Baghdad, US turn to Iraqi Kurds for oil exports as Iran war hits supplies

Iraqi Prime Minister Mohammed Shia al-Sudani has appealed to the Kurdistan Regional Government (KRG) to help export up to 200,000 barrels per day (bpd) of its crude via a pipeline running to Turkey after Iraq ceased all foreign sales on March 1 due to the US-Israeli war against Iran, Al-Monitor has learned. 

Ensuring Iraqi crude reaches world markets is seen as critical by the Trump administration, as Gulf nations targeted by Tehran’s missiles curb production and the Strait of Hormuz remains effectively closed. The resulting squeeze in supplies saw the price of oil surge above $100 per barrel on Sunday — before dropping down to around $90 Monday afternoon — with analysts predicting further spikes that could herald the worst crisis since the 1970s.

However, Iraqi Kurdish leaders have said they will let the oil flow only if Iraq agrees to resolve a long-standing dispute over Baghdad’s push to fully control all of the Iraqi Kurdistan region’s foreign trade, KRG officials told Al-Monitor. Many believe they now have the upper hand and are determined to leverage their perceived advantage.

“We need pragmatism in Baghdad. There is a new reality in Iraq. With crossings to Iran closed because of the war, the federal government now depends on Prime Minister Masrour Barzani’s goodwill for imports and oil exports through Turkey,” a senior KRG official speaking on background told Al-Monitor.

US officials have been communicating with Baghdad and Erbil to resolve the dispute in hopes of relieving pressure on the markets, the senior official told Al-Monitor. Acting Assistant Secretary for the Office of International Affairs Tommy Joyce called the KRG’s Washington representative, Treefa Aziz, on Friday, asking her to provide talking points for upcoming discussions with Baghdad relating to the dispute. An administration official speaking on background confirmed that Washington wants the pipeline to come back on stream. Another Washington insider involved in discussions about exporting Iraqi crude through Turkey said relevant members of the Trump administration had been focused on the topic for at least the past five days.

The Department of Energy did not respond to Al-Monitor’s request for comment.

On March 1, Iraq’s Ministry of Oil informed the KRG that it would begin exporting 100,000 barrels of crude per day from its Kirkuk fields through a pipeline that links to another in the Kurdistan region that runs to export terminals on Turkey’s southern Mediterranean coast. The KRG refused to let the flow of oil proceed. On Monday, an increasingly desperate Baghdad appealed to the KRG to allow double the amount — 200,000 bpd — to go through the Kurdish pipeline.

The KRG has laid out several conditions that it says need to be met before it lets the oil flow.

Kurds play hard ball

The immediate standoff centers on Baghdad’s refusal since Jan. 1 to let the KRG and local business people pay dollars for any of their imports. Since 2023, when Baghdad began collecting all the proceeds from the sale of oil produced in the Kurdistan region and exported via Turkey, the KRG has had to increasingly rely on the Central Bank of Iraq to secure dollars.

Trade with Turkey, the KRG’s biggest trading partner, has plummeted since. The average number of trucks crossing the border has gone down from 3,000 a day to around 300 a day, according to KRG data.

Baghdad slapped the dollar embargo because of Erbil’s long-running objections to granting the central government full control over the management of the Kurdistan region’s land borders and airports under a newly introduced scheme that is being rolled out elsewhere across Iraq. The system, devised by the United Nations and called the Automated System for Customs Data (ASYCUDA), is meant to enforce standardized tariffs, bring stricter supervision and documentation of trade, and therefore ensure greater transparency and prevent corruption.

The KRG insists, however, that the terms of the new model need to be adjusted in line with the KRG’s federal status that is enshrined in the Iraqi constitution. On March 6, Barzani conveyed to Sudani in writing that the KRG would adopt ASYCUDA, but on its own terms. Sudani has yet to respond.

Until recently, Washington had steered clear of the issue, writing it off as just another Baghdad-Erbil squabble. 

Iraqi energy officials did not respond to Al-Monitor’s request for comment.

“Our position is clear: dollar relief first, then oil exports,” the senior KRG official said. It remains unclear whether Washington will use its coercive power to get Sudani to fix the KRG’s dollar dilemma or whether it will lean on the KRG instead to let the oil flow.

