By Jim Loney
BAGHDAD, Jan 1 (Reuters) - Iraq's political stability took a sharp blow in December with the departure of the last U.S. troops as the Shi'ite-led government of Prime Minister Nuri al-Maliki sought the arrest of a Sunni vice president, inflaming sectarian tensions.
The worst political crisis in a year threatens the OPEC oil producer's fragile coalition government as Iraq continues its battle against a weakened but tenacious Sunni insurgency without the presence of American troops for the first time since the 2003 invasion that ousted Sunni dictator Saddam Hussein.
The move to arrest Vice President Tareq al-Hashemi, coupled with Maliki's request to parliament to fire Deputy Prime Minister Saleh al-Mutlaq, another prominent Sunni, served notice Maliki could push for a majority government that excludes the Sunni-backed Iraqiya bloc, the big winner in the 2010 elections.
The inclusion of Iraqiya in the coalition government was considered vital to preventing a slide back into sectarian conflict, which killed tens of thousands of people in 2006-7.
Hashemi fled to the semi-autonomous northern Kurdish region to avoid arrest, further raising tensions between the Kurds and the central government in Baghdad, which already have longstanding disputes over oil, land and constitutional rights.
A decision by Exxon Mobil late last year to venture into the Kurdish region had already set up a confrontation between the world's largest publicly traded oil company and Baghdad, which threatened to cancel Exxon's southern oilfield deal.
The political crisis and the Exxon pact could push disputes between Baghdad and the Kurds to new heights, increasing anxiety in Iraq's disputed territories, already a potential faultline for conflict without U.S. troops to act as a buffer.
While violence has fallen since the worst days of sectarian conflict, bombings, assassinations and other attacks by Sunni Islamist insurgents and Shi'ite militias still occur daily and scores of people are killed every month.
The now-completed U.S. military withdrawal - nearly nine years after the invasion that toppled Saddam - could allow a worsening of sectarian differences and meddling by neighbours, including Shi'ite Iran and Sunni Saudi Arabia.
A return to sectarian bloodletting could embarrass U.S. President Barack Obama as he campaigns for re-election.
Multibillion-dollar deals Baghdad signed with energy majors have the potential to quadruple oil output capacity in six years and power Iraq into oil's big league, but they are moving ahead only slowly.
Increased production would give Iraq the money it needs to rebuild, but everything depends on whether the OPEC member can secure oilfields, refineries and other vital infrastructure.
Iraq is isolated from world markets. Only a few dozen firms are listed on the stock exchange. Iraq's dinar is thinly traded and the exchange rate is effectively determined by the central bank in its dollar auctions.
Below are some of the major risks facing Iraq.
The new crisis erupted on Dec. 18, the very day the last U.S. troops were heading out of Iraq. The Shi'ite-led government sought the arrest of Hashemi, a prominent Sunni leader, on charges of running death squads.
Maliki, accused by critics of having autocratic tendencies, also went after his Sunni deputy, Mutlaq, asking parliament to replace him.
Sunni-backed Iraqiya, led by former Prime Minister Iyad Allawi, a secular Shi'ite, launched a parliamentary boycott. Maliki, never comfortable with the U.S.-supported coalition that includes Shi'ite, Sunni and Kurdish factions, said Sunnis could be shut out of government.
Sunni Muslims had held the reins in Iraq for more than two decades under Saddam, and many say they have felt marginalised politically since the 2003 U.S.-led invasion that ousted the dictator, allowing majority Shi'ites to take power.
Without U.S. troops on hand, analysts say Maliki seems intent on provoking Iraqiya and consolidating his control over Iraq, which has the world's fourth largest oil reserves.
In a harshly worded editorial published in the New York Times last week, Iraqiya leaders including Allawi said Iraq was headed toward a "sectarian autocracy that carries with it the threat of devastating civil war."
WHAT TO WATCH:
- Kurdish efforts to mediate the dispute
- Further attempts by Maliki to isolate Iraqiya
THE U.S. PULLOUT
The last U.S. troops, but for a small contingent attached to the U.S. embassy, left Iraq on Dec. 18, putting responsibility for security squarely in the hands of an Iraqi army and police force still being rebuilt after a devastating defeat in 2003.
The Iraq-U.S. security pact agreed by then-President George W. Bush in 2008 lapsed on Saturday.
Maliki has said his army and police can handle internal security. But military commanders say Iraq's defence against external threats is weak and they still need U.S. help, particularly with air force and naval training.
Iraq has signed a deal to buy 18 F-16 warplanes in a move that will further strengthen military ties with Washington but the jets will not be delivered for years.
Baghdad and Washington have yet to complete any new defence agreements but analysts say it is likely the U.S. military will step in to protect Iraq's vulnerable airspace from incursions.
WHAT TO WATCH:
- A new security agreement between Baghdad and Washington.
- Signs of conflict along ethnic, sectarian faultlines
Tension between Arabs and minority Kurds, who have enjoyed virtual autonomy in their northern enclave for 20 years, is festering. U.S. military officials have long considered the northern disputed territories a potential flashpoint for future conflict, particularly now that the American troops are gone.
Kurds hope to reclaim areas they deem historically Kurdish.
While Kurdish leaders celebrated the announcement in November of a new contract for six exploration blocks with Exxon Mobil, the first major to move into their region, Baghdad fumed.
The central government claims rights over Iraqi oil reserves and deems deals between foreign oil companies and the Kurdish government illegal. It threatened to void Exxon's contract to develop the rich West Qurna Phase One oilfield in the south.
Baghdad and Arbil have been at odds for years over control of Kurdish oil, but the Kurds are key allies of Maliki in his frail coalition government.
WHAT TO WATCH:
- Any move to punish Exxon for its Kurdish deal
- Clashes between Kurdish peshmerga and Iraqi troops
- Passage of oil legislation, or a protracted fight
A SURGE IN VIOLENCE
Despite improvements, Iraq remains vulnerable to Sunni insurgents and Shi'ite militias. More than 2,600 civilians, soldiers and police died in violence last year, according to government figures.
Political feuds, Sunni discontent or an attack on a holy site could rekindle violence.
Attacks on oil facilities could push up global oil prices. Recent attacks on southern oil facilities showed even areas considered safer can still be vulnerable.
WHAT TO WATCH:
- Attacks on oil facilities or foreign oil workers
- Major attacks in Baghdad testing local forces (Editing by Peter Graff)