Iraq has the second-largest petroleum reserves in the Middle East (after Saudi Arabia), with proved deposits estimated at 112.5 billion barrels in early 2002. Oil revenues help to balance the budget, stabilize the currency, establish a surplus balance of payments, and finance the development program. Oil concessions were first granted in 1925, and the first production began two years later. The three major oil companies operating in Iraq by the early 1970s were the Iraq Co. for Oil Operations (ICOO), the Basrah Petroleum Co. (BPC), and the Iraq National Oil Co. (INOC). By 1975, as a result of nationalizations carried out starting in 1972, state-owned operations controlled 100% of national oil production.
Major drops in crude oil production accompanied both the war with Iran and the 1991 Gulf War. Output dropped from 3,476,900 barrels per day in 1979 to 897,400 barrels daily in 1981, and from 2,897,000 barrels per day in 1989 to 305,000 barrels daily in 1991, following an embargo on Iraqi oil exports. In January 1992, the Al-Bakr oil export terminal, the only outlet to the sea, was reopened at half capacity; by August, the full capacity of 1.6 million barrels per day was restored, even though UN sanctions prohibited Iraq from exporting its oil.
In September 1991, the UN proposed a plan to allow Iraq to raise revenue for humanitarian purchases and war reparations by exporting limited quantities of oil. Iraq repeatedly rejected the plan claiming that it would violate sovereignty, but in January 1996 began negotiations with the UN on implementation of the plan. By May 1996, Iraq and the UN agreed on how to carry out UN Resolution 986, which allows Iraq to sell $1 billion worth of oil every 90 days for a 180-day trial period (called the "Oil for Food" program). Proceeds from the sales were to go into a UN-managed escrow account and be used to provide humanitarian assistance to Iraq under UN supervision. In 1998, the UN Security Council voted to raise Iraq's six-month export quota to $5.26 billion, in Resolution 1153. In 1999 the UN removed all restrictions on the amount of oil Iraq could export. For most of the 1990s, the US-imposed trade embargo reduced Iraqi access to oil industry technology, supplies, and investment Early in 2002, a government official indicated that of Iraq's 73 oil fields, only 24 were actually in production. In 1998, construction was authorized for a 100,000 barrel per day pipeline to pump Iraqi crude oil to Jordan's Zarga refinery. In 2000 oil production was an estimated 2.5 million barrels per day.
The most important fields are at Kirkuk, with lesser fields at Naft Khaneh, Ayn Zalah, and Butmah in the Mosul area, and at Az-Zubayr and Ar-Rumaylah near Basra. Oil for export was formerly piped to the Mediterranean through Syria and Lebanon, or to the Persian Gulf, but Syria closed the pipeline when Iraq invaded Iran, which Syria supported, and Iran closed Iraq's Gulf shipping. A new pipeline through Turkey transported more than half of Iraq's oil exports in the early 1980s; this was expanded by additions in 1985 and 1987, supplemented by a pipeline completed in 1985 running to Saudi Arabia's Red Sea port of Yanbu al-Bahr; the pipeline was closed during the Persian Gulf War.
The development of both hydroelectric and thermal capacity proceeded rapidly during the 1970s. In Baghdad, electricity is supplied by a thermoelectric fuel-oil plant installed by British and Belgian firms but was later nationalized and supplemented by a second plant. Other cities generate power in small municipal power stations. Iraq's power installations were repeated targets of Iranian air attacks in the 1980s, and were badly damaged during the conflict in the Persian Gulf in 1991. As much as 90% of Iraq's power grid, as well as a substantial portion of its power infrastructure, was damaged or destroyed. At the beginning of 2002 Iraq had 3.1 trillion cu m of proven natural gas reserves, plus another 4.2 trillion cu m in probably reserves. Nearly three-fourths of Iraq's oil reserves are associated with oil fields. In 2000, Iraq produced 3.1 billion cu m of natural gas.
Total electricity production in 2000 was 31,700 million kWh, of which 98% was from fossil fuels and 2% from hydropower. The country's generating capacity was about 9,500 MW in 2001.