Iraq’s Energy Sector Faces Its Most Important Test in Decades

Iraq’s oil sector has been discussed over the last few years primarily through the lens of production figures, OPEC quotas and reserve estimates. The latter, however, is no longer sufficient or even appropriate, as today’s story is no longer only oil. The current focus should be on a struggle over sovereignty, state authority, regional geopolitics and economic survival.

The coming months will prove decisive for the future of Iraq’s hydrocarbon sector. The government in Baghdad is currently attempting to rebuild and centralize an energy industry that has been fragmented for decades by war, corruption, militia influence, regional rivalries and institutional weakness. Iraq, at the same time, will need to get out of the ongoing conflict between an assertive Iran, increasingly independent Kurdish ambitions, and mounting pressure from international energy markets.

The irony is striking. The Middle East giant still holds some of the world’s largest oil and gas reserves, but its energy future will be determined not by geology but by politics.

Iraq’s Ministry of Oil has become the centerpiece of Baghdad’s broader state-building project. Since early 2026, federal authorities have accelerated efforts to centralize control over exports, revenues and infrastructure. After the elections, a new leadership has been appointed. The increasing role of SOMO and federal institutions already indicates a clear objective: to reduce fragmentation and restore Baghdad’s authority over the entire hydrocarbon sector. The new Iraqi leadership has become aware that continued political fragmentation translates directly into lost revenues and reduced strategic influence.

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The Hormuz crisis has only amplified the urgency of these reforms, as the country is among the hardest hit by disruptions to Gulf energy exports. Before the regional conflict, Baghdad exported around 93 million barrels per month through the Strait of Hormuz. By April 2026, however, these exports through the Strait had declined to around 10 million barrels. Again, even if some don’t want to see it, this has exposed the extraordinary vulnerability of Iraq’s export system. Insurance costs, security concerns, and tanker shortages created an economic shock that Baghdad could not ignore.

For the first time in years, Baghdad’s policymakers are forced to confront a reality that energy analysts have highlighted for decades. The country cannot continue relying almost exclusively on southern export terminals connected to a single geopolitical chokepoint.

This new realization, or maybe even the first-time realism back in town, is the main factor behind the resumption of exports through the Kirkuk-Ceyhan pipeline has become so strategically important. The March 2026 agreement between Baghdad and the Kurdistan Regional Government (KRG) was not simply an export deal. Without a doubt, Iraq’s energy security depends on cooperation between Erbil and Baghdad, which the Iraqi government now acknowledges. Exports through Ceyhan have resumed at around 200,000-250,000 bpd, with ambitions to increase substantially in the coming months. Joint committees have been established, revenues are again flowing into federal structures, and both sides recognize the strategic necessity of keeping northern export routes operational.

Still, there should not be real optimism yet, as this would be a major mistake; it is only a tactical cooperation, not yet a strategic reconciliation.

The relationship between Baghdad and Erbil remains fundamentally fragile. The KRG continues to demand guarantees on budget transfers, salary payments, trade restrictions and investor protections. All Kurdish leaders have repeatedly argued that security threats from militia groups operating near energy infrastructure will have to be addressed and fully removed before long-term confidence can return. Iraqi authorities, however, still insist that all hydrocarbon revenues ultimately belong to the Iraqi state.

Despite these tensions, there are reasons for cautious optimism.

The Hormuz crisis has created a rare alignment of interests: Baghdad needs northern export routes, while the KRG needs revenue. International oil companies need predictability. Turkey wants transit volumes restored. Washington supports closer federal-KRG cooperation. For perhaps the first time in years, all major stakeholders benefit from a functioning export framework. This also applies to natural gas projects.

For decades, Iraq has been one of the world’s great paradoxes: a major energy producer that continues to import gas and electricity. Associated gas flaring remains enormous, while domestic demand continues to rise. Due to the changing geopolitical and security situation in the region, Baghdad now sees gas development as both an economic necessity and a geopolitical imperative. Clearly, every cubic meter of domestically produced gas will reduce Iraq’s dependence on Iranian imports and strengthen the country’s energy security.

This is where the Kurdish region may become a critical part of Iraq’s future.

The KRG possesses significant untapped gas resources capable of supporting domestic Iraqi demand, industrial development, and, potentially, future exports to Turkey and Europe. European and other Western policymakers are increasingly viewing Kurdish gas development as a means of reducing Iraqi dependence on Iran. At the same time, it will also support Europe’s move to quit its dependence on Russian and other external suppliers. The strategic importance of Kurdish gas has therefore risen substantially over the last two years.

