Resume KRG oil pipeline exports or face sanctions, US tells Iraq: sources

The US has ordered Iraq to resume exporting Kurdish crude through a pipeline to Turkey's Ceyhan terminal after a two-year closure or face the threat of sanctions, sources confirmed to Platts Feb. 21.

White House officials were scheduled to hold a call with Iraqi counterparts to discuss the issue in the coming days, according to one source familiar with the matter.

Much of the oil sector in Iraq's semiautonomous Kurdistan region is operated by Western companies, many of whom say they remain frustrated by what they see as delay tactics by the federal Iraqi government in reopening the pipeline to Ceyhan. The closure of the Iraq-Turkey pipeline has kept some 400,000 b/d of Kurdish crude from the Mediterranean market since March 2023.

Now, with US President Donald Trump seeking to resume a "maximum pressure" policy on Iran in a bid to squeeze the country's crude exports to zero, the White House is also eying Tehran's influence in neighboring Iraq, where Iranian-aligned militia are pervasive in its government and economy.

A resumption of Kurdish crude exports could also be a potential means to offset any loss of Iranian barrels and prevent a price spike.

Baghdad now faces the threat of sanctions, which could have a major impact on its fragile economy, if it does not imminently reopen the pipeline, the sources said.

"The Iraqis are threatening their entire oil sector over 400,000 b/d of oil," one source involved in the discussions said.

Representatives for Iraqi state-owned oil marketer SOMO declined to comment, while the White House and US State Department could not immediately be reached.

Front-month ICE Brent futures were down $1.33/b from the previous close as of 1643 GMT, partly driven by the news.

Analysts from S&P Global Commodity Insights said in a note Feb. 21 that pressure from the US to resume Kurdish pipeline exports is "bearish" for crude prices, but noted that it could be offset by reduced CPC volumes into the Mediterranean following drone strikes in Russia.

"Importantly, more Kurdish crude into the global market should be seen as a balancing act against potential lower Iranian crude exports, due to increased sanctions/pressure on Iran from Washington," the analysts said.

Oil smuggling

In the run-up to Trump's White House return, sources told Platts that his team was weighing sanctions on Iraq, OPEC's second-biggest producer.

The Iraq-Turkey pipeline has been offline since March 2023, when an arbitration court in Paris said Turkey had violated the pipeline agreement by allowing independent Kurdish sales.

However, a recent Iraqi federal budget amendment and negotiations between Kurdish officials and Baghdad over the share of crude sales allotted to the KRG have raised hopes of an imminent resumption.

Addressing a conference in Baghdad on Feb. 17, Iraq's oil minister, Hayan Abdul Al-Ghani, hinted that exports through the pipeline could resume next week, according to local media reports. However, Turkish sources told Platts that no such agreement had yet been reached between Erbil, Ankara and Baghdad.

The US has in recent years sought to disrupt ties between the two Middle Eastern neighbors. Electricity-starved Iraq relies heavily on Iran for imports of energy supplies, which sources say has enabled Tehran-affiliated militias to embed themselves in SOMO and the oil ministry.

That has, in turn, given rise to an oil smuggling network worth billions of dollars a year.

Iran pumped 3.2 million b/d of crude in January, according to the latest Platts OPEC Survey, compared to Iraq's 4.06 million b/d.

The closure of the Ceyhan pipeline initially caused Kurdish crude production to plummet, but it subsequently rebounded, thanks to a thriving local market. Kurdish output was estimated in January by the Platts Survey at around 240,000 b/d. Much of it flows by truck into Iran and Turkey, as well as being used by small-scale local refineries.

Threats by the Trump administration to boost pipeline flows could endanger Iraq's OPEC compliance and hinder delicate negotiations between Ankara, Baghdad and Erbil.

On Feb. 5, a senior SOMO official told Platts that the budget amendment would lead to SOMO holding exclusive marketing rights for Kurdish crude, but noted that Baghdad would likely sacrifice KRG output in favor of Asia-bound southern production, in order to remain within its 4 million b/d OPEC quota.

Production from the KRG could therefore be capped at 150,000 b/d, the official said.