"Oil is obviously at the forefront of every decision Baghdad makes and the fact that all of its hydrocarbons are located far from the capital is beginning to make the government's position more precarious," the Middle East Economic Digest observed recently.
Baghdad is increasingly alarmed at how the Kurdistan Regional Government, based in the northern city of Irbil, is attracting international oil companies to conduct exploration in the three Kurdish provinces along the northern borderlands.
Baghdad refuses to recognize the deals the KRG has signed with 40 small foreign oil companies, insisting the government is the sole authority when it comes to oil contracts.
But Iraqi Prime Minister Nouri al-Maliki's government was severely jolted in October 2011 when the world's largest oil company, Exxon Mobil of the United States, defied Baghdad and signed a six-block deal with Irbil.
Baghdad declared that illegal. Tensions have risen since Exxon's surprise move that jeopardized its stake in the huge West Qurna 1 field in the south.
The company refuses to back down but so far it hasn't begun drilling in Kurdistan.
On March 25, the state-owned North Oil Co. announced it had signed a preliminary deal with BP to develop the northern Kirkuk oilfields, which contain one-third of Iraq's reserves of 143.1 billion barrels.
That was slap in the face for the KRG, which claims the city of Kirkuk and the oil fields are Kurdish territory because they formed a Kurdish province ruled by the Ottomans for 400 years.
The BP deal, designed to boost Kirkuk production from 280,000 barrels per day to 580,000 bpd, was widely seen as Baghdad's response to the KRG's controversial contract with Exxon Mobil.
On Sunday, the KRG struck back by cutting back its oil exports, accusing Baghdad of failing to make payments totaling $1.5 billion since 2011. The KRG's exports were reduced to 50,000 bpd from an estimated 90,000 bpd.
Irbil threatened to cut off exports altogether within a month if Baghdad continued to withhold payment. Baghdad said it had allocated $560 million for the KRG but the dispute continues.
The rift has been magnified by the KRG giving sanctuary to Iraq's fugitive vice president, Tareq al-Hashemi, and allowing him to flee to Qatar.
Hashemi, the top Sunni politician in Maliki's Shiite-dominated coalition, has been accused by the government of "aiding terrorists." He denies the charges, which are widely seen as part of a widening crackdown by Maliki to eliminate his political rivals in the post-U.S. era.
But it's the feud over oil and revenue-sharing that dominates the widening rift between Baghdad and the Kurds. The outcome could have a far-reaching impact on Iraq's future as it struggles to rebuild after decades of war, international sanctions and internal, sectarian rifts and on the minority Kurds' determination to assert themselves as a long-suppressed people.
"Baghdad has an unenviable task of bringing together a country that has for so long been ripped apart by war and tyranny," MEED observed.
"Finding an effective and workable solution to selling its hydrocarbons should be its first priority."
The dispute centers primarily on Kirkuk, an ethnically mixed city where Saddam Hussein drove out the Kurds who once formed the majority and packed it with Arabs during his tyrannical rule.
After the Americans toppled Saddam in April 2003, the Kurds, key U.S. allies during the invasion, reclaimed Kirkuk and its oil fields. Controlling them, along with reserves of an estimated 50 million barrels in Kurdistan, would form the economic backbone of the independent state for which the Kurds have fought for decades.
The region has become a flashpoint between Iraq's Arabs and the Kurds. U.S. forces kept the two sides apart but, now the Americans have left, the decades-old dispute between Kurds and Iraqi Arabs could ignite.
On top of that, Maliki's dictatorial inclinations have prompted minority Sunni provinces to demand autonomy, threatening a possible breakup of the federal system established under the Americans.
The Kurds are the effective kingmakers in Iraq's often deadly politics and that gives the KRG in Irbil some high cards that Maliki ignores at his peril.
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