By Stephen Kalin and Dmitry Zhdannikov
BAGHDAD/LONDON (Reuters) - Shuttle diplomacy by the United States' envoy to the anti-Islamic State coalition brokered an oil deal between Iraq and its Kurdish region vital to a climactic battle with the jihadists, diplomats, officials and oil men say.
The oil revenue-sharing deal sealed in August was critical to getting the central and regional governments to coordinate planning for a push on the Islamic State stronghold Mosul, which Kurdish peshmerga forces surround on three sides, as soon as this month, the sources said.
Brett McGurk shuttled from Iraqi Kurdistan capital Erbil to Baghdad and back again from the first half of April, culminating in a June 19 meeting in Erbil with Kurdistan Regional Government (KRG) leader Massoud Barzani and Iraqi National Security Advisor Falah Fayad.
Barzani "met McGurk and said, 'We cannot afford Mosul. We need oil and revenues back," said a high level source close to the Kurds. "If it wasn't for McGurk, this deal would have never happened."
The Kurdish region is home to Iraq's major northern oilfields but a quarrel over who benefits from export revenues has become a prolonged, tangled and emotive dispute.
In early 2014 Baghdad slashed funds to the KRG, which then began exporting oil independently via a pipeline to the Turkish port of Ceyhan.
In March Iraq's state-run North Oil Company (NOC) stopped pumping crude through the pipeline from fields it operates in Kirkuk, which the KRG has controlled since Iraqi security forces disintegrated two years ago when Islamic State overran a third of the country.
The move cut Kurdish oil revenues by around a quarter, worsening the budget crisis in Erbil amid low oil prices and the fight against the jihadists.
Iraq and the U.S.-led military coalition backing it are relying on cooperation from the Kurds to retake Mosul from the ultra-hardline jihadists and undermine their self-proclaimed caliphate.
For Washington, defeating Islamic state has been one of the major foreign policy objectives under the second term of president Barack Obama, who will step down as president in January.
The deal to restore the flows of Kirkuk crude progressed in August, when public statements show McGurk visited Prime Minister Haider al-Abadi in Baghdad on Aug. 11 and two days later met again with Barzani and Fayad in Erbil.
According to sources in Erbil, the KRG told McGurk and Baghdad they had lost around $1 billion dollars in revenues since March as the Kirkuk field was reinjecting around 150,000 barrels per day (bpd) back under the ground instead of exporting it with other Kurdish production of around 450,000 bpd to world markets via Turkey.
That pushed all sides to iron out a final agreement that was announced following an Aug. 29 meeting in Baghdad between Abadi, McGurk and Barzani.
Under the agreement, up to 150,000 bpd of oil are being exported through Ceyhan as a 50/50 split between the KRG and Baghdad.
It also averted deeper division in Kurdistan itself. Local authorities governing Kirkuk from the city of Sulaimaniyah were asking to ship oil to Iran instead of Turkey, which the governments in Erbil, Baghdad and Washington rejected.
The breakthrough helped start a separate conversation about the disposition of forces for the push on Mosul and the disputed internal boundaries between central Iraq and the Kurdistan region, said a senior Western diplomat in Baghdad.
"Take that sand out of the gears and turn the oil into oil in the gears ... and then they can have those other conversations about who's going where" on the battlefield, said the diplomat, who declined to be identified speaking about private discussions.
Since the Kirkuk oil deal was sealed, the Kurds have pledged in private to keep the peshmerga out of Mosul proper while allowing the Iraqis to use territory they currently control around the city to stage troops for the offensive, senior Western diplomats told Reuters, allowing war planning to accelerate.
The military now looks set to push into Mosul by the end of October, which looked improbable just a few months ago. Kurdish leader Barzani visited Baghdad last week for the first time in more than three years, a sign of improving relations.
A lawyer by training, McGurk has been involved in some of Iraq's thorniest disputes since a U.S.-led invasion toppled Saddam Hussein in 2003. As an adviser to the occupation authorities, he helped draft an interim constitution and oversee the legal transition to an interim Iraqi government.
He advocated the U.S. troop "surge" that is partially credited with stemming Iraq's sectarian violence from its 2006-2007 heights. When Islamic State swept through a third of the country in mid-2014, he played a leading role in bringing Prime Minister Abadi into office to address the threat.
McGurk, who could not be reached for comment, has been sprinting around the world for the past year to implement the Obama administration's policy to defeat the jihadists, which includes holding together an Iraq that some observers say is more divided than ever.
A spokeswoman for the U.S. embassy in Baghdad, asked about the oil deal, said: "We give the Iraqi government all of the credit on the agreement."
Asked about the matter it last month during a trip to Baghdad, U.S. Deputy Secretary of State Tony Blinken said he was "encouraged by the efforts that have been made in recent weeks." He subsequently visited Erbil.
A spokesman for Abadi said the United States and the international community had played "an undeniable role" in encouraging dialogue between Baghdad and Erbil on Kirkuk exports, which built up confidence and helped advance other issues. A KRG spokesman did not respond to requests for comment.
(Editing by William Hardy)