Iraq's Sovereignty Undermined as US-Iran Conflict Ignites Internal Divisions and Oil Attacks

One week after the United States and Israel killed Ayatollah Ali Khamenei and ignited a regional war, drones started flying over Basra in southern Iraq. They were targeting Iraq’s oil industry. They hit an oilfield operated by BP, as well as a cargo terminal at Basra airport and a large compound that houses foreign companies that service the oil sector. Another attack on 6 March hit the same compound, striking offices and warehouses used by Halliburton and KBR, two US companies that have been in Iraq since the 2003 invasion. The attack sparked a massive fire that lit up the night sky.

In the wider war, it was not a particularly notable day – but in Iraq the strikes laid bare just how weak the state had become and “how easily sovereignty could be violated”, as one senior Iraqi security official put it to me. For 40 years, the US, Iran and Israel existed in an uneasy equilibrium of neither peace nor war. As this has come to a sudden, dramatic end, Iraq finds itself caught in the middle.

More attacks on Iraqi energy infrastructure were to come. On 11 March, an Iranian drone boat attacked two oil tankers off the port of Basra, setting them ablaze and killing at least one crew member. In the following days and weeks, a succession of drone strikes hit more oilfields operated by foreign companies. Hundreds of energy sector workers from American, European and Chinese firms left, many travelling overland because the country’s airspace was closed. Thousands of Iraqi workers were sent home.

No one claimed responsibility for these attacks (apart from the strikes on the oil tankers, which Iran acknowledged). The central government in Baghdad and the local authorities in Basra were remarkably quiet, offering only empty official statements about sovereignty and the promise of investigations. The truth is that most of these attacks were not coming from Iran. They were undertaken by Iraqis acting on Iraqi soil – the work of factions of the country’s powerful, Iran-backed Shia militias. “This is an act of treason,” a visibly shaken senior official at the oil ministry in Basra told me.

Speaking confidentially, multiple officials told me the oil attacks had been carried out by the Islamic Resistance in Iraq (IRI), an umbrella group of Shia paramilitary organisations that were originally trained and equipped by Iran to fight the Americans after the 2003 invasion. IRI factions are also members of the Popular Mobilisation Units (PMU) – a collection of Iran-backed, mainly Shia militias in Iraq that were brought together in 2014 to fight the Islamic State. The PMU is, in theory, subordinate to the Iraqi government but in reality follows its own agenda, with investments in construction and agriculture giving it a source of economic power.

While Iraq, which is majority Shia, may seemingly have a single, unitary government run from Baghdad, in reality multiple groups with varying degrees of independence – formed in the aftermath of the 2003 invasion – exert huge influence. Today, there are two types of paramilitary militia in the country. Those that use their weapons to protect their economic interests – the state contracts and businesses that they have cultivated over the years. And those that are primarily driven by ideology: deeply committed to the Iranian project of defeating Israel and expelling the United States from the Middle East.

In 2026, this unstable balance has erupted into violence not seen for years. On the one hand, the US/Israeli war on Iran has spurred the hardline ideological paramilitaries to Tehran’s aid, attacking not just Iraq’s oil infrastructure but US military bases and the US embassy in Baghdad. On the other hand, a new, US-backed Iraqi prime minister, Ali al-Zaidi, has upped the ante by giving all of the country’s militia groups a deadline of 30 September to disarm and incorporate their fighting divisions into the Iraqi state. This is to satisfy longstanding American ambitions to reduce Iran’s influence in Iraq.

While al-Zaidi has had some success, the hardcore groups have steadfastly refused to give up their weapons. As long as there is an American presence in Iraq, with Israeli jets flying overhead, the IRI will continue to fight.

Speak to Iraqi government officials and you hear nothing but anger and exhaustion about the attacks on their oil infrastructure. “The installations that were attacked were on Iraqi soil, paid for by Iraq, as was all the destroyed equipment,” one told me. It was not the US companies that would be harmed – they would charge Iraq for the destroyed assets – but the Iraqi economy, the oil sector and the reputation of Iraq as a safe place to conduct business, he added. He also noted that the attackers had highly accurate intelligence, probably leaked from within, about where to strike and which building or warehouse to destroy.