While all of this is clear, it still does not separate it from the Iranian factor.

Iran remains the single most important external influence on Iraq’s political and energy landscape. The Iranian Iraqi relationship is deeply embedded through trade, electricity imports, religious networks, political parties and security structures. The last sanctions on Iraqi officials and allegations involving Iranian-linked oil networks have again highlighted how difficult it remains to separate Iraqi energy policy from broader regional geopolitics. Baghdad’s main challenge is not simply Iranian influence; it is the role of Iran-linked militias operating inside the country.

The new Iraqi leadership has pledged to strengthen state authority and bring weapons under government control. Some militia groups have signaled a willingness to cooperate with reform efforts, while others remain deeply entrenched inside political, security and economic structures. Emerging optimism about signs that certain factions explore separation from formal militia frameworks should be tempered, as institutional influence built over two decades cannot be dismantled overnight.

For international investors, Western but also others, this situation or critical position remains the single greatest concern.

International oil companies can manage geological risks or price volatility. IOCs and NOCs can even manage regulatory uncertainty. The main issue they are unable to deal with is the risk of missile attacks, militia interference, political intimidation and infrastructure disruption. For Iraq, the coming weeks (or months) will represent a critical test.

If Baghdad succeeds in gradually strengthening state authority while avoiding confrontation with militia actors, investor confidence can improve. If tensions between Washington and Tehran escalate again, as they seem to be doing at present, Iraq is clearly expected once more to be one of the preferred arenas for proxy competition. Under such circumstances, pipelines, oil fields, export terminals and foreign-operated facilities would inevitably become targets.

At the same time, the broader regional environment adds another layer of complexity. The closure of the Strait of Hormuz has changed Iraqi strategic thinking. Even as regional tensions ease, policymakers now understand that the old model is no longer viable. Baghdad is and will need to actively explore alternative export routes, pipeline expansions, and new agreements with Turkey. Discussions involving international energy companies, including major American firms, demonstrate Iraq’s ambition to increase production capacity toward 5 million bpd while simultaneously expanding gas development.

Again, however, strategies and political wishful thinking will be confronted by a list of obstacles that must be addressed. The existing Iraq-Turkey pipeline framework faces uncertainty as long-standing agreements approach expiration. At the same time, infrastructure investment needs will be massive, totaling several billion dollars. Security concerns remain significant for a longer period. Yet the direction of travel is increasingly clear: Iraq is seeking diversification, redundancy and greater strategic autonomy.

This is where the story could become more optimistic than many observers assume.

For years, Iraq’s energy narrative has been dominated by crises. ISIS. Budget disputes. Oil price collapses. Iranian influence. Militia violence. Pipeline shutdowns and political paralysis. At present, however, maybe for the first time in a decade, there are signs that structural incentives are aligning in favor of reform.

Baghdad recognizes the necessity of stronger institutions, including a functioning security system. At the same time, the KRG recognizes the necessity of cooperation. International investors recognize the scale of the opportunity. Turkey recognizes the value of Iraqi exports. Even regional actors increasingly understand that a stable Iraqi energy sector benefits everyone. The potential prize is enormous.

Even with the Middle East’s vast potential, Iraq remains one of the few countries capable of materially increasing global oil production over the next decade. The country’s gas reserves are still underdeveloped, while its petrochemical sector offers substantial growth opportunities. Geography here also plays a significant role, as its location serves as a bridge among the Gulf, Turkey, Europe, and the Eastern Mediterranean.

For the Kurdish region, the outlook is equally promising if political agreements can be sustained. The combination of oil exports, gas development, proximity to Turkey and growing international interest in energy diversification could transform the KRG from a perpetual political problem into one of Iraq’s most important economic assets.

Optimism could be right, but reality is still hard to deal with. Iranian influence, even if the current regime in Tehran is weakened, will remain. Iraqi Shia militias will not disappear overnight, while the Baghdad-Erbil disputes are not solved yet. Regional instability will periodically return, even in case of a US-Iran deal or a change of regime in Tehran.

Yet the most important development is that Iraq’s leadership is finally beginning to address the structural weaknesses that have constrained the sector for decades. The next crisis in Tehran, Washington or Erbil will not determine the future of Iraq’s oil and gas industry. When addressed rightly, it will be determined by whether Iraq can build institutions stronger than the political forces that have historically divided it.

By Cyril Widdershoven for Oilprice.com

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