Kurdistan Leverages Oil Amid Baghdad-Iran Tensions

For years, Iran -- together with its long-term sponsors China and Russia -- has been increasing pressure on neighbouring Iraq to remove the remaining powers from its semi-autonomous northern region and subsume it as a regular governorate into a single unified country, firmly rooted in Beijing and Moscow’s sphere of influence. The reason for this was underscored exclusively to .com by a senior energy source who works closely with Iran’s Petroleum Ministry: “By keeping the West out of energy deals in Iraq, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” On the other side of the power equation, the U.S. and its key allies wanted the Kurdistan Region (and Iraq) to terminate links with Chinese, Russian and Iranian companies connected to the Islamic Revolutionary Guards Corps. The U.S. and Israel also had a further strategic interest in utilising the Kurdistan Region as a base for monitoring operations against Iran, as fully analysed in my latest book on the new global oil market order. However, the war in Iran may have turned the relationship between the Baghdad-based Federal Government of Iraq (FGI) and the Erbil-based Kurdistan Regional Government (KRG) on its head.

Last month saw Baghdad’s key transport route oil exports (which still generate around 90% of its government revenues) closed off to it, with the effective closure of the Strait of Hormuz. This southern route transported nearly all the FGI’s crude from Basra into the Persian Gulf, through the Iran-controlled Strait into the Gulf of Oman, and finally into the Arabian Sea, from where it could be moved anywhere Iraq wanted, although much of it headed east to Asia. The only other significant export route in Iraq moves oil to its northern region into the Turkish port of Ceyhan, from which it can be moved into mainland Europe or shipped elsewhere via the Mediterranean. This route is through the Iraq Turkey Pipeline (ITP), operated by the Kurdistan Pipeline Company (KPC), and ultimately controlled on the Iraqi side by the KRG. However, 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 a couple of weeks ago, 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. This culminated in the Baghdad-engineered shutdown of the pipeline that began in March 2023 and only resumed last September.

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One of these would be meaningful compensation to the KRG for the potential revenue lost as a result of the Baghdad-led shutdown of the ITP from March 2023 to September 2025. KRG Prime Minister Masrour Barzani stated in June 2025 that losses had already reached US$25 billion, and by the time that the shutdown was lifted the Association of the Petroleum Industry of Kurdistan (APIKUR) estimated total losses to Iraq surpassed US$35 billion. This figure includes several components, including the much lower percentage of its federal budget entitlements over the period, with only IQD 24.3 trillion (US$18.5bn) transferred against the IQD44.4 trillion owed. The KRG also incurred over US$1 billion in arrears to international oil firms for production that occurred before and during the shutdown. And it was forced through financial budget shortfalls from Baghdad to sell some of its oil at knockdown prices to keep the Kurdistan Region afloat. “Bigger than that, though, is they [the KRG] want a complete re-drawing of the whole budget payments for oil deal,” said the E.U. source.

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Even before Baghdad’s shenanigans related to the recent extended shutdown of the ITP, the KRG had felt they were on the wrong end of the original 2014 ‘Budget Payments-for-Oil’ deal that formed the basis of the financial relationship between Baghdad and Erbil. In this, the KRG agreed to export a certain volume of oil from its own fields and Kirkuk via Iraq’s State Organization for Marketing of Oil (SOMO) and to not independently sell oil from the fields on the international markets. In return, the FGI in Baghdad would disburse a certain level of payments to the KRG from Iraq’s central budget. The initial figures agreed by both sides were 550,000 bpd of oil a day from the KRG side to the Federal Government in Baghdad and 17% of the federal budget after sovereign expenses (around USD500 million at that time) per month in payment from Baghdad’s side to the KRG. Even before 2017, the deal did not work properly, with both sides accusing the other of failing to fully deliver on their obligations, but in 2017, two events occurred that complicated this already difficult situation. One was the independence referendum in Kurdistan, in which over 90% of the population voted in favour of full independence from the rest of Iraq, as also fully detailed in my latest book on the new global oil market order. The response from Baghdad, and neighbouring Iran and Turkey was an instant putting down of this nationalist momentum. The second was the effective takeover of the KRG’s oil sector by Russia, through three key deals, also examined in the book. Part of the reason for the KRG’s move to Moscow was that the Kurdistan Region felt it had been betrayed by the West, as it had been led to believe that Washington would support its move to independence as a reward for the Kurdish Peshmerga army being the key instrument that stopped the further rise of Islamic State at the time. That said, Moscow used its newly found leverage over the KRG to exacerbate the chaos between it and the FGI with a view to provoking Baghdad into finally removing all of Erbil’s powers and simply rolling the Kurdistan Region into the wider Iraq.

As it now stands, the move is on in Erbil to use the KRG’s leverage over Baghdad to move further away again from the FGI, and toward the sort of greater independence originally envisioned back in 2013, before the omni-toxic 2014 ‘Budget Payments-for-Oil’ deal. Specifically, back on 23 April of that year, the KRG passed a bill that would allow it to independently export crude oil from its fields and those of Kirkuk in the event that Baghdad failed to pay its share of oil revenues and exploration costs for crude found in the Region, as analysed in depth in my latest book. A corollary bill to create an oil exploration and production company separate from the FGI in Baghdad and to establish a sovereign wealth fund to take in all energy revenue was approved at the same time. At that point, the Kurdistan Region was producing around 350,000 barrels per day (bpd) – out of a total 3.3 million bpd across Iraq -- and planned to increase this to 1 million bpd by the end of 2015. In sum, the Region intended the 2013 bill to give it complete financial independence from the rest of Iraq as a precursor to total political independence shortly thereafter. The next phase -- after independent oil sales were assured by the Kurdistan Region -- was the planned referendum on independence, which was stymied in 2017. “That’s what the Kurdistan Region really wants, and this is a good time for it to steer things back in that direction,” concluded the E.U. source.