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Iraq, Kurds agree on oil deal, uniting to fight Islamic State

As Islamic State threatens Iraq and its Kurdish region, Baghdad and Kurds settle a divisive issue: oil

Iraq's central government and leaders of the nation's semiautonomous Kurdish region unveiled an oil and budget deal Tuesday aimed at resolving a months-long dispute and presenting a united front against Islamic State militants.

The accord provides an interim resolution to a divisive issue at a time when the extremists threaten the central government in Baghdad and the Kurdish regional administration in the northern city of Irbil. The United States and other Iraqi allies have long pushed for an agreement to help improve often frosty relations between Baghdad and Irbil.

The deal calls for an Iraqi state entity to sell oil from Kurdish-controlled areas in the north while long-suspended federal revenues are restored to the Kurdish region. Both sides appeared to have compromised for now on the central issue: Who has the ultimate rights for the vast amounts of oil found beneath Kurdish lands?

Authorities said they hoped the accord would boost the nation's faltering economy.

"This deal is a win-win deal for both sides," Iraqi Finance Minister Hoshyar Zebari, a Kurd, told the Associated Press.

The disputed status of Iraq's oil revenues has stoked tension for more than a decade and recently threatened the government of Prime Minister Haider Abadi, a moderate backed by the United States and Iran, Iraq's major allies. Oil is Iraq's major source of revenue.

Abadi came to power in September, a few months after Islamic State insurgents swept through a large part of the country in June, chasing government forces and posing a grave security threat less than three years after U.S. troops left Iraq. The Pentagon has since launched airstrikes in Iraq and neighboring Syria against Islamic State, which President Obama has vowed to "degrade and ultimately destroy."

Though leading a Shiite-dominated government, Abadi has vowed to reach out to Iraq's disenchanted minorities, including Kurds and Sunni Muslims, as pro-government forces struggle to regain ground lost to the militants. Many experts saw Tuesday's agreement as a concrete marker of improved relations between Baghdad and the Kurdish region.

Brett McGurk, the U.S. deputy assistant secretary of State for Iraq, called the deal an "important breakthrough" in a Twitter post.

The United Nations envoy to Iraq, Nickolay Mladenov, hailed the two sides' "leadership and spirit of compromise in reaching this encouraging agreement."

In a televised address, Oil Minister Adel Abdul-Mahdi declared that the nation's oil "was for all Iraqis."

But independent analysts cautioned that the accord represented at best a temporary fix that leaves in place many major points of contention. The looming menace of the Islamic State, plus plunging oil prices that have battered the Iraqi economy, added urgency to negotiations, observers said.

"There's a recognition in Baghdad and Irbil of a short- and long-term reality: that there is more to be gained being together than apart," said Raad Alkadiri, managing director for petroleum sector risk at IHS Energy, a research organization.

Among the hard issues still pending are the Kurds' asserted right to export oil independently and the future of disputed, oil-rich areas, notably near the northern city of Kirkuk, which is claimed by the Kurds and has been under Kurdish control since June. Baghdad says all oil must be sold via the central government and rejects the inclusion of Kirkuk in any Kurdish-governed zone. The central government has aggressively gone to court to block Kurdish sales of oil abroad.

"The agreement represents a Band-Aid to slow down some of the bleeding, but it isn't something that is going to heal the wound," Ramzy Mardini, an analyst at the Atlantic Council, a Washington think tank, wrote in an email.

"It focuses on a small set of disputes to offset mutual financial problems due to the drop in oil prices," Mardini wrote. "The more thorny issues on the energy front remain unresolved."

Under the agreement, announced in Baghdad, 550,000 barrels of oil each day from areas under Kurdish control will be released to the federal government for export via pipelines to Turkey. That includes 300,000 from the oil fields outside Kirkuk.

In return, authorities said, Baghdad will resume sending 17% of the national budget revenue to the Kurdish region, which came to about $12 billion last year. The revenue was suspended this year when the central government balked at Kurdish efforts to hawk its crude on the international market.

In addition, the Kurdish region will receive about $1 billion in installments toward salaries and equipment for Kurdish peshmerga forces, who fell back in humiliating fashion to Islamic State fighters this summer across northern Iraq. The peshmerga say they have regrouped and are steadily gaining ground against the militants. Kurdish and Iraqi government forces have coordinated various attacks against militant positions.

The two sides had been edging toward an agreement for weeks. Last month, the Kurds agreed to provide about 150,000 barrels a day to Baghdad in exchange for $500 million to pay civil servant salaries in Irbil.

Relations hit a low point in July when Kurdish lawmakers in Baghdad walked out in protest against then-Prime Minister Nouri Maliki's allegation that the Kurds were harboring terrorists. Maliki, widely criticized as a pro-Shiite sectarian leader, was later pressured to step down and replaced by Abadi.

Iraqi lawmakers are drafting a new budget that will reflect the decreasing price of crude after OPEC's decision last week not to cut production. The militant advance also disrupted oil production in Kirkuk and elsewhere, further slicing revenues at a time when Baghdad must finance a sweeping military offensive against Islamic State, which uses black-market oil sales as a major source of its revenue.

This week, the Iraqi government said it had discovered about 50,000 "ghost soldiers," fictional troops whose wages went to their officers — one indicator of endemic corruption in the armed forces. Authorities say the phenomenon probably contributed to the lack of a defense against the lightning Islamic State advance across much of Iraq that saw the northern city of Mosul, the nation's second largest, fall to militant forces without much of a fight.

Times staff writer Neela Banerjee in Washington and special correspondent Nabih Bulos in Beirut contributed to this report.

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