He and other oil-sector officials in Basra told me that the aim of the attacks was to disrupt oil production, raise global prices and ramp up pressure on the US administration to stop its war on Iran. Within weeks of the war’s start, Basra’s output had fallen by two-thirds, with exports essentially halted. “Maybe they want to drive these western companies out to replace them with companies from countries more aligned to them,” the official said.

What is clear is that consequences of the war in Iran, which escalated dramatically this week after the collapse of the ceasefire, have been profound in Iraq – exposing the weakness of a state that is perilously divided between the war’s two main antagonists.

In one of Baghdad’s upmarket restaurants, a government adviser reclined on a large sofa. Until recently, he said, the Iraqi government had managed to keep most of the country’s militia factions under control. As the war in Gaza raged, and even during the 12-day war between Israel and Iran in 2025, they were kept at bay through dialogue and negotiation. But the killing of Ali Khamenei changed everything. “You can’t ask the factions not to participate any more,” he said. “This is an existential struggle and a religious duty.”

The adviser could see why Iran and its supportive factions in Iraq were doing what they were doing. Iraqi airspace and American bases in Iraq were being used to pummel Iran with airstrikes. Iranian officials had told him that 40,000 Starlink devices, used to bypass the Islamic republic’s internet clampdown, had been smuggled into Iran from Iraq during the recent anti-regime demonstrations. “We should be grateful they didn’t use their full force and strike Iraq in retaliation, because they could easily have burned half the country,” he said. “And what do we have to defend ourselves against them?”

In another part of Baghdad, I met with a high-ranking security official who had worked closely with the Americans for many years. He had little time to empathise with Iranian anxieties, but echoed the analysis of Iraq’s military ineptness.

“The war has proven the weakness of Iraq. I don’t mean only militarily. Our country was violated by everyone, our airspace used by both sides.” The state could not even protect “its own soldiers and officers when we came under attack by the militias”, he said. “Everyone in the military command knows exactly who [the attackers] are. Maybe we don’t know the name of the person who pilots the drone, but we know who gave the orders, the chain of command and where they were launched from.”

He nodded towards a police car parked nearby, the policemen standing around it, and referred to all the cameras installed on street corners. “Some rockets and drones were launched from the centre of Baghdad. Who can travel with rocket launchers through the city? How can you pass all the checkpoints, or drive into the countryside and fire them as they show in videos, without being detected?”

By way of explanation, the conversation turned to corruption. There are honourable commanders in the Iraqi security forces, he conceded, but many of the highest-ranking posts are awarded to officers only after they make a payment to their superiors. “If you pay US$5m to take command of a force,” he said, “the priority becomes protecting that investment by avoiding confrontation, and that is a disaster.” The reason it is an investment is because a high-ranking security post is a way of making money – through fraud, embezzlement and accepting bribes. He placed his hands on the table, to emphasise his point. “When officers look and see their commander running their own schemes to siphon money, that affects the whole security forces.”

Economics partly explains the division between the older militias, which have largely accepted the prime minister’s decree that they be incorporated into the Iraqi state, and the newer, hardline factions under the IRI banner. In late May, the highly influential Shia cleric Moqtada al-Sadr called for his militia to be placed under the command of the state, and two other factions followed suit. But the move was met with derision and disdain by the hardline paramilitaries, who declared that their weapons were sacred and would not be surrendered until the end times. In effect, they were saying that they were fighting for an ideological cause, while the older militias were merely looking out for their own economic interests.

On 7 April, Iran and the US. The following day, the IRI announced that it would also be suspending operations for the duration of the ceasefire. (Fighting continued, albeit at a low level.) On that same day, Iraq and Saudi technical teams were having an online meeting to explore the reopening of the Iraqi-Saudi pipeline, which has been closed since the invasion of Kuwait in 1990. They were looking for a new way for Iraqi oil to bypass the pinch point in the strait of Hormuz.

As the oil industry came to a near halt, long queues formed outside petrol stations, bringing to mind the worst days of chaos that followed the 2003 war. In a statement, the ministry of oil blamed the shortage on the shutdown of some refineries after foreign workers left the country and on its inability to export unrefined, heavy fuel oil.

