"The dispute highlights a power struggle over oil between Erbil, the Kurdish capital, and Baghdad, which wants oil companied to focus on large but financially less attractive southern oilfields so it can meet national crude production targets," the Financial Times reported.
Kurdistan has signed production contracts with more than 40 companies in recent years, mostly small companies and wildcatters. But deals with major outfits like Exxon Mobil, who led the way into Kurdistan in October 2011, and more recently Chevron, Total of France and Russia's Gazprom, have dramatically changed the equation.
They've incensed the coalition government of Prime Minister Nouri al-Maliki, for whom quadrupling Iraq's national oil production to 10 million-12 million barrels per day in the next few years is paramount.
The Financial Times quoted Toby Dodge, an Iraq specialist at the London School of Economics, as saying, "With the big majors going north and getting much better terms, Exxon has to be punished -- otherwise Iraqi oil policy falls to pieces.
"What can the Iraqi government do that doesn't scare the majors off? That's what they're wrestling with," observed Dodge, who has advised oil companies on working in Iraq.
The deals with the Kurdistan Regional Government in Erbil have became a serious threat to Baghdad not just because the companies defied the central government, but because it fears this will encourage the Kurds' long-cherished ambition of an independent homeland with oil and gas as its economic base.
That could seriously impede Baghdad's energy strategy, on which postwar reconstruction hinges, while bolstering the aspirations of other regions that have been talking of more autonomy.
These include most notably the Shiite-dominated south where two-thirds of Iraq's known oil reserves of 143.1 billion barrels are located.
Maliki, aghast at the prospect of seeing Baghdad-controlled oil reserves reduced, has found himself with few viable options in blocking the shift toward Kurdistan by major oil companies he needs to develop Iraq's megafields and generate the revenue for reconstruction.
Kurdistan sits on 45 billion barrels of oil and that figure is likely to swell as exploration expands.
The KRG at present can produce some 150,000 bpd but expects to boost that 200,000 bpd by October, with 1 million bpd a possibility.
At present, that's pumped into the state pipeline network, with twin export lines running from the northern Kirkuk oilfields -- which the Kurds claim is historically theirs: another dispute with Baghdad -- to Turkey's Ceyhan terminal on the Mediterranean.
But already the KRG is trucking modest amounts to northern neighbor Turkey, which despite a history of conflict with the Kurds is becoming the KRG's most important ally.
Turkey, which has ambitions of becoming the regional energy hub, has offered to build a 1.5 million bpd pipeline from landlocked Kurdistan to Ceyhan that will bypass Iraq's export grid.
The regional politics remain extremely sensitive on this. Turkey, which has problems with its own secessionist Kurds, is hesitant about fostering notions of independence among Iraq's Kurds, but the idea has deepened Baghdad's concerns.
So for the moment, Nouri still has a few cards to play. He cannot take harsh retaliatory action against Exxon Mobil and the others because that would scare off future investment that's still badly needed.
At the same time, while the KRG's terms are more liberal and potentially more lucrative than the restrictive, standard flat-fee production deals that Baghdad insists upon, Exxon Mobil and others cannot expect the same scale of production in Kurdistan, even if the pipelines to Turkey are ever built.
The Kurds, not yet prepared to make a final break with Baghdad, have an Achilles heel: the alliance between their two main factions, the Kurdistan Democratic Party and the Patriotic Union of Kurdistan.
They have a long history of rivalry that has frequently erupted into open warfare over the last few decades, even when they were supposedly fighting Saddam Hussein's repressive regime.
Maliki may seek to exploit this tribal curse as the two parties renegotiate a 2005 power-sharing agreement.
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