Iraq’s oil production has surged by 71% over the past two decades (from 2000 to 2022), despite the disruption following the US and UK-led invasion of 2003 and years of disorder. As of November 2024, Iraq produced 4.2mn b/d, making it the fourth largest producer in the world, and the second largest in the Middle East after Saudi Arabia, according to the International Energy Agency’s Oil Market Report.

With oil revenues now accounting for more than 90% of its governmental budget, Baghdad is keen to bolster output and utilise the latest Western technologies to reduce methane flaring and better exploit its reserves. But with more than 60% of its oil exports already sent to China and India, and a challenging operating environment, Iraq has offered dwindling appeal to US and Western oil companies.

Indeed, following a visit to Washington DC in April 2024, Iraqi Prime Minister Mohammed Shia’ Al Sudani delayed the country’s fifth and sixth oil licencing rounds to encourage US investors, but attracted minimal interest.

‘Iraq is not an easy place to do business, and in the fifth and sixth rounds failed to garner any Western oil companies. I was shocked when I saw the figures, with 95% of contracts [going] to Chinese companies,’ says Dr Naser Tamimi, a Senior Associate Research Fellow at the Institute for International Political Studies, in Milan, Italy, and Senior Associate Research Fellow at the Global Institute for Strategic Research, in Doha, Qatar.

This followed more than half of contracts in 2023 also being won by Chinese companies. Currently, Chinese companies manage over a third of Iraq’s oil and gas reserves. ‘Western companies’ involvement in Iraq is in decline. The government is not happy about this, as they don’t want to be dependent on China. They also want to be self-sufficient in gas production, to lessen import dependency on Iran, but they need two things – investment and Western companies’ involvement,’ he adds.

Investment is needed to upgrade ailing infrastructure, from pipelines to refineries, and to develop a downstream sector, particularly in petrochemicals. Western energy companies are needed to develop gas production from oil and gas fields. The country’s financial system also needs to be upgraded to improve finance of energy projects. ‘It’s a daunting task. The Iraqi political system is very complicated, with militias, as well as Iranian and US involvement, and projects can be blocked in parliament. From the beginning this has frustrated foreign investors,’ says Tamimi.

Foreign investment has also been stymied by high levels of corruption, with Transparency International ranking Iraq 154 out of 180 countries. Such corruption is evident in chronic electricity shortages, particularly in the summer months. ‘Iraq has invested around $80bn from 2005 onwards for the renovation and upgrading of its national grid, but where the majority of that money went is not certain,’ comments Dr Justin Dargin, an energy expert at the Middle East Council on Global Affairs, also in Doha.

‘Iraq is not an easy place to do business, and in the fifth and sixth rounds failed to garner any Western oil companies.’ – Dr Naser Tamimi, Senior Associate Research Fellow at the Institute for International Political Studies (ISPI), in Milan, Italy

Despite the challenging environment, Western companies have not, however, totally eschewed the Iraqi market, with British oil major BP reaching an agreement with Baghdad in August 2024 to develop and explore the Kirkuk oil field in the north, which holds an estimated 9mn barrels of recoverable oil. BP also has a 50% stake in a joint venture controlling the giant Rumaila oil field in Iraq’s south.

French major TotalEnergies is involved in the Gas Growth Integrated Project, a $10bn energy deal, finalised in 2023, to produce energy from four oil, gas and renewables projects. Last year, LNG giant QatarEnergy took a 50% stake in TotalEnergies’ 1.25 GW solar project in the country. Baghdad’s deal with TotalEnergies also involves the development of a Common Seawater Supply Project, which is to pump 12.5mn b/d of seawater via 426 km of pipelines to enhance oil recovery in the ageing oil fields of Rumaila, Halfaya, Zubair, West Qurna-1, West Qurna-2, Missan, Tuba and Majnoon in southern Iraq.

In December 2024, Baghdad also approved a $4.56bn pipeline to transport crude from Basrah in the south to Haditha, 240 km north-west of the capital. ‘The pipeline could carry up to 2mn b/d, and be used to supply Turkey, Syria and Jordan. But that will need more infrastructure investment and stability in Syria,’ notes Tamimi.

Regional turmoil is complicating Baghdad’s overall energy plans. The Israeli war with Hamas in Gaza, and with Hezbollah in Lebanon since October 2023, and the sudden overthrow of Syrian President Bashar Assad in December 2024, has thrown the region into uncertainty and discouraged Western involvement in Iraq, while Iraq is at risk of being ‘caught in the crossfire’, says Tamimi.

Iraq has strong relations with neighbouring Iran (both are majority Shia Muslim countries), which has been put on the backfoot due to the weakening of its regional allies Hezbollah and Hamas. Meanwhile, due to the collapse of Assad’s regime there is risk of renewed instability as well as sectarian animosities arising again in Iraq between its Sunni and Shia population.

