The Kurdistan Regional Government (KRG) said Baghdad had agreed to a $500 million payment in exchange for the transfer of 150,000 barrels of Kurdish oil per day to the federal government.
The deal was reached at a meeting in the Kurdish capital Arbil between Iraqi Oil Minister Adel Abdel Mahdi, Kurdish Prime Minister Nechervan Barzani and his deputy, Qubad Talabani.
"As a first step it was agreed that the federal government will transfer the amount of $500 million to the KRG," in return for which the northern region "will put 150,000 bpd at their disposal," the statement said.
Kurdistan has been independently selling oil via Turkey, sparking the ire of the central government and taking a fresh step towards further autonomy.
"Nechervan Barzani will then head a delegation due to arrive in Baghdad in the coming days to reach a comprehensive, fair and constitutional solution to all outstanding differences between the federal government and the KRG," the statement added.
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The timeframe of the deal is not clear but the definitive agreement to be sealed in Baghdad is expected to provide for further payments from the federal government.
Talabani, writing on Twitter, said "today's important agreement between the KRG and Baghdad is a first step towards a lasting agreement on revenue sharing and oil exports."
The upfront payment will help pay the salaries of Kurdish civil servants, as Baghdad is constitutionally obliged to do, and ease budget pressures on the region.
The deal is one of the most significant achievements of the new Iraqi government of Prime Minister Haidar al-Abadi.
The dispute has lasted almost a year and had led to a steep deterioration of relations between the federal government and the secessionist Kurdish north.
A resolution of the bitter budget feud is seen as an essential step in improving cooperation between Baghdad and Arbil in their common fight against the Islamic State jihadist group.