U.S. helped clinch Iraq oil deal to keep Mosul battle on track

Shuttle diplomacy by the United States' envoy to the anti-Islamic State coalition brokered an oil deal between Iraq and its Kurdish region vital to a climactic battle with the jihadists, diplomats, officials and oil men say. 

The oil revenue-sharing deal sealed in August was critical to getting the central and regional governments to coordinate planning for a push on the Islamic State stronghold Mosul, which Kurdish peshmerga forces surround on three sides, as soon as this month, the sources said.

Brett McGurk shuttled from Iraqi Kurdistan capital Erbil to Baghdad and back again from the first half of April, culminating in a June 19 meeting in Erbil with Kurdistan Regional Government (KRG) leader Massoud Barzani and Iraqi National Security Advisor Falah Fayad.

Barzani "met McGurk and said, 'We cannot afford Mosul. We need oil and revenues back," said a high level source close to the Kurds. "If it wasn't for McGurk, this deal would have never happened."

The Kurdish region is home to Iraq's major northern oilfields but a quarrel over who benefits from export revenues has become a prolonged, tangled and emotive dispute.

In early 2014 Baghdad slashed funds to the KRG, which then began exporting oil independently via a pipeline to the Turkish port of Ceyhan.

In March Iraq's state-run North Oil Company (NOC) stopped pumping crude through the pipeline from fields it operates in Kirkuk, which the KRG has controlled since Iraqi security forces disintegrated two years ago when Islamic State overran a third of the country.

The move cut Kurdish oil revenues by around a quarter, worsening the budget crisis in Erbil amid low oil prices and the fight against the jihadists. 

Iraq and the U.S.-led military coalition backing it are relying on cooperation from the Kurds to retake Mosul from the ultra-hardline jihadists and undermine their self-proclaimed caliphate.

For Washington, defeating Islamic state has been one of the major foreign policy objectives under the second term of president Barack Obama, who will step down as president in January. 

The deal to restore the flows of Kirkuk crude progressed in August, when public statements show McGurk visited Prime Minister Haider al-Abadi in Baghdad on Aug. 11 and two days later met again with Barzani and Fayad in Erbil.

According to sources in Erbil, the KRG told McGurk and Baghdad they had lost around $1 billion dollars in revenues since March as the Kirkuk field was reinjecting around 150,000 barrels per day (bpd) back under the ground instead of exporting it with other Kurdish production of around 450,000 bpd to world markets via Turkey. 

That pushed all sides to iron out a final agreement that was announced following an Aug. 29 meeting in Baghdad between Abadi, McGurk and Barzani.

INTENSE LOBBYING

Under the agreement, up to 150,000 bpd of oil are being exported through Ceyhan as a 50/50 split between the KRG and Baghdad.

It also averted deeper division in Kurdistan itself. Local authorities governing Kirkuk from the city of Sulaimaniyah were asking to ship oil to Iran instead of Turkey, which the governments in Erbil, Baghdad and Washington rejected. 

The breakthrough helped start a separate conversation about the disposition of forces for the push on Mosul and the disputed internal boundaries between central Iraq and the Kurdistan region, said a senior Western diplomat in Baghdad.

"Take that sand out of the gears and turn the oil into oil in the gears ... and then they can have those other conversations about who's going where" on the battlefield, said the diplomat, who declined to be identified speaking about private discussions.

Since the Kirkuk oil deal was sealed, the Kurds have pledged in private to keep the peshmerga out of Mosul proper while allowing the Iraqis to use territory they currently control around the city to stage troops for the offensive, senior Western diplomats told Reuters, allowing war planning to accelerate.