ERBIL, Iraq, July 11 (Reuters) - Heading for Turkey to

the north and Iran to the east, hundreds of oil tankers snake

each day from near Kurdistan's capital Erbil, clogging the Iraqi

region's often winding and mountainous highways.

The tankers are the most visible aspect of a massive

operation to truck oil from the semi-autonomous region of Iraq

to Iran and Turkey in murky, off-the-books transactions that

have boomed since an official export pipeline closed last year.

Reuters pieced together the details of this flourishing

trade through conversations with over 20 people including Iraqi

and Kurdish oil engineers, traders and government officials,

politicians, diplomats and oil industry sources.

They painted a picture of a booming business in which more

than 1,000 tankers carry at least 200,000 barrels of cut-price

oil every day to Iran and, to a lesser extent, Turkey -

bringing in about $200 million a month.

The scale of the unofficial exports, which has not

previously been reported, is one reason Iraq has been unable to

stick to output cuts agreed with the OPEC oil cartel this year,

Iraqi officials said.

Iranian and Turkish officials did not respond to requests

for comment.

Iraqi oil ministry spokesperson Assim Jihad said the

Kurdistan trade was not approved by the Iraqi government and

state oil marketer SOMO was the only official entity allowed to

sell Iraqi crude.

He said the government did not have accurate figures for how

much oil was being smuggled into Iran and Turkey.

"OPEC now has less patience for smuggling and has even been

known to slap punitive measures on offending members. I doubt

we'll see any retribution against Baghdad because it's well

known that the Kurdish region lies outside central control,"

said Jim Krane at Rice University's Baker Institute in Houston.

The business could also put Kurdistan on a collision course

with close ally Washington, as it assesses whether the trade

breaches any U.S. economic sanctions on Iran, according to a

U.S. official.

Until last year, Kurdistan exported most of its crude via

the official Iraq-Turkey Pipeline (ITP) running from the Iraqi

oil city of Kirkuk to the Turkish port of Ceyhan.

But those exports of about 450,000 barrels per day (bpd)

halted in March 2023 when an international tribunal ruled in

favour of the Iraqi federal government's call for the shipments

to stop - leaving the pipeline in legal and financial limbo.

The federal administration in Baghdad, which has long held

that it is the only party authorised to sell Iraqi oil,

successfully argued that Turkey arranged the exports with the

Kurdistan regional government without its consent, in breach of

a 1973 treaty.

'NO TRACE'

Tankers soon started taking Kurdish oil to neighbouring

countries instead and the business accelerated this year after

talks to reopen the pipeline stalled, industry sources, oil

officials and diplomats said.

Local officials said none of the proceeds are accounted for,

or registered, in the coffers of the Kurdistan Regional

Government (KRG), which has been struggling to pay thousands of

public employees.

"There is no trace of the oil revenues," said regional

lawmaker Ali Huma Saleh, who was chair of the oil committee in

Kurdistan's parliament until it was dissolved in 2023. He put

the trade at over 300,000 bpd, higher than most other estimates.

Hiwa Mohammed, a senior official in the Patriotic Union of

Kurdistan (PUK), one of Kurdistan's two ruling parties, said the

oil was going through border crossings with the knowledge of the

regional and federal governments.

KRG Treasury officials did not respond to requests for

comment. The KRG Ministry of Natural Resources, which oversees

oil trading in Kurdistan, does not have a spokesperson.

A U.S. official said Washington was looking at the oil trade

to assess compliance with sanctions on Iran.

The U.S. Treasury Department declined to comment.

A State Department official said: "U.S. sanctions on Iran

remain in place, and we regularly engage with partners on

sanctions enforcement issues, but we do not detail those

conversations."

A senior official at Kurdistan's natural resources ministry

said oil production in the region was running at 375,000 bpd, of

which 200,000 was trucked to Iran and Turkey, and the rest

refined locally.

"Nobody knows what happens to the revenues from the 200,000

smuggled abroad, or the oil derivatives sold to refineries in

the region," said the official, who declined to be named because

the sensitivity of the matter.