For a country so dependent on oil sales, which underwrite the salaries of 4 million public-sector employees, the decision by Iran-aligned militias to attack their own economy might have looked suicidal. “Not necessarily,” a civil-rights activist in the city of Basra told me. “Many people believe that oil companies are exploiting the country and they find the attacks justified.” Basra is one of the most polluted cities in the world, where people breathe the toxins from the burning flares of oil wells and drink brackish water. At the same time, its citizens are surrounded by signs of oil wealth – car dealerships, fancy sushi restaurants, expensive real estate – that are available only to a few. It is not surprising that many shrug their shoulders when they hear of attacks on oil companies’ assets.

How did postwar Iraq fail to make use of its immense oil wealth to deliver a better life for its people? On the eve of the US invasion in 2003, the country’s oil infrastructure was in near ruin after decades of war and UN sanctions. The machinery was antiquated and production was kept alive only by veteran engineers. In the aftermath of the invasion, looting and sabotage nearly collapsed the industry altogether. Lacking the finances and capacity to rebuild the sector on its own, Iraq turned to international firms, signing contracts with major oil companies including BP, ExxonMobil and Shell. The deals inked were not the profit-sharing agreements that the foreign companies wanted – Iraq still takes huge pride in having nationalised its oil industry in 1972 – but less lucrative, flat per-barrel service fees. Baghdad had a stated ambition to pump about 12m barrels a day by 2017, a level that would rival Saudi Arabia. That target was never remotely met, peaking closer to 4.5-5m barrels a day in the late 2010s and hovering there.

Gradually, the postwar euphoria around Iraq’s oil potential cooled, and within a few years companies began to abandon their projects. The thin margins had made Iraq one of the least profitable places the firms operated, but the retreat was mainly driven by political instability, contractual disputes and massive delays in government payments. The delays occur because of multiple layers of bureaucracy, deployed ostensibly to prevent corruption but in practice functioning as bottlenecks where bribes are extracted to smooth the process. Multinationals that are bound by anti-corruption laws generally refuse to pay such bribes, and their fees are held up as a result.

Ministry officials and business insiders in Basra described to me a contracting system that – as elsewhere in Iraq – is dominated by political parties, clans and sometimes armed groups that line their pockets by exploiting agreements with contractors and subcontractors.

In late May, the deputy oil minister responsible for the country’s refineries, Adnan al-Jumaili, was detained on corruption charges – part of the new prime minister’s anti-corruption drive. Al-Jumaili was shown on television in a yellow jumpsuit, surrounded by dozens of machine guns and boxes of ammunition that were reportedly found at his home. Investigators said they also recovered $10m (£7.5m) in cash, 3bn dinars (roughly £1.7m) and 1.5kg of gold. As the investigation expanded, security forces detained 47 people, including 13 MPs and senior officials, and seized hundreds of millions of dollars in cash and gold. Among those arrested in the same sweep was a second deputy oil minister, who had already been sanctioned by the US for allegedly diverting Iraqi oil to benefit Iran.

It is no surprise that, for many Iraqis, the oil industry is less a symbol of the country’s pride than all that is wrong with it.

This July, the funeral procession of the Iranian supreme leader, Ali Khamenei, took place in Iran – though it also crossed the border with Iraq, drawing 3.8 million people on to the streets of Najaf alone, according to official figures. Unlike in the choreographed ceremonies in Iran, massive throngs in Iraq pushed and shoved to get close to the coffin in the fierce summer heat. The white turbans of mullahs came undone as they jostled with the crowds; arms stretched forward, people wept, and those who could not get close enough threw their shawls and scarves at the casket to be blessed by it. Away from the crowds, the coffins, including a smaller one for Khamenei’s granddaughter, who was killed alongside him, were received inside the shrine of Imam Ali, a holy site in Shia Islam. Iraq’s leaders, among them the new prime minister, Ali al-Zaidi, stood in solemn silence alongside the Iranian president.

Six days later, as if to perfectly illustrate the double-edged nature of Iraqi politics, that same prime minister sat next to Donald Trump in the Oval Office, beaming as he listened to the American president declare that the two men had “tremendous chemi