ARBIL, Iraq Iraqi Kurdistan will be forced to seek a "new form of relations" with the central government in Baghdad if negotiations fail to resolve their disputes over oil and land, the president of the autonomous region said.
Masoud Barzani, who has hinted at full independence from Iraq in the past, told Reuters the current round of talks, which started last month, marked the final opportunity to end a feud that has strained Iraq's uneasy federal union to the limit.
How the matter is settled will have a major impact on oil producers like Exxon Mobil and Iraq's neighbor Turkey, which has upset Baghdad and Washington by deepening energy ties with Kurdistan.
"The current talks will be the last chance," Barzani said in an interview at his presidential office outside the Kurdish capital Arbil. "There has been a softening of their (Baghdad's) position, but practically speaking there has been no progress".
"Either we will be able to reach an agreement... or we will have to think of a new form of relations between the region and Baghdad," he said, declining to elaborate.
Ten years after the U.S.-led invasion of Iraq, a stable power-sharing arrangement between Shi'ite, Sunni and ethnic Kurdish factions is still elusive and a recent intensification of violence has prompted warnings of civil war.
But Kurdistan has managed to insulate itself against the fallout, and is enjoying unprecedented prosperity for a region that was once the most impoverished and repressed in Iraq.
The northern enclave of more than 4.5 million people is also pursuing increasingly independent energy and foreign policies, antagonizing Baghdad to the point that both sides have deployed troops to reinforce positions along their disputed internal border.
Even if a compromise were to be found with Baghdad, statehood remains the ultimate objective for Barzani, a former guerrilla fighter who was born in the short-lived Kurdish republic of Mahabad in Iran in 1946.
Divided between Iran, Syria, Turkey and Iraq, the Kurdish people number more than 25 million and are often described as the world's largest ethnic group without their own state.
"It's the goal of all the Kurdish people and it's a right," said Barzani, who was wearing traditional costume with a red and white headdress. "I believe that to be the final solution."
Key to realizing that ambition is oil. In recent years, the Iraqi Kurds have signed contracts on their own terms with the likes of Exxon Mobil, Total and Chevron Corp. That has infuriated the central government, which insists it alone is entitled to control exploration of Iraq's oil.
Kurdistan used to ship crude through a pipeline network controlled by the central government and receive a share of the national budget. But exports via that channel dried up last December due to a row over payments for oil companies operating in the region.
The region says the constitution allows it to exploit the reserves under its soil, and is building the final leg of an independent export pipeline that could help bypass the central government and send as much as 300,000 barrels per day (bpd) of oil to international markets through neighboring Turkey.
Resource-hungry Turkey has cultivated close energy ties with Barzani's Kurdistan Regional Government (KRG), despite objections from the United States, which fears the region's increasingly independent oil policy will lead to the break-up of Iraq.
"Both sides (Turkey and the KRG) are determined to make progress in terms of this relationship," Barzani said. "When you have oil, oil will find its own way."
The partnership has helped foster a nascent peace process between the Turkish state and rebels from the Kurdistan Workers' Party (PKK), who have fought it for the past three decades. PKK fighters began withdrawing from Turkey into Iraqi Kurdistan last month, drawing complaints from Baghdad, which said it would not accept any armed group entering its territory.
Asked whether he had any qualms about receiving several hundred guerrillas in the mountains of Iraqi Kurdistan, Barzani said there was no cause for concern. "We are expecting that after the problem is solved, they will go back to their homes."
Barzani has responded to the civil war in neighboring Syria by sending aid to fellow Kurds there, receiving thousands of refugees, and seeking to unite the ranks of Syrian Kurdish political parties, with mixed success.
"They have still got some internal problems," Barzani said. "We will encourage them to continue to work collectively and to take advantage of any opportunity that may come in order to achieve their objectives."
(Editing by Patrick Markey and Mark Trevelyan)