A series of crucial meetings over the past two days have yielded no progress in Baghdad-Erbil negotiations, as unprecedented drone strikes target KRG oil infrastructure while Baghdad courts the US through new energy deals with American companies. Meanwhile, salaries for KRG public employees have now gone unpaid for more than two and a half months.

Context: The Federal Court has postponed a complaint related to KRG salaries until July 28th. Last night’s Iraqi governing coalition meeting refused to discuss the Baghdad-Erbil oil and budget dispute in detail, deferring the issue to the Prime Minister’s discretion. Today, the Iraqi Council of Ministers did not address the KRG oil and salary issue at all. Similarly, yesterday’s meeting between top KDP and PUK leadership failed to produce concrete results, with leaders merely urging continued dialogue with Baghdad. Meanwhile, since last night, two drone strikes have targeted Khurmala oilfield in south Erbil and one drone targeting Sarsang oilfield, causing material damage in both cases.

Analysis: What makes this episode particularly perilous for the KRG is that Baghdad is not merely pressing for the handover of oil revenues; the crisis is now exposing the KDP’s strategic weaknesses. The repeated threats from KDP President Masoud Barzani increasingly ring hollow, revealing a lack of leverage. This emboldens Baghdad to press even harder, potentially adopting more maximalist demands.

For now, the KRG appears to lack a coherent strategy for addressing the dispute. Yesterday’s KDP-PUK meeting produced nothing beyond a commitment to “continue negotiations,” while Baghdad has developed a coordinated and multi-pronged approach that becomes clearer as the crisis persists.

First, unlike in past disputes, Prime Minister Mohammed Shia’ al-Sudani has remained firm in his demands, consistently framing the issue as technical—a matter of enforcing the federal budget law and the Federal Court’s rulings. With KRG salary non-payment exceeding 75 days, economic activity in the region has completely stalled, generating mounting frustration and anger among the population. This internal pressure forms a key component of Baghdad’s strategy to pressure the KRG from within: forcing the KRG leadership to yield by inflaming public discontent.

The second prong of the strategy involves using hard power to directly target the revenue sources of the ruling KRG elite, who have previously remained insulated as their income from oil production and refined product sales continued unaffected. Within the last 24 hours, at least two oilfields have been struck by kamikaze drone attacks, causing damage and halting production. These attacks appear to be limited in scope and more of a message to put pressure on the elite rather than causing serious permanent damage. The Khurmala oilfield in south Erbil, operated by KAR Group and producing approximately 90,000 barrels per day, and the Sarhang oilfield in northeast Duhok, operated by NKH Energy with production of approximately 30,000 barrels per day, have both been targeted.

What’s particularly striking is that just hours after the attack on Sarsang, the Iraqi oil ministry signed a new development deal with the same HKN company to develop the Hamrin oilfield in Diyala, territory within the disputed areas. The U.S. Ambassador to Iraq attended the signing ceremony. Representing HKN was Matthew Zais, the company’s Vice President, who formerly served as Deputy Assistant Secretary at the U.S. Department of Energy and was until recently a vocal critic of Baghdad’s handling of the KRG oil file. The symbolism here is stark: Baghdad is actively courting Washington and using deals with U.S. firms to undercut the KRG’s last major card: American support.

This is a serious shift. The KRG’s long-standing strategy has relied on its relationship with the U.S. as a counterweight to Baghdad. But Baghdad is now moving to neutralize that advantage. Among U.S.-linked firms, HKN is especially significant: its president, Mark Rollins, is married to Brooke Rollins, currently U.S. Secretary of Agriculture under the Trump administration. The company also includes figures with deep ties to both the Trump-era foreign policy team and the U.S. military: former Army Colonel David Nabb, a former liaison to Kurdish forces, and Matthew Zais himself.

If the drone strikes on KRG oilfields are indeed being carried out by Iran-aligned Shiite militias—as seems likely—this would suggest the pressure campaign has the backing of Iraq’s entire ruling Shiite bloc, not just Al-Sudani. It also raises further questions about the U.S. position: while Washington is involved in mediating, it has not yet issued any threats of sanctions or meaningful consequences should Baghdad continue to sideline the KRG.

This silence may be telling. It suggests Washington could be willing to let the crisis weaken the KRG as part of a broader strategy: consolidate the Iraqi state under a pliable Prime Minister, then work with him to gradually dismantle the Shia militias and fold them under the Iraqi army. The underlying logic suggests that a weakened Prime Minister vis-à-vis the KRG would possess little power or leverage against Shia militias. If so, it would mean Masoud Barzani has made a major miscalculation. His rhetorical escalation in May was likely based on the assumption that the Israel–Iran war might spiral into a wider regional conflict, offering an opportunity to shift the balance of power. But instead, the U.S. may now see more utility in bolstering Baghdad’s hand, even at the KRG’s expense.