Islamic State has made Iraqi-Kurdish energy cooperation more likely, helping to guarantee lower world oil prices for the medium-term future.

Under threat of their common enemy, the central government in Baghdad and the Kurdish Regional Government (KRG) in the north have agreed on the division of the country’s oil export revenues. That is something that they had been trying to do, without success, for almost ten years.

The agreement also provides a framework for cooperating on future oil development and export. As such, it will in the medium term only add to the current glut on the world market.

Iraq has the fifth largest confirmed oil reserves in the world and is the sixth largest exporter. It is the eighth largest producer in the world and second largest in OPEC. One-sixth of the country’s proven reserves, about four billion barrels, are in the north. The region is under active exploration that could well discover at least several times more that amount.

Baghdad had put oil payments to the north on hold since the beginning of this year. This put the KRG in a difficult position. It has not only had to defend against Islamic State (IS) but also provide for millions of war refugees and at the same time retain the loyalty of civil servants whose salaries were consistently months in arrears.

At the end of June this year, the central government’s soldiers under IS onslaught abandoned the key northern city of Kirkuk. The Kurdish fighting force known as the “peshmerga” moved in to take their place and threw back the IS advance. Part of the new agreement provides for Baghdad to subsidize the peshmerga directly. The sums will be paid to the KRG Defence Ministry.

It all started in 2005, when the Iraqi Constitution left the status of Kirkuk, a city nearly four millennia old and not far from the KRG territory, up in the air.

In 2007 the KRG passed its own hydrocarbon investment law, after the legislature in Baghdad had repeatedly failed to do this on the national level. The KRG then signed oil production sharing agreements with several international oil majors and began sending 175,000 barrels per day (bpd) through a pipeline of the Northern Oil Company (NOC) to Turkey.

Since 2011 that flow has been off-and-on over revenue distribution disputes, with the KRG charging Baghdad with failure to make payments. The new agreement provides for the KRG to deliver 250,000 bpd directly to the national oil marketing agency plus another 300,000 bpd through the state-owned NOC pipeline to Turkey.

When oil was discovered in Kirkuk in 1927, the population was mainly ethnic Turkmen or, as they are called in Iraq, Turcoman. The development of the industry in the middle third of the last century attracted Kurds and Arabs to the city. Then under Saddam, large numbers of Kurds were forcibly displaced while Arabs were transferred to settle it, in a centrally planned population shift.

After Saddam’s fall, Kurds removed from the city were supposed to be allowed back, a new census was supposed to establish new voter rolls, and a referendum was supposed to have been held to decide whether the city would be part of the KRG territory or Iraq proper.

This was all supposed to happen by the end of 2007. It never did and has not since.

The inability to resolve the Kirkuk issue meant that there was no legal structure to provide security of investment for either past or future energy development in the region. It also meant that no revenue-sharing agreement could be reached, and that in turn put Iraq’s very cohesiveness as a state into constant jeopardy.

The peshmerga’s occupation of Kirkuk following the rout of Baghdad’s troops from the city effectively resolved the status question that the 2005 Constitution had put on hold. Maliki denounced it at the time but the new Iraqi prime minister Abadi is more conciliatory. On the Kurdish side, the matter is now considered closed.

There is a lot that could still happen to derail the agreement. Details of implementation need to worked out. The budgets need to be written up and legislatively approved. The infrastructure needs repairs and upgrading.

Agreements have been announced before, but they have been temporary. The common threat from IS, the increased size of the pie to be divided, and the effective resolution of the Kirkuk question all make the situation much more hopeful than in the past.

The KRG prime minister has previously suggested, that once agreement was reached, exports from the north could rise to 1 million bpd within two years and to 2 million bpd four years after that, i.e. now by the early 2020s.

This extra oil washing into the world markets is not a trivial amount and it would help to keep the world price down even after it begins to rebound later this decade.

The IS attack on Kirkuk may well turn out not only to guarantee the political integrity of the Iraqi state including Kurdish autonomy but also, as a consequence, to stabilize the world oil markets in the medium term at present low levels.