By Selcan Hacaoglu and Zaid Sabah | Bloomberg

Winston Churchill understood the significance of the black stuff seeping to the surface in the Kurdish plains of Mesopotamia when he included the region within Iraq as the British forged the nation in the 1920s.

In doing so, Churchill, the colonial secretary at the time, set in train almost a century of bickering between the Iraqi government and its Kurdish enclave over the area’s estimated 45 billion barrels of crude.

While their latest dispute was temporarily resolved last month to help finance the struggle against Islamic State, the accord has not addressed differences between administrations in Baghdad and Erbil that include the future of Kirkuk, northern Iraq’s main oil hub. The Iraqi government started pumping crude from Kirkuk via Kurdish pipes that bypass militant-held territory to Turkey, Al-Mada Press reported Jan. 1.

“The need to finance military operations has brought together the Iraqi government and the Kurds,” said Hussein Allawi, a Baghdad-based oil analyst. “But this is a temporary agreement that does not resolve fundamental differences.”

Under the deal, the Kurdistan Regional Government will share revenue from the 250,000 barrels a day that it had been unilaterally shipping from its territory to the Turkish port of Ceyhan. Iraq says it intends to increase exports from Kirkuk, which Kurdish Peshmerga forces are defending from Islamic State attack, by 300,000 barrels a day during 2015. The central government in Baghdad has also resumed budget payments to Kurdish authorities, including a one-time payment of $1 billion to cover expenses of the Peshmerga.
Kurds Winning

While the Iraqi central government is set to bank increased revenue, its oil exports to Turkey now depend on pipelines traversing the Kurdish region.

Should Baghdad try to withhold budget cash again “we hold a key to their oil exports,” Nechirvan Barzani, the prime minister of the KRG, said Dec. 3, according to his government’s website. The agreement also gives the KRG’s oil sales through its pipelines tacit approval by Baghdad.

The shift in the balance of power explains why the pact may not last long.

“Independent oil sales from the KRG are not going to be tolerated by Baghdad in the long term and eventually this deal will collapse,” said Christian Sinclair, assistant director of Center for Middle Eastern Studies at the University of Arizona.
Churchill’s Vision

The accord does not resolve long-standing points of friction between Baghdad and Erbil, that also include the KRG’s ambitions for independence, Sinclair said.

That discord stretches back to Churchill’s deliberations over how to divide lands the British had seized from the Ottoman empire during the First World War, juggling as he did so the economic viability of newly created states and British access to oil, according to published official correspondence between him and the top U.K. diplomat in the region, Percy Cox.

He ultimately bowed to Cox’s argument that Kurdish areas should be attached to Iraq, in part to ensure that its oil would fall under British control and not that of the new Turkish republic founded by Mustafa Kemal Ataturk.
Trouble and Strife

Iraq’s Kurdish population only emerged from under the thumb of the central government in Baghdad in the 1990s, when a U.S.- backed no-fly zone allowed for the creation of a semi-autonomous region and a trucked-oil trade with Turkey.

The U.S.-led invasion of 2003, and the removal of Saddam Hussein, saw an agreement under which Iraq’s government allocated 17 percent of the nation’s oil revenue to the KRG without the sides resolving deeper questions over how to share Iraq’s untapped oil wealth.

In 2012, the Kurds stopped exporting crude via Iraq’s national pipeline system, and last year began operating their own link to Turkey. The Kurds increased exports to more than 250,000 barrels per day, in defiance of Iraq’s oil ministry, which labeled the exports illegal and sought to stop them.

More than 32 million barrels of Kurdish oil worth $2.5 billion were exported through Turkey and pumped onto 40 tankers, according to the country’s Energy Minister, Taner Yildiz, on Dec. 30.

In retaliation for the Kurdish sales, Iraq’s government stopped its contributions to the KRG budget in Jan. 2014, five months before Islamic State seized Mosul, Iraq’s biggest northern city.
Coming Undone

“Neither party benefited from the previous deadlock, which played into the hands of the Islamic State,” said Anthony Skinner, head of analysis for the Middle East and North Africa at U.K.-based forecasting company Verisk Maplecroft, said by e-mail. Islamic State earned $2 million a day from black-market oil sales, powering its rapid expansion in Iraq and neighboring Syria.

U.S. airstrikes targeting Islamic State in Iraq since August have limited its oil revenue, and allowed Kurdish and Iraqi forces to roll back some of the militant gains.

While the KRG and the Iraqi government are fighting together against a common enemy, the Kurds have not given up on their hope for full autonomy to go with their increasing financial clout, said Skinner.

With Baghdad unlikely to grant further concessions and KRG President Massoud Barzani calling for a referendum on Kurdish independence last year, the map of Iraq that Churchill approved may not last.