The semi-autonomous Kurdish Regional Government in the Kurdish enclave that spans three provinces in northern Iraq wants to export its oil and natural gas to neighboring Turkey through pipelines to be built by Ankara.
Iraq's federal government in Baghdad refuses to allow that and insists that the oil in question belongs to the state, and if it's shipped north to Turkey should flow through state-controlled pipelines running from the Kirkuk oil fields to Turkey's Mediterranean export terminal at Ceyhan.
A few weeks ago, it looked like the KRG, headquartered in the city of Erbil, and Ankara had after months of discreet negotiations reached a secretive agreement on pumping Kurdish oil to Turkey via a pipeline with a capacity of 300,000 barrels per day controlled by Baghdad starting in December.
It would also give Ankara a big stake in several oil fields in Iraqi Kurdistan through a new state entity, the Turkish Energy Co.
Kurdistan has been exporting 30,000-50,000 bpd to Turkey by truck for months, but with new pipelines to the north KRG Natural Resources Minister Ashti Hawrami said Nov. 20 Erbil planned to supply 1 million bpd by 2015, rising to 2 million bpd by 2019.
KRG Prime Minister Necirvan Barzani said oil could be flowing via the pipeline "before Christmas," a move that would have wide geopolitical consequences and would redraw the energy map of the Middle East.
Then on Dec. 4, Barzani confessed Erbil and Baghdad were unable to reach agreement and dismissed tripartite negotiations as proposed by Ankara. Baghdad made clear it would not play ball on a deal it deemed "illegal."
"Now the agreement's been openly proclaimed by the parties, doubts are growing about how, when and even if it will enter into force," observed regional analyst Daniel Dombey in Istanbul.
"Ankara now says the future of the agreement is up to Baghdad and Erbil."
A KRG export operation, independent of Baghdad, would cut Iraq's oil exports, which provide the revenue for national reconstruction after four decades of war, insurrection, economic sanctions and neglect.
But there are strategic political reasons behind Baghdad's stonewalling: KRG-controlled oil exports would greatly spur Kurdish efforts to eventually establish an independent state that could threaten the collapse of a multi-ethnic Iraq while the Middle East is convulsed by political and religious turmoil.
The Kurds already behave as if they have a sovereign state. They have their own government, flag and military forces, and a prospective energy deal with Turkey would make them economically independent of Baghdad, which under Saddam Hussein waged a near-genocidal campaign to crush them and their aspirations of statehood.
The United States is aghast at the idea of Iraq breaking up and has sought, in vain, to prevent the Kurds setting up their own oil industry, separate from Iraq's, with major players like Exxon Mobil, Chevron, Total of France and Gazprom Neft of Russia.
Indeed, U.S. officials in Baghdad say Kurdish oil flowing into Turkey could be the greatest threat to Iraq's cohesion, and that by alienating Iraq's Shiite Prime Minister Nouri al-Maliki, the the Sunni Kurds, and Sunni majority Turkey, could push Iraq closer to Iran.
Turkey, which has no energy resources of its own and is stuck with an annual energy import bill of $50 billion, is desperate to get access to the Kurds' oil reserves, estimated at 45 billion barrels, and natural gas holdings of at least 106 trillion cubic feet.
Turkish Prime Minister Recep Tayyip Erdogan wants to exploit Turkey's location between Europe and Asia to become the main energy hub for oil and gas flowing from Russia, the Caspian Basin, Central Asia and the Middle East.
Now he's seeking peace with Turkey's own Kurdish separatists to end a 29-year-old insurgency, he feels confident enough to deal with Iraq's independence-minded Kurds, setting aside past conflicts to pursue a mutually beneficial partnership.
Erdogan "hopes to use a closer relationship with the Iraqi Kurdish government to facilitate peace negotiations with Kurds in Turkey," the U.S. global security consultancy Stratfor observed.