BAGHDAD -- With their opposing armies massed on either side of the contested border dividing southern and northern Iraq, leaders in Baghdad and the semi-autonomous Kurdistan region are warning they are close to civil war -- one that could be triggered by Exxon Mobil.
Although leaders on both sides are negotiating a walk back from the brink, they also say their armies could easily be provoked into battle. One of the most sensitive tripwires is Exxon, which is preparing to drill for oil in the disputed territories at the heart of the military standoff. Iraq's two most explosive political conflicts -- over land and oil -- are primed to combust.
"The prime minister has been clear: If Exxon lays a finger on this territory, they will face the Iraqi army," said Sami Alaskary, a member of parliament and close confidant of Prime Minister Nouri al-Maliki. "We don't want war, but we will go to war, for oil and for Iraqi sovereignty."
Iraq's major ethnic groups have laid competing claims to land stretching across the northern part of the country, between the Kurdistan region and southern Iraq. An unofficial and ever-shifting "line of control" bisects the disputed areas, demarcating the southern border or Kurdistan-governed territory.
The crisis began after a Nov. 16 battle in the town of Tuz Khurmatu, whose diverse population and ethnic tensions are typical of the disputed areas. The fighting erupted when federal forces tried to arrest a Kurdish fuel seller, who asked Kurdish soldiers, known as pesh merga, to protect him. A shootout between the opposing forces ensued.
Mr. Maliki and Kurdistan President Massoud Barzani quickly ordered thousands of reinforcements to move toward the line of control, to protect against a potential incursion.
"We do not want war," Mr. Barzani said in a speech to troops on the front lines, "but if war comes, then all Kurdish people are ready to fight."
Iraqi Kurds are scarred by memories of Saddam Hussein's murderous campaigns of ethnic cleansing. After the fall of his regime, they staked out substantial autonomy in northern Iraq, and now the Kurdistan region has many features of an independent state: the regional government provides all public services, controls its own police and security forces and flies its own flag.
Many of the Kurdistan region's southern Iraqi neighbors, however, complain the Kurds are grasping for territory that is not rightfully theirs. Authorities in Baghdad say they had to deploy thousands of Iraqi army troops to prevent further Kurdish encroachment.
"This recent crisis has given gains to the Kurds," said a high-ranking military officer in Baghdad, speaking on the condition of anonymity because of political sensitivities. "They control ground now that they didn't have before."
Military leaders in Baghdad and the Kurdistan region say fighting could begin with a single misfire. In some areas near the city of Kirkuk -- home of a massive oil field and the epicenter of the territorial disputes -- the Iraqi army and the pesh merga are less than a mile apart, well within firing range of each other's weapons.
The Baghdad military officer said the Iraqi army would open fire under three scenarios: if the pesh merga fire first, if the pesh merga advance beyond their current positions, or if oil companies begin working in disputed areas.
"If they do this, it's a declaration of war," the officer said. "They will have started it."
Exxon is not the only company with oil deals in Iraq's disputed areas, but its contracts are the most controversial because of the company's iconic stature and the location of its exploration blocks, on the southernmost edges of Iraqi Kurdistan's expansive interpretation of its territory. Before Exxon signed the contracts in October 2011, Baghdad warned the company that it considered such deals illegal.
"It is the responsibility of the government to defend Iraq's sovereignty," Deputy Prime Minister Hussain al-Shahristani said in an interview, warning that if Exxon chooses to operate in disputed territories, "they would be committing a grave mistake."
The Obama administration did little to discourage Exxon from making those deals, and it has not taken action to prevent the company from drilling next year, according to several U.S. officials. One official, speaking anonymously because of the sensitivity of the situation, said the United States has no authority "to stop people who aren't violating U.S. law."
But American diplomats have mediated between leaders in Baghdad and the Kurdish capital of Irbil. They helped Iraqi army and pesh merga commanders agree on a de-escalation plan in which all forces would have returned to their pre-crisis positions, but the plan was rejected, according to varying accounts, by Mr. Barzani, or Mr. Maliki, or both.
On Dec. 13, with U.S. assistance, Iraqi President Jalal Talabani, a Kurd, brokered an agreement between Mr. Maliki and Mr. Barzani to tone down their public statements and form a committee to create a longer-term solution for security in disputed areas. Neither side has committed to military demobilization until that proposal has been implemented, however, and there is no timeline for further steps. But Monday, Mr. Talabani was hospitalized after suffering a stroke.
Meanwhile, Exxon's contracts with Kurdistan contain strict timelines. At the beginning of 2013, the company will begin surveying and other on-the-ground work in the disputed blocks, and Exxon plans to begin exploration drilling in the summer, according to an official who is close to the company and has direct knowledge of its plans. Changes to these timelines would have to be negotiated with Kurdistan, said the official, who spoke anonymously because of political sensitivities.
An Exxon spokesman declined to comment on the company's intentions, but the oil giant has a reputation for adhering to the letter of its contracts.
Before drilling begins, exploration typically escalates from lower-profile activities such as surveying to larger projects such as the construction of roads and camps. And as Exxon ramps up, both Mr. Maliki and Mr. Barzani have political incentives not to back down.
Mr. Barzani has enjoyed a surge in stature as the fractious parties within Iraqi Kurdistan rally behind him against a common threat. He made a high-profile visit to the pesh merga's front lines in Kirkuk on Dec. 10 -- a provocative move that demonstrated his physical control over that especially sensitive territory.
A day later, a procession of Maliki-aligned politicians appeared before television cameras to denounce what they termed a "war visit." They are also rallying a coalition in parliament to slash federal funding for the Kurdish Regional Government in the 2013 federal budget.
The Kurds still rely on Baghdad for the vast majority of their budget, but they have taken steps to create their own oil sector, signing nearly 50 contracts with international companies, increasing the Kurdistan region's control over its revenue streams. The Kurds could sever their economic dependence on Baghdad if they succeed in finalizing a deal being negotiated with Turkey for oil exploration and pipelines.
Mr. Maliki's advisers argue that Kurdistan has more to lose from a civil war, because foreign companies have been attracted by the region's excellent security, whereas those that have invested in southern Iraq have done so anticipating a risk of violence.