Iraq’s second-largest oil company has reduced its daily production for the first time since 2003, while the government says it is in control of the country’s largest refinery that was taken over by militants.

The state-run Northern Oil Company said on Friday it was cutting production from 650,000 to 300,000 barrels per day – the drop coming after it stopped supplying the Baji refinery and a halt to northern exports.

The Baji refinery, about 200 kilometres north of the capital Baghdad, accounts for almost a third of Iraq’s refining capacity.

While the government said it had repulsed an offensive by Sunni-led insurgents in Baji, sources in the area said militants of the Islamic State in Iraq and the Levant (ISIL) are in control of areas outside the refinery.

Northern Oil, based in Kirkuk, said oil now produced will be used to extract fuel and liquefied gas used for cooking, company sources told DPA.

Clashes between the military and ISIL militants were ongoing on the outskirts of al-Alam, in Salah el-Din province, blocking the main entrances to the town and causing food shortages for residents.

Al-Qaeda splinter group ISIL, also known as ISIS, seized the northern city of Mosul in a blitz last week and then moved on to capture a string of towns stretching south towards Baghdad.

More than two million Shi’ites volunteered across Iraq to take arms and help the army defeat the jihadist group.

Prime Minister Nouri al-Maliki has ordered a monthly income of 500,000 dinars (about $A483) for each volunteer, in addition to 125,000 dinars in food allowance, state media reported.

Al-Maliki’s announcement came after a call by Iraq’s influential Shi’ite cleric, Ali al-Sistani, to his followers to help stem advances by Sunni militants.

He said on Friday that Sunni jihadists who have overrun swathes of territory must be expelled from the country before it is too late.

If the Islamic State of Iraq and the Levant is not “fought and expelled from Iraq, everyone will regret it tomorrow, when regret has no meaning”, his spokesman announced on his behalf.

US President Barack Obama has said he is prepared to send up to 300 military advisers to Iraq to help the military fend off the militant Islamist threat.

They will arrive “very soon” from their bases in the region to focus first on helping Iraqi troops secure Baghdad.

The prospect of the jihadist ISIL and other extremist groups gaining a base of operations across Iraq and Syria poses an additional threat to US national security.

US officials blame al-Maliki for failing to govern fairly in the interests of minority Sunni and Kurds and various tribes, thus fuelling support for ISIL.

In Basel, Switzerland, UN Secretary General Ban Ki-moon said the US would not need the approval of the UN Security Council for military operations in Iraq if it acts on a request by the Baghdad government.

The US “will have to decide whether they intervene in the conflict with ground troops or other military means, and whether they will co-ordinate such a course of action with the regional power of Iran”, Ban told the Swiss daily, Neue Zuercher Zeitung.

He added that “if Iraq asks both countries to take such a step, it would surely not need a decision by the UN Security Council”.

He lauded Iraqi Prime Minister Nuri al-Maliki for having recently met Sunni leaders, but stressed that the premier would need the help of regional powers to lower sectarian tensions.