‘The so-called ‘axis of resistance’ [of Iranian allies] has been exposed as little more than a paper tiger, a reality that has caught many off-guard. In response, Iran faces a decisive choice: turn inward to shore up domestic stability and prevent potential unrest or rethink its regional strategy in light of the setbacks suffered by its two key allies – Hezbollah and Syria. If Tehran opts for the latter, Iraq could become even more critical as a buffer state, allowing Iran to maintain its foothold in the region,’ says Dargin.

Long-term animosity between Iran and the US is further complicating Iraq’s energy development plans. The country currently imports between a third and 40% of its gas and electricity from Iran, according to government figures, for which it needs a sanctions waiver from the US to pay Iran. The waivers have been repeatedly renewed by the US following the re-imposing of sanctions in 2015, with the latest issued in November 2024 for 120 days. Baghdad is also required to deposit all oil payments with the US Federal Reserve, which has banked Iraqi foreign currency reserves since the 2003 invasion. These reserves are then disbursed through transfers to the Central Bank of Iraq. Meanwhile, Iraq has been using the Chinese Yuan Renminbi earned from oil sales to China for financial transactions, but ‘the Fed seems to have directed them to stop [in July 2024] due to concerns about potential manipulation and other issues', says Dargin.

With Trump’s move into the White House on 20 January, US policy on Iraq and Iran may change, with the sanctions waiver potentially in doubt. ‘If Trump returns to his former maximalist strategy to apply pressure on Iran, then this type of waiver may not continue,’ suggests Dargin, although Trump did permit these sales in his first 2016–2020 term.

Heightened US pressure on Iran will ‘send a bad signal for foreign investors in Iraq, as they will be even more cautious’, comments Tamimi. The widening of Israeli military strikes is a further consideration. ‘If Israel threatens to hit Iraqi militias [linked to Iran], they might hit back. The Biden Administration stopped them, to keep Iraq out of the fight. But with Trump, you don’t know what may happen,’ he adds.

Iraq’s plans to develop its own natural gas production are sorely needed. ‘It makes sense to develop its significant natural gas reserves, as a lot are wasted from flaring, and it would cost around $2/BTU compared to paying $8/BTU to Iran,‘ says Dargin.

He stresses: ‘Iran is determined to block Iraq’s push for energy independence, leveraging its deep influence in Iraqi domestic politics to do so. Every time Iraq has attempted to ramp up its own natural gas production, it has faced attacks and sabotage, largely orchestrated through Iran’s vast network of proxies and militias. Northern Iraq has been hit multiple times, most notably in a drone strike shortly after Prime Minister Sudani returned from a US trip where he signed key energy agreements with American companies. Tehran has made it clear – it will go to great lengths to keep Iraq dependent on its gas supply.’

Amidst this ongoing uncertainty, under-investment in infrastructure and required legal changes are also undermining Iraq’s efforts to cut methane emissions by 30% and carbon emissions by 15% by 2030, adds Dargin. ‘For Iraq to reach its energy goals, it needs the right infrastructure to capture the vast amounts of gas currently going to waste. But that’s only part of the challenge. Reforming outdated regulations, clarifying gas capture rights and tackling systemic corruption are just as crucial. In Iraq, passing a law is often more symbolic than transformative, and without real enforcement, mismanagement and inefficiency will continue to stand in the way,’ he continues.

Decarbonisation goals are also not likely to be met. ‘Iraq’s carbon emissions are set to rise as it ramps up natural gas production. Emissions have more than doubled – jumping from nearly 80mn t/y in 2000 to approximately 175mn t/y in 2023 – driven by increased energy demand, economic growth and persistent gas flaring,’ he adds.

With the Middle East in turmoil, Iraq will face an uphill battle to ensure current oil projects continue and for others to be given the green light. ‘Iraqis are hopeful that things stay the same as many are expecting the worst – an escalation between Iran and Israel, Iran and the US, and the US and China. All elements affect Iraq, directly or indirectly, and affect climate change investments,’ concludes Tamimi.

• Further reading: ‘Escalating action to reduce methane emissions in the oil and gas industry’. Annual methane emissions from fossil fuel operations rose to over 120mn tonnes in 2022; to date they are estimated to account for around 30% of global warming since the Industrial Revolution. But the International Energy Agency estimates that 80% of the options to reduce the industry’s emissions could be implemented at no net cost. Julien Perez, Vice President of Strategy & Policy at the Oil and Gas Climate Initiative, discusses this preventable problem.
• The Middle East energy transition tends to be slow and piecemeal compared to momentum in many other countries. But there are signs of development, tempered by the need for new policy and regulation, and the urgency for a calmer political and investment environment.