Look east from the Kurdish trenches on a dusty ridge outside the northern Iraqi city of Kirkuk and you can see the cause of it all: a rudimentary oil field where water wells are being sunk and sites are being cleared for drilling.
Now look south into the valley below the Kurdish positions and you can see two Iraqi army units poised to make sure that drilling never begins.
Since November, a crisis of oil, money and history has been building in the semiautonomous northern Iraqi region of Kurdistan. Some 30,000 Kurdish soldiers face just as many regular Iraqi army troops, setting the stage for a civil war in a country that has already endured more than its share. Under these lands lie an estimated 66 billion barrels of oil, enough to shift the global market for crude and alter Iraq's economic fortunes provided the resource doesn't tear apart the country first.
Both armies arrived in Kirkuk at the end of November after a gas-station shoot-out nearby between Iraqi police and Kurdish troops left one dead and both sides furious. The forces have been tripping over each other since, in patrols through the divided city of Kirkuk and throughout the surrounding disputed territory, which is a bit larger than Kuwait. The situation has become tense for both sides. "I'm going to fight them," Iraqi Prime Minister Nouri al-Maliki warned his staff and allies in December. "I will use force to prevent them from working in the disputed area." With the two armies mustered in such close proximity, war may not wait; a suicide bomber killed at least 36 people and wounded more than 100 at a Kirkuk police station on Feb. 3. "Accidents happen," says Harry Schute, a former U.S. Army colonel who led U.S. forces into Kurdistan in 2003 and returned in his retirement to advise the Kurdish government on security issues. "This could blow up to be a war that no one wants."
The tinderbox has been years in the making. Kurds a nomadic Indo-European ethnic group spread across parts of Turkey, Syria, Iran and Iraq have sought an independent state since 1920, with limited success. But Kurds in northern Iraq were largely able to govern themselves from 1991 to 2003 in Iraq and had little or no contact with Baghdad. Only after the fall of Saddam Hussein, however, did the Iraqi Kurds begin to flex their muscles on energy policy, claiming the right to sign deals with foreign oil companies and drill on lands they historically claimed. When the Kurdistan Regional Government opened up to drilling in 2004 it sweetened the offer by allowing foreign oil companies to keep far more of the profits than the post-Saddam government was offering from oil fields in southern Iraq. Baghdad in 2011 threatened to cancel all its contracts with companies drilling elsewhere in the country if they signed up with the Kurds, but that didn't deter more than 50 multinationals from making deals with the north, including majors like ExxonMobil, Chevron, Total and Gazprom. "U.S. firms want to be able to work anywhere in Iraq and base their business decisions on which province or region is the most attractive for investors," says Hussain Qaragholi, president of the U.S. Business Council in Iraq, whose board includes ExxonMobil and Chevron.
Of course, oil isn't worth much unless you can ship it to the people who want to buy it, and Iraqi Kurdistan is landlocked. So last month the Kurds struck a provisional deal with neighboring Turkey to build a pipeline to carry any oil drilled on Kurdish lands or even disputed territory out of Iraq. There's just one problem: under the new Iraqi constitution, Baghdad controls all oil exports. And without a pipeline to move the crude to market, drilling in Kurdistan makes little sense. The result is an increasingly nasty standoff that's brought to the surface deep divisions between the Kurds and Baghdad.