Unlocking the Promise of Iraq’s Oil Sector

Iraq’s energy sector faces a critical juncture. Although Iraq is one of the world’s largest oil producers, its heavy reliance on oil exports and its underdeveloped infrastructure leave the country vulnerable to global price fluctuations. Moreover, persistent political instability and fragmented governance complicate the state’s efforts to implement comprehensive reforms.

Iraq’s oil sector holds the key to transforming its economy. But achieving this transformation will require substantial financial investments and a comprehensive overhaul of institutional frameworks, such as implementing transparent fiscal policies, judicial reforms, and robust regulatory mechanisms, to improve governance and policy consistency.

Vast Oil Reserves and Promising Production Targets

Iraq’s energy potential is immense. The country possesses the fifth-largest proven oil reserves, estimated at 145 billion barrels of crude, and the oil industry has long been the backbone of Iraq’s economy. In 2024, Iraq produced approximately 4.5 million barrels of oil per day (bpd), making it the second-largest producer in OPEC and the sixth-largest globally. Despite these impressive production figures, Iraq’s continued overreliance on oil revenues renders its fiscal health vulnerable to volatile global markets and cycles of borrowing whenever oil prices drop. This overreliance, which breeds boom and bust cycles, underlines the urgency of the government’s economic diversification efforts.

At least outwardly, however, the government has not signaled much interest in divesting from hydrocarbon production. In fact, the country’s oil reserves are expected to play an even larger role in the global energy landscape over the coming decades. Last September, the state-owned Iraqi News Agency, quoting Deputy Minister for Extraction Affairs Basim Khudair, reported that Iraq plans to increase production by one-third, to 6 million bpd. According to the Ministry of Oil, this target could be achieved with an investment of over $50 billion to modernize the country’s oil fields. Khudair also noted that Iraq intends to produce enough gas to meet its industrial and electricity needs. In a sign of positive change for its economy, Iraq has secured $100 billion in foreign direct investment (FDI) over the past two years.

Khudair’s ambitious targets are more than just aspirational figures; they represent a transformative vision for the Iraqi economy that aims to reduce the country’s dependence on oil and realize a diversified energy economy focused on sustainable growth. However, realizing this vision will require coordinated efforts across both government and private sectors to manage the substantial risks involved. According to Mohammed Al-Najjar, Director of the Iraq Development Fund, foreign investments will contribute to various industrial and economic projects aimed at fostering diverse growth, supporting infrastructure modernization, and providing high-paying jobs across the country.

Strategic Investments and International Partnerships

The path to scaling production is not one that Iraq can navigate alone. As the country has learned over the past several decades, external investment and technological expertise are critical to overcoming its limitations and realizing its oil potential. In other words, international partnerships are a vital pillar of Iraq’s energy strategy.

Unfortunately for Baghdad, Iraq has struggled to secure and maintain partnerships with major Western oil companies due to a combination of political instability, security risks, unattractive contract terms, and shifting global energy priorities. Despite its vast reserves, Iraq’s oil sector remains heavily state-controlled, with rigid technical service contracts that limit the profit potential for foreign firms. These factors, coupled with bureaucratic inefficiencies and delayed infrastructure projects, have depressed investment in the country’s energy economy.

At the same time, Iraq’s political landscape remains volatile, marked by frequent shifts in government, widespread corruption, and ongoing disputes between Baghdad and the Kurdistan Regional Government (KRG) over oil revenues—all of which contribute to an unpredictable business environment. Security risks posed by powerful non-state actors and Iran-backed militia groups further complicate this state of affairs. As a result, companies like ExxonMobil and Shell have either exited the Iraq market altogether or scaled back their operations, while firms such as BP and TotalEnergies have sought renegotiations or adapted their investment strategies.

Meanwhile, Chinese and Russian companies have sought to exploit this vacuum by accepting less restrictive contract terms. In fact, Iraq’s “fifth-plus” and sixth oil and gas tender rounds—by which foreign firms can gain rights to exploit Iraqi oil reserves—further cemented China’s influence, with state-backed giants like China Petroleum and Chemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC), as well as service firms like Geo-Jade and Zhenhua Oil, securing key deals. This shift underscores Iraq’s willingness to adapt the terms of its oil contracts to attract investment, though Western majors (who largely operate without state support, unlike their Russian or Chinese counterparts) have only expressed lukewarm interest.

