Iraqi forces seized control of the disputed city of Kirkuk on Monday as Kurdish forces appeared to melt away, escalating a crisis triggered by last month’s independence referendum in the autonomous Kurdistan region.

Elite Iraqi counter-terrorism forces moved into the provincial government headquarters in the centre of the oil-rich city, which has been run by the Kurdistan Regional Government (KRG) since 2014. The Iraqi military said it had taken control of Kirkuk’s airport, while its forces also secured North Oil Company facilities, including the state company’s headquarters.

The crisis pits US allies against each other as Washington has spent several years and millions of dollars arming and training the Iraqi military and Kurdish forces to help in the battle against the Islamic State terror group. It helped drive oil prices up 2 per cent to $58.47 a barrel, the highest level this month over concerns that crude supplies could be disrupted.

The KRG exports more than 550,000 barrels of oil a day, the majority from Kirkuk and surrounding fields, and production in Kurdish-controlled territories accounts for about 15 per cent of Iraq’s total output.

Tensions in the region have been escalating since the KRG went ahead with its independence referendum last month, despite fierce opposition from Baghdad, Iran, Turkey and the US. Regional powers fear it will embolden Kurds in their own countries to push for greater autonomy and undermine the fight against Islamic State, also known as Isis.

Kirkuk has long been one of Iraq’s deepest faultlines and is claimed by both the KRG and Baghdad.

Both Iraqi officials and Washington have portrayed Monday’s operation as a co-ordinated move with Kurdish peshmerga forces, rejecting claims by some Kurdish leaders that it was an attack.

There were some clashes, but most of the sites were in effect surrendered to Iraqi forces after the peshmerga withdrew, a move that has sparked outrage among Kurds. Iraqi forces were moving to capture the Avana and Bai Hassan oilfields. A KRG official dismissed reports that production from the fields had been shut down.

Both sides appear to want to keep the oil flowing.

Disputed territories

The KRG had gradually gained control of Kirkuk after the 2003 US invasion toppled Saddam Hussein. Its peshmerga finally achieved full control of the city when they moved in and replaced the army as Islamic State swept through northern Iraq in 2014.

Kirkuk is one of 15 disputed territories claimed by the KRG and Baghdad that were included in the referendum. It is home to roughly a million people, including Kurds, Arabs, Turkmen, Christians and other minorities.

Iraqi prime minister Haider al-Abadi called on Kurdish peshmerga fighters to operate under the “federal authority as part of the Iraqi armed forces”. In a statement read on state television, he said he had ordered security forces “to impose security in Kirkuk in co-operation with the population of the city and the peshmerga”.

Residents said gunmen had taken to the streets of the city, and they could hear sporadic clashes. They said crowds of people were fleeing Kirkuk.

“The city has practically been emptied. I would estimate about 60 per cent have left. The city is now surrounded by the Iraqi army and police and they are now entering the North Oil Company headquarters,” said Ali Mehdi, leader of the Iraqi Turkmen Front, a political movement, in Kirkuk. “We have seen gunmen on the streets. Some of them are armed civilians, others are a peshmerga [Kurdish forces].”

The crisis has exposed the divisions among the Kurds, particularly between Kurdish president Masoud Barzani’s KDP and the Patriotic Union of Kurdistan (PUK), which has a strong presence in Kirkuk. The factionalism spills over into the peshmerga and the rival camps traded accusations as the Iraqi forces advanced.

Hemin Hawrami, a senior adviser to Mr Barzani, tweeted a statement from the peshmerga general command saying some PUK officials had “betrayed” Kurdistan by “abandoning key fronts”. But a PUK official said that there had been an “understanding” between the PUK and the KDP to hand control of security facilities and oil installations back to Iraqi forces, as existed before Isis over-ran northern Iraq in 2014.

A local leader in Kirkuk said he expected the Kurdish forces and the Iraqi military to reach an agreement.

“I think there was an international agreement ahead of this,” he said. “What is going to happen now is that the Iraqi army takes back the strategic areas of the city and the peshmerga remain in the rest as a second-class presence.”

The Kurdish region exports about 550,000 barrels a day of crude oil, including from fields operated by the federal North Oil Company.

Shwan Zulal, of Carduci Consulting, which specialises in Iraqi Kurdistan, said any attempt to attack or occupy the oilfields around Kirkuk would probably lead to a shut-in of supplies because the KRG controls the northern export pipeline.

“The oilfields, if attacked, would be shut down and majority of Kurdish export will be halted,” Mr Zulal said. “Supply will be affected either way but it will dry the KRG’s main source of income.”

Copyright The Financial Times Limited 2017