CUT-PRICE CRUDE

The crude is sold by oil companies in Kurdistan to local

buyers at cut-price rates of $30 to $40 a barrel, or about half

the global rate, which equates to at least $200 million

a month in revenue, industry and political sources said.

Kurdistan's oil production is majority controlled by eight

international oil firms: DNO ASA ( DTNOF ), Genel Energy ( GEGYF )

, Gulf Keystone Petroleum ( GUKYF ), ShaMaran Petroleum ( SHASF )

, HKN Energy, WesternZagros, MOL's Kalegran and

Hunt Oil Company.

Hunt Oil, based in the United States, declined to comment.

The other seven companies did not respond to requests for

comment, nor did local company KAR Group, a major player in

Kurdistan.

While most oil production halted when the pipeline closed,

some companies including DNO, Keystone and ShaMaran have said in

statements they have since started producing crude for sale to

buyers within Kurdistan.

ShaMaran said the average price of oil it sold in the first

three months of 2024 was $36.49 per barrel while Keystone said

in June that sales of crude from the Shaikan Field this year

were bringing in about $28 a barrel.

The industry sources said approved local buyers take the

crude from oil companies and sell it on through middlemen for

export, without the knowledge of the producers.

The vast majority of the trucked oil goes to Iran, most of

the industry and political sources said, via official Iraqi

border crossings including Haji Omaran, or via Penjwen further

south.

From there, it is loaded onto ships at Iranian ports in the

Gulf at Bandar Imam Khomeini and Bandar Abbas - a trade route

used in the past for Kurdish oil exports - or transferred by

road to Afghanistan and Pakistan, industry, political and

diplomatic sources said.

Reuters could not determine what Iran, which faces

difficulties selling its own oil products because of sanctions,

gets out of the trade, nor who is receiving the oil in Iran.

The PUK's Mohammed said it was sent to Iran to be refined

into gasoline.

Pakistan's petroleum ministry declined to comment. Afghan

officials did not respond to requests for comment.

BLACK-MARKET LABYRINTH

The trade is the latest iteration of a long-standing Iraqi

black-market oil business widely seen as benefiting political

elites who are closely linked to business interests.

Twelve people said officials in Kurdistan's two ruling

parties, the Kurdistan Democratic Party (KDP) of the Barzani

clan and the PUK of the Talabani clan, were the beneficiaries.

"There is a labyrinth of black-market salespeople getting

paid, and people approving those sales. It's not that they are

just looking the other way. They're taking their share," an

industry source working in the Kurdish oil trade said.

A senior diplomat in Baghdad said political interests were

so vested in the trade that resuming official exports via the

pipeline, once seen as a priority, had dropped down the

diplomatic agenda.

"I'm not going to be advocating for this while they're all

having a party," the person said.

KDP officials did not respond to requests for comment about

the black-market trade. Mohammed, the PUK official, did not

comment on who might be behind it.

Kurdish officials say the region was forced into the trade

by the pipeline closure, which they see as part of a broader

effort by Iran-backed Shi'ite parties in Baghdad to curb the

relative autonomy they have enjoyed since the end of the first

Gulf war in 1991.

A senior Iraqi parliamentary official familiar with oil

matters said Baghdad was aware of the details of the business

but was avoiding public criticism as officials seek to resolve

outstanding disputes with Erbil.

Putting pressure on Erbil to stop oil smuggling would corner

the region and deprive it of all sources of funding, which could

result in its collapse, said the person, who declined to be

named due to the sensitivity of the issue.

The trade has been cited privately by Iraqi officials as

being behind Baghdad's inability to stick to its OPEC production

quotas, a bone of contention with OPEC's de facto leader Saudi

Arabia.

Jihad, the oil ministry spokesman, said Iraq, which has

pledged to scale back output this year to make up for the

overproduction, was committed to voluntary production cuts.

For now, the sheer volume of tankers snarling up highways,

and getting involved in accidents, is angering residents along

major thoroughfares.

"It's very painful," said Rashid Dalak, visiting the grave

of his brother Rouzkar, who was killed in a crash with a tanker

in May on the highway between Erbil and Sulaimaniya that leads

to the Iranian border.

"Despite passing through and damaging our roads and killing

our loved ones ... no-one here has seen a dollar."