However, there are signs that Western corporations are beginning to rethink their bleak assessment of Iraq’s energy sector. To curb Iran’s rising influence over its neighbor and counter the influence of China, the United States has backed Iraq’s push to achieve energy independence by 2030. In April 2024, Iraq and U.S. companies Baker Hughes, GE, and KBR signed a series of deals to reduce gas flaring and channel captured gas into domestic electricity production. Iraq energy and utility company Raban Al-Safina for Energy Projects signed MOUs with American firms to develop the Nahr Bin Umar gas field, a partnership that aims to tackle environmental challenges and promote sustainable domestic gas use. In February, BP committed to invest up to $25 billion over 25 years to revitalize oil and gas fields in Kirkuk and boost production to 450,000 bpd. This deal not only signals growing investor confidence, but also promises the transfer of advanced technology and expertise to enhance extraction efficiency and sustainability. Most significantly, BP’s long-term commitment reflects the company’s willingness to wager on Iraq’s stability and security, though Baghdad will need to remain vigilant in addressing the internal challenges that can impede such projects.

French giant TotalEnergies’ $27 billion investment deal, announced in January, is another example of Iraq’s growing appeal to international investors. This huge project focuses on gas development, including the capture of flared gas in the Basra region. Iraq’s efforts to capture and utilize flare gas are critical to both environmental and economic stability. Iraq is one of the largest producers of flare gas—a byproduct of oil production that is often wasted, polluting the air. By capturing this gas, Iraq can reduce its environmental footprint, generate additional revenue, and improve its energy security. This deal illustrates how Iraq’s energy sector can simultaneously address environmental and economic challenges, further enhancing its attractiveness to global investors.

Through these partnerships, Iraq is not merely seeking to increase oil output; it is also modernizing its energy sector, enhancing its gas industry, and diversifying its energy portfolio. Indeed, recent developments suggest a future wherein oil is no longer the country’s primary export, as gas and renewable energy take on an increasingly important role. TotalEnergies’ distinct interest in natural gas highlights this potential shift. While international partnerships and investments lay the groundwork for growth, harnessing new discoveries and modernizing aging infrastructure are equally vital to sustain long-term progress.

New Discoveries and Infrastructure Developments

Iraq’s potential as an oil exporter is not limited to its current reserves. New discoveries continue to enhance the country’s energy profile, adding depth and diversity to its oil sector. In early 2025, Iraq announced the discovery of an oil field near Baghdad, estimated to hold 2 billion barrels of oil, with much of the crude being more preferable medium and light grade. This discovery not only boosts Iraq’s proven reserves, but also signals that the country’s oil-rich regions may still hold untapped wealth. Overall, these developments  will contribute to Iraq’s overall output, potentially supporting its ambitious goal of producing 6 million bpd by 2028. It will also bolster Iraq’s negotiating position with international companies looking to move into the Iraqi market.

On the ground, Iraq’s new reserves are particularly significant in the context of Iraq’s ongoing efforts to modernize and expand its energy infrastructure. Much of Iraq’s energy infrastructure dates to the 1970s and 1980s, and many of its oil facilities are outdated, inefficient, and vulnerable to sabotage. To address this, the Iraqi government has been working on upgrading its aging pipeline network, refining capacity, and port facilities, all of which are essential to accommodating greater production and increasing exports. A key element of this effort is the ongoing expansion of the Basra oil terminal, a critical hub for exporting Iraq’s oil. The terminal, which handles approximately 70% of Iraq’s crude exports, is undergoing expansion to accommodate Iraq’s ambitious oil production targets. In September 2023, Baghdad approved approximately $1.26 billion to fund the construction of two pipelines under the Sealine 3 project, along with the rehabilitation of the Khor Al-Amaya oil export terminal and the development of a new marine platform at Basra Port.

Political and Fiscal Challenges: Obstacles to Progress

For decades, the central government has struggled to assert control over Iraq’s oil-rich regions—most notably the Kurdish Regional Government (KRG), in the north. This political fragmentation, which continues today, complicates the effective management of oil resources and has led to recurring disputes over revenue sharing. A prime example is the contention over the Kirkuk region, a longstanding hot spot of political tension. With the KRG in direct control of parts of the Kirkuk oil fields, disagreements over revenue-sharing arrangements and autonomy in resource management have periodically disrupted oil production and exports. Resolving these disputes is essential to stabilizing oil revenues and ensuring equitable distribution of benefits.

