By Isabel Coles, Rania El Gamal and Dmitry Zhdannikov
ARBIL/LONDON, March 13 (Reuters) - A four-month-old oil dealbetween Iraq and the semi-autonomous Kurdistan region is closeto unravelling after payments from Baghdad dried up, promptingArbil to threaten to sue buyers and ramp up independent oilexports.
The dispute highlights fundamental differences between thetwo sides over who controls oil resources and revenues and willreinforce the views of many Iraqi watchers that Kurdistan wouldseek bigger if not full independence from Baghdad one day.
Baghdad cut budget payments to the Kurds in January 2014 aspunishment for their attempts to export oil independently,plunging the semi-autonomous region into economic crisis andforcing it to seek loans at home and abroad.
Under a new deal, the Kurds committed to export an averageof 550,000 barrels per day in 2015, in exchange for Baghdadresuming budget payments of over $1 billion a month to Kurdistanin 2015.
The agreement was hailed as a breakthrough that would helpIraq increase oil exports at a time when revenues are strainedby low global prices and the cost of financing a war againstIslamic State insurgents in the north and west.
But so far this year, Baghdad has paid only a fraction ofthe money, arguing that the oil handed over to SOMO does notmatch the expected volumes.
For its part, Kurdistan insists it has supplied almost 97percent of the agreed volumes and is working to raise volumesfurther despite receiving no payments. Sources in Arbil aresaying they will use all possible means to recoup the money.
"We are not being treated as part of the country but as acommercial oil producer," said a high-level Kurdish oilsource. "In case we don't get the payments, we will have to goafter the buyers because this crude still belongs to us."
In the past few months, SOMO sold Kurdish crude to buyersincluding Turkey's Tupras, Swiss-basedtrader Litasco, Spain's Repsol, Italy's Eni and BP.
Last year, SOMO threatened to sue direct buyers of Kurdishoil and has successfully stopped some sales.
The Kurd's latest threat to do the same may pose legalchallenges for companies who have bought oil through SOMObecause the deal between Baghdad and Arbil was preliminary anddid not give clarity over who owns the oil.
According to shipping documents seen by Reuters, oiltransferred to SOMO still belongs to the Kurdistan RegionalGovernment (KRG).
Another potential legal pitfall is that oil sold by SOMOfrom the Turkish port of Ceyhan is being marketed as Kirkukunder the name of the same field in northern Iraq. However, onlya third of oil in the pipeline is Kirkuk while the rest isdifferent grades from other KRG new fields.
The preliminary deal in December also did not address debtsowed to listed oil companies like Genel which helpedKurdistan develop its fields. Baghdad sees those contracts asillegal even though SOMO is currently selling crude from thosedeposits to buyers in Europe and beyond.
PUNISHMENT
Tensions spilled into the open this week at a forum in theKurdish city of Suleimaniyah, where Iraq oil minister Adel AbdelMehdi said Kurdistan had handed only some of the oil it pumpedto Ceyhan over to SOMO and was exporting the rest independently.
Kurdish minister Ashti Hawrami said the region was committedto the deal, but since Baghdad was not sending enough money, theheavily indebted region was forced to sell some oil to repaycreditors.
"Can somebody please explain to me why we are still beingpunished?" Hawrami asked. "If we continue receiving this little,what will happen to this relationship?" Both tried to end on aconciliatory note saying they would make the deal work.
Kurdistan has seen an inflow of over a million refugees fromIraq and Syria and had to raise billions of dollars via loansand oil export pre-payment deals with oil firms, trading houses,banks and Turkey to cover its budget shortfalls.
If the oil deal between Baghdad and Arbil collapses, thechances are high the KRG, which under the December dealcurrently sells 80,000-100,000 bpd independently from SOMO, willbe moving back to ramping up independent sales.
"After April, the KRG would be technically able to export825,000 bpd via its own pipeline system," a source in the KRGsaid. "We would be able to fully cover our budget needs withthose exports by tightening our spending and providingour fighting forces their salaries on time." (Additional reporting by Ahmed Rasheed; editing by SusanThomas)