Geopolitical Tensions Rise As Iran-Iraq Oil Swap Begins

A crude oil swap deal between Iran and Iraq, which was supposed to begin in mid-April, has started, Iran’s Shana agency reported yesterday, as quoted by Reuters. Under the deal, Iraq will send oil from the Kirkuk fields to Iran by truck, to be refined in Iran, and Iran will send the same amount of crude it receives to Iraq’s southern ports for export.

The deal is seen by some as a major influence push by Iran in Iraq, after Tehran helped Baghdad quash an emerging independence movement in Kurdistan that culminated in an independence referendum, the results of which Baghdad refused to recognize. After the referendum, Iraq, helped by Iran, sent troops to Kurdistan and retook control of Kirkuk and the oil fields around the northern Iraqi city.

In earlier reports on the swap deal, an Iraqi oil official had said the initial flow of Kirkuk oil to Iran would be 30,000 bpd, but could rise to 60,000 bpd within a year—the initial duration of the deal—which the sides agreed could be extended.

In the future, the partners plan to build a new pipeline from the Kirkuk field to the border with Iran, to replace the tanker trucks. This suggests that although the initial term of the deal is just one year, there are plans to make it a longer-term deal.

This new pipeline, Reuters noted last December, could replace the current Kirkuk-Ceyhan infrastructure, which is the main channel for exporting Kirkuk crude oil to Turkey and the Mediterranean. Iraq will also build a new pipeline along the Kirkuk-Ceyhan route to replace a badly damaged section of the existing infrastructure.

The oil swap could also strain the relations between Saudi Arabia and Iraq—OPEC’s number-one and number-two producers, respectively. Baghdad has had good relations with OPEC’s de facto leader, but warming relations with Tehran is unlikely to sit well with Riyadh.

Irina Slav  for OilPrice.com