Western sanctions have reshaped Iraq’s oil sector. In October 2025, the United States and United Kingdom targeted Lukoil and Rosneft’s overseas operations to curtail Moscow’s war financing. Lukoil promptly declared force majeure at West Qurna-2, which produces 400,000-480,000 barrels per day, nearly 10 percent of Iraq’s output.
Lukoil owns 75 percent of West Qurna-2, one of the largest undeveloped reserves with 13 billion barrels recoverable. Iraq awarded the project during the 2009 licensing round under Prime Minister Nouri al-Maliki. The Iraqi government sought to incentivize production, promising to increase Lukoil’s remuneration $2 per barrel if they could produce 1.8 million barrels per day. Lukoil invested billions of dollars to boost production from 100,000 barrels per day in 2013 to current levels, deploying advanced drilling and recovery techniques for complex reservoirs, but always fell short.
The West Qurna-2 project exemplified Russia’s post-Cold War strategy of expanding influence in Middle Eastern upstream markets.
The West Qurna-2 project exemplified Russia’s post-Cold War strategy of expanding influence in Middle Eastern upstream markets, filling gaps left by Western firms wary of instability. West Qurna-2 generated $1.5-2 billion annually, shielding Lukoil from domestic price caps and export restrictions imposed after the 2022 invasion of Ukraine. Moscow amplified the diplomatic leverage it gained, to give it a leg up on arms sales and to win Iraq’s diplomatic support.
By 2025, Lukoil employed over 1,000 workers, including expatriates, integrating Iraqi contractors for localization. Yet this presence created vulnerabilities, as Iraq depends on foreign firms for 70 percent of output from fields like West Qurna-1 and Rumaila, despite maintaining 90 percent state control. But, with Lukoil’s declaration that sanctions would prevent it from fulfilling its contract, Baghdad halted payments and blocked crude loadings, stranding millions of barrels of oil and exposing Iraq’s reliance on sanctioned firms. Lukoil withdrew foreign staff from Iraq and set a six-month deadline to resolve the crisis.
Because Lukoil managed drilling, facilities, and exports at West Qurna-2, disruptions strain Basra’s export system, already burdened by Kurdish pipeline disputes and Houthi maritime threats. The project once balanced Russian expertise with Iraqi sovereignty; now it exposes the fragility of this set-up. The crisis escalated on October 22, 2025, when President Donald Trump expanded sanctions under the existing Executive Order 14024, targeting Lukoil’s global subsidiaries and executives. The United Kingdom froze assets and blocked transactions under autonomous sanctions. Officials intended to “starve the war machine,” crashing Lukoil’s shares 12 percent, wiping out $8 billion.
Caught in geopolitical crossfire, Iraq moved to avoid secondary sanctions that previously hit Chinese and Indian buyers of Iranian crude. On October 28, 2025, Iraq’s Oil Ministry ordered State Oil Marketing Organization to suspend payments to Lukoil, freezing $500 million and four million barrels. November cargoes totaling 6 million barrels were canceled and rerouted to fields like Zubair. With dollars and SWIFT access blocked, Baghdad eyed yuan and barter settlements, rejected by Lukoil over compliance fears.
The standoff highlights Iraq’s reliance on foreign capital and expertise. International consortia drive roughly 80 percent of upstream projects. Idling West Qurna-2 costs Iraq $3 billion to $4 billion annually at $80/barrel, worsening fiscal deficits beyond 5 percent of gross domestic product. On November 10, 2025, Baghdad handed control of West Qurna-2 over to Basra Oil and Missan Oil, whose limited technical capacity risks a 20-30 percent output fall from deferred maintenance and poorer recovery. These setbacks compound OPEC+ caps, militia disruptions, and corruption, which together siphon perhaps 10 percent of revenues.
Lukoil’s departure could lead Chevron and BP to return, unlocking up to one million barrels per day in capacity, strengthening U.S.-Iraq ties.
Globally, the crisis signals heightened sanctions exposure for politically vulnerable oil producers. Iraq’s muted 2024 licensing round demonstrated how geopolitical uncertainty and governance risks now factor into investor decision-making, complicating long-term upstream commitments. Lukoil’s retreat forces Russia to deepen reliance on discounted Urals crude sales to India and China, typically priced $10-$15 below Brent, reinforcing Moscow’s dependence on limited Asian markets. Moscow may pursue BRICS swap deals, limited by secondary U.S. sanctions.
Lukoil’s departure could lead Chevron and BP to return, unlocking up to one million barrels per day in capacity, strengthening U.S.-Iraq ties under the 2025 Framework Agreement. However, Iraqi political uncertainty and endemic corruption, politicized appointments, and slow procurement hinder Baghdad’s ability to replace Lukoil’s technical capacity or sustain output, amplifying investor and market anxiety.
Brent crude rose 2 percent to $82 on November 11, signaling fears of supply tightness and testing OPEC+ cohesion at a fragile moment. Baghdad likely will pursue diplomacy via Gulf intermediaries, or seek narrowly tailored sanctions waivers to stabilize output and avoid regional energy shocks. Yet, without structural reform in state oil management, such measures would function as temporary crisis management rather than durable stabilization.