Compounding these political challenges is fiscal uncertainty, which is a major issue for Baghdad. Although the government has taken steps to improve the investment climate for international oil companies (IOCs), concerns persist regarding the unpredictability of fiscal terms. Iraq’s oil sector operates under production-sharing agreements (PSAs) that, while generally favorable, include contentious cost-recovery clauses and raise questions about the government’s ability to honor its financial commitments. Until these issues are resolved, foreign companies may hesitate to commit the necessary investment to meet Iraq’s ambitious production targets.

Despite these challenges, we can glimpse glimmers of progress. Hopes for resuming oil flows were recently bolstered when the Iraqi federal parliament approved a budget amendment that guarantees the KRG $16 per barrel for oil produced in the northern region—double the previous rate. This policy effectively serves as a subsidy for production costs incurred by IOCs operating in the Kurdistan Region of Iraq (KRI). However, progress remains slow, largely due to the deeply strained political relationship between the KRG and Baghdad, as well as ongoing negotiations over outstanding oil revenue debts and transit fees to Turkey. Nevertheless, this amendment marks a welcome step forward, signaling a cautious willingness to address Iraq’s most critical challenges.

Governance and Institutional Frameworks

Of course, vast reserves and well-crafted policies are not the only pillars of sustainable growth. A functioning governance structure is essential for ensuring long-term stability and effective policy implementation. While Iraq has commercial courts and legal mechanisms for handling energy disputes, it does not have dedicated, specialized commercial or energy courts that focus solely on oil and gas matters. Similarly, although state-run entities manage oil revenues, Iraq lacks an independent, well-governed sovereign wealth fund that operates with the transparency and accountability seen in other resource-rich nations. These gaps underscore the need for further reforms to improve oversight and reduce political interference in the management of Iraq’s oil sector.

To realize its goals, Iraq’s governance model must overcome entrenched corruption, inefficiency, and sectarianism. Efforts to overhaul Iraq’s bureaucracy and streamline its oil ministry have borne fruit in recent years, but much work remains. Iraq’s domestic political scene is still heavily influenced by sectarian and ethnic groups, creating entrenched and systematic friction that breeds instability.

To enact meaningful change, Iraq must continue its efforts to improve transparency in governance, implement sound fiscal policies, and ensure that the government and the judiciary firmly uphold the rule of law. The government must also embrace measures to enhance its regulatory frameworks, providing the requisite legal clarity for businesses to operate effectively.

Energy Transition and Economic Diversification

While oil remains the backbone of Iraq’s economy, its vulnerability to price fluctuations underscores the urgent need  to diversify away from fossil fuels. To this end, the government is gradually investing in agriculture, manufacturing, services, and renewable energy to reduce its reliance on oil and stabilize economic growth. The construction sector is one area where Iraq sees substantial growth potential. With increased investment in infrastructure projects, including roads, railways, housing, and energy, the construction industry is expected to grow by at least 5 percent annually over the next five years. As Iraq modernizes its oil and gas infrastructure, there is also an increasing push to develop renewable energy sources, such as solar and wind energy. The government aims to meet 20 percent of its electricity demand with solar power by 2030, a goal that will require significant investment and expertise from both domestic and international actors.

Iraq is also looking to foster a more robust manufacturing sector. As part of its Vision 2030 economic diversification initiative, Iraq is focusing on building industries such as petrochemicals, cement, and steel, all of which will help reduce its reliance on oil exports while creating job opportunities for a growing population. However, Iraq’s manufacturing sector remains weak, ranking 82nd out of 126 on the industrial production index. Poor management, inadequate planning, and ineffective marketing continue to hamper this sector, and must be rectified before Baghdad will see meaningful returns on its investments.

Iraq’s oil sector is both a wellspring of vast potential and a barrier to progress. While the country holds the resources and investment potential to become a dominant force in the global energy market, its ability to fully capitalize on these advantages is hampered by deep-rooted issues in governance, infrastructure, and political cohesion. As Iraq aims to reduce its dependence on oil and build a more diversified economy, it must address the persistent political, fiscal, and security challenges that have stymied its progress. Only through a unified, reform-driven approach can Iraq unlock the true value of its energy wealth, driving growth not just in the oil sector but across the broader economy.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.