicators increasingly pointed to renewed regional conflict involving Iran and as the United States expanded its military presence in the Gulf ahead of its campaign.
The consequences became evident when the crisis materialized. Iraq lacked the infrastructure to redirect significant volumes of oil northwards. Years of underinvestment left the pipeline network unable to move crude efficiently from Basra to Kirkuk. Even now that exports have resumed, doubts remain over whether flows can sustainably exceed 170,000 bpd without disrupting domestic supply to northern refineries and power plants.
Security failures compounded these constraints. Oil fields in Kurdistan had already been targeted last July by Iran-backed Iraqi armed groups, yet no effective deterrence or security framework was agreed upon. Since the onset of the current conflict, the Kurdistan region has suffered the heaviest toll from strikes by Iran and these armed groups, including drone strikes on the Sarsang field operated by US firm HKN in early March and early April. These attacks have deterred the restoration of oil production, cutting Kurdish output by more than 200,000 bpd, volumes that could have bolstered current northern exports.
Had Baghdad firmly deterred earlier attacks on Kurdistan’s energy sector, it might have established a broader red line against threats to oil infrastructure across Iraq, including strikes against US firms and foreign-operated fields in Basra during the current conflict.
Instead, these attacks have exposed the government’s limited ability to protect the sector from domestic armed groups, undermining its previous claims of success in insulating the country from last year’s twelve-day war. That failure now raises the security risk for international investment and could deter the entry of US majors into the Iraqi federal government’s oil sector.
The KRG’s lost opportunity
Last year’s export agreement, though limited, created a rare opening to potentially address long-standing disputes over the governance of Kurdistan’s oil sector. Baghdad has long refused to recognize the legality of oil development contracts signed by the KRG with international oil companies. By allowing a federal oil marketer, the State Organization for Marketing of Oil, to oversee exports, the deal signaled a softening in Baghdad’s position, indicating that there was space for dialogue to resolve other oil sector disagreements.
However, like prior agreements, this deal managed rather than resolved underlying disputes. It was driven by political expediency, reached ahead of parliamentary elections as Prime Minister Mohammed Shia’ al-Sudani sought to ease tensions with the Kurds in preparation for lengthy government formation talks.
The agreement’s fragility became clear after the Hormuz closure. The KRG’s initial reluctance to allow federal authorities to use the pipeline, combined with demands related to customs restrictions, was widely interpreted in Baghdad as an attempt to leverage the crisis for concessions. This perception allowed federal authorities to deflect criticism of their own lack of preparedness while strengthening the narrative advanced by Iran-aligned factions that Erbil was acting in narrow self-interest.
While some of the KRG’s concerns were legitimate, the timing proved counterproductive. By prioritizing short-term gains, Erbil forfeited an opportunity to demonstrate strategic flexibility that could have strengthened its position in future negotiations over oil governance and in shaping near-term political coalition dynamics in Baghdad.
US intervention also challenged entrenched assumptions within Iraq’s Shia political class that Washington would automatically align with Kurdish positions. Instead, US engagement prioritized restoring Iraqi exports and stabilizing the broader energy market.
Clouded outlook
While this Baghdad-Erbil crisis was short-lived, it underscored that the dispute over oil governance has been left unresolved for too long, and that the United States remains the only external actor capable of brokering meaningful compromise between the two sides.
Both sides have repeatedly called for the passage of a federal oil and gas law that would create a framework for normalizing hydrocarbon management countrywide, yet disagreements over constitutional interpretation continue to block progress. The significance of US mediation lies not in resolving these disputes, but in steering both parties toward pragmatic, mutually beneficial arrangements. The challenge after the current conflict will be to revive that approach.
This effort will unfold against a deteriorating political and security backdrop. Iran is already seeking to consolidate its influence through support for Nouri al-Maliki to become the country’s next leader, while Iran-aligned armed groups have escalated attacks on American targets, including diplomatic facilities, leading to US retaliation.
These developments highlight the Iraqi state’s limited capacity to enforce a monopoly over the use of force and its vulnerability amid competing external pressures. The risk of US sanctions, particularly if Tehran-aligned factions dominate the next government, adds another layer of uncertainty, with potentially severe consequences for Iraq’s fragile, oil-dependent economy.
The regional situation remains in flux. The conflict has already complicated government formation, and its outcome will test whether Iraqi leaders can restore pre-crisis economic stability and assert meaningful control over armed groups while navigating competing pressures from the United States and Iran.
Looking ahead, Iraq is likely to sit at the intersection of any postwar recalibration of US and Iranian influence. Much will depend on how much power Tehran retains and how Iraq’s competing political actors seek to exploit regional fault lines. While regional dynamics may shift, the broader political class in Baghdad and Erbil shares an interest in preserving the existing power-sharing system.
For the United States, disengagement would risk ceding ground at a critical moment. Washington’s challenge is to prevent Iraq from being drawn more deeply into a post-conflict regional order shaped by an emboldened Iran. A reduced US role would risk squandering years of political and economic investment in Iraq, potentially resulting in the loss of leverage in one of the region’s most consequential oil producers.
Against that backdrop, Washington’s proven ability to mediate Baghdad-Erbil disputes offers an entry point for a broader role. Iraq has already sought deeper engagement with US energy firms to diversify from Chinese dependence, while the scale of Iraq’s resource base continues to attract investment from US oil majors such as Chevron and ExxonMobil.*
The Hormuz crisis has highlighted the strategic value of securing supply from oil producers such as Iraq. A more active US role comes with the opportunity to align American commercial, geopolitical, and stabilization objectives in the country.
Yesar Al-Maleki is a nonresident senior fellow at the Atlantic Council’s Rafik Hariri Center for the Middle East and Gulf analyst at the Middle East Economic Survey.
Note: Chevron and ExxonMobil are donors to the Atlantic Council but not to this line of work.
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