Iraq has begun reconstruction work at what was the country's biggest oil refinery before it was damaged by intense fighting between government forces and Islamic State group jihadists, the oil ministry said Thursday.

The aim is to complete work early next year on one of the units that will produce 70,000 barrels per day at the Baiji complex which is currently shut, said ministry spokesman Assem Jihad.

Constructed in 1975 and located 200 kilometres (125 miles) north of Baghdad, the refinery produced between 250,000 and 300,000 barrels a day before IS seized it in June 2014.

Government forces retook the facility and the city of Baiji in October 2015 during fierce clashes with the jihadists but the severe damage meant that the refinery remained closed.

"The rehabilitation will allow the distribution of refined products for the north of the country and reduce our imports," said Jihad.

Baiji was particularly hard hit by the devastation wreaked by Iraq's campaign to reclaim its towns and cities from IS.

In 2016 it was declared a disaster zone by the national parliament.

Backed by a US-led coalition, Iraqi forces gradually retook control of all territory lost to IS over the past three years and on Saturday Prime Minister Haider al-Abadi declared victory against the jihadists.

But experts warn that IS remains a threat, with the capacity as an insurgent group to carry out high-casualty bomb attacks using sleeper cells.

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