The breakaway move into Kurdistan, the first by any of the oil majors operating in Iraq under 20-year production contract signed in 2009, could cost Exxon Mobil its stake in the giant West Qurna Phase One mega-oil field in southern Iraq.
The field contains an estimated 8.7 billion barrels of oil and is a vital component in the government's plans to quadruple oil production from the current 2.9 million barrels per day -- an increase of 1 million bpd over the pre-2003 U.S. invasion level -- by 2017.
That's one of the most important contracts in Iraq and the American move could signal a possible major shakeup in the country's all-important energy industry on which all hopes of national reconstruction are pinned.
Given the political intrigues endemic in Baghdad and Erbil, the Kurdish capital, the parameters and possible consequences of the Exxon Mobil-KRG deal remains unclear.
But there are clear political elements involved. The U.S. withdrawal is expected to exacerbate a long-running dispute between the central government and the independence-minded Kurds over oil rights.
The federal government claims sole authority over the energy industry anywhere in Iraq.
The KRG, guided in part by American advisers, has signed controversial deals with some 40 small oil companies, mainly U.S. and European wildcatters unable to bid on the major contracts, since 2006 as it seeks to build an oil industry independent of Baghdad.
The Kurds say their enclave could contain as much as 45 billion barrels. Iraq's overall reserves are pegged at 143.1 billion barrels.
The central government deems all oil contracts signed with the KRG, which runs the Kurdish enclave that spans three of Iraq's northern provinces, without Baghdad's approval to be illegal.
"The Kurdistan region has a lot of untapped oil and every IOC would sign deals if they got a green light to do so from Baghdad," one industry source commented.
An oil law to regulate the industry and revenue-sharing has been hung up in Iraq's fractious Parliament since 2007, intensifying Kurdish frustrations.
The Middle East Economic Digest reports that Kurdistan's reserves are beginning to attract international oil companies, or IOCs, "which are becoming disillusioned with prospects in the rest of Iraq."
However, MEED said no deals "would be ratified or made public until a formal deal is signed between the government in Baghdad and the KRG regarding new oil discoveries."
So it seemed odd to find that the whistle-blowing on the Exxon Mobil agreement came from Michael Howard, a top adviser to the KRG.
"The KRG has for the last few months been in discussions with a number of major oil companies," he said. "This resulted in the recent signing by Exxon Mobil of contracts to explore in six blocks."
Abdul Mahdy al-Aneedi, head of the Oil Ministry's contracts and licensing directorate, said Baghdad had been aware of the talks and had warned Exxon Mobil any deal with the KRG could mean "termination of the West Qurna contract."
Only a month ago, Iraqi Prime Minister Nouri al-Maliki's top energy adviser, Thamer Ghadhban, said Exxon Mobil, along with BP and Italy's Eni, would invest $100 billion to upgrade West Qurna and two other southern superfields, Rumaila and Zubair.
Production at these fields has increased to around 2 million bpd, most of Iraq's current total. Under the 2009 contracts, production there should hit 6.8 million bpd by 2017.
Exxon Mobil, like other majors, had to accept a take-it-or-leave-it Iraqi offer of a $2 per barrel payment to secure the crucial 2009 contracts.
That's one of the lowest rates on the world and Baghdad has made clear that won't change.
This has embittered most of the big companies like BP, Royal-Dutch Shell and Exxon Mobil.
Relations have been worsened by political in-fighting in Baghdad that has held up contracts and project work while the government presses for higher production.
U.S. companies had been expected to the big winners in Iraq after Saddam Hussein was toppled. But Americans were widely perceived by Iraqis as occupiers, and only one of the 11 fields up for auction went to an American major -- Exxon Mobil.