Iraq sucked in

Meanwhile, Iran and its Iraqi Shiite militia allies have been targeting the Kurdistan Region of Iraq since the start of the war. The attacks intensified amid reports that the CIA and Israel were involved in a covert effort to arm and train Iranian Kurdish fighters based in Iraqi Kurdistan to help overthrow the Iranian regime. President Donald Trump said on Saturday that he did not support the enterprise.

The pro-Iranian Islamic Resistance group in Iraq on Monday claimed responsibility for a drone attack on Erbil airport targeting US forces nearby. The drones were intercepted by US forces, local media reported.

On March 5, a drone struck the Sarsang field in the Kurdistan region, which produces an average of 30,000 barrels of crude per day. It is operated by HKN Energy, a privately owned US company that is part of the Hillwood group, founded by Ross Perot Jr. The attack caused a fire and halted production.

A Kurdish security officer was killed in a March 7 strike on Erbil airport. Barzani called on Baghdad to rein in the attacks, noting that the groups carrying them out were funded and armed by the central government.

Sudani’s failure to halt the assaults has deepened Erbil’s resentment toward him.

The US Embassy in Baghdad was targeted in an unidentified rocket attack over the weekend.

Washington is widely believed to support Sudani’s bid for a second term as rival factions fail to agree on a new prime minister in the wake of parliamentary elections that were held in November.

Reversing Kurdish autonomy 

Iraq has, since 2017, been steadily reasserting central authority over the Kurdistan region, an effort Kurdish officials say is aimed at erasing their autonomy altogether. That year, the KRG held a referendum on independence. It was overwhelmingly approved by a majority of Kurds but sent relations with the central government into an even deeper hole.

Relations between the KRG and Baghdad have long been strained over disputes concerning revenue sharing, particularly related to oil. Baghdad periodically weaponizes the budget against the Kurds, freezing disbursements that are used to pay public worker wages in Iraqi Kurdistan.

“Economic coercion is becoming a powerful lever to pull on the road to asserting Baghdad’s control over Erbil. There is a systemic pattern of actions by the Iraqi government to force revenue streams to be rerouted through the center,” Ramzy Mardini, founder of Geopol Labs, a risk consultancy firm based in the Middle East, told Al-Monitor. “This gives the Iraqis unprecedented leverage, which they will most certainly use for political reasons, even to constrain growth and development in the Kurdistan Region,” he said.

“This isn’t motivated by state-building or fiscal transparency. This is a long-running centralization campaign designed to strip away and ultimately erode the autonomy of the Kurdistan Region. The Iraqis are getting better at it, and Washington has grown too partial to Baghdad rather than serve as an honest broker,” Mardini added.

In a further setback for the KRG — and Turkey — an international arbitration court ruled in 2023 that Ankara had violated an existing agreement with Iraq’s central government by selling oil produced in the Kurdistan region since 2014 through a purpose-built pipeline. Iraq now wants to use that pipeline, which has lain dormant since Feb. 28, when international oil companies ceased all production amid continued Iranian-backed attacks on US bases and oil and gas fields in the Kurdistan region.

The pipeline can accommodate up to 700,000 bpd. It was carrying 250,000 bpd before its closure on Feb. 28 — all of it Iraqi Kurdish crude. Iraq was exporting around 3 million bpd via the Strait of Hormuz before the Iran conflict. Oil produced in the Kirkuk fields, which Iraq now wants to divert to Turkey, was used for domestic consumption.

Previously, the Kirkuk fields were connected to export terminals via a dual pipeline that runs directly to Turkey. Last July, Turkey issued a decree terminating a 52-year-old agreement under which the oil was exported. It had already halted the flow in 2023 after the International Court of Arbitration ordered Ankara to cough up $1.5 billion to Baghdad in damages over the unauthorized sales of Kurdish oil. Iraq is pressing for additional compensation in a separate arbitration case. The lines have a combined capacity to transport 1.5 million bpd. Should Iraq agree to waive the case and the previous fine that Ankara has so far refused to pay, the pipeline could resume operations, if not at full capacity. Washington may also be pressing for a deal between Baghdad and Ankara.