The move by the Kurdish Regional Government in its semiautonomous enclave in northeastern Iraq, which contains an estimated 45 billion barrels of oil, is fraught with political risk and may well mark a defining moment in post-Saddam Hussein Iraq.
For some time, the KRG has been challenging Baghdad by luring Big Oil to the Kurdish zone, which has proven reserves of 110 trillion cubic feet of natural gas and possibly another 150 tcf.
Iraq sits on oil reserves of 143.1 billion barrels along with gas reserves of 112 tcf.
The landlocked Kurdish enclave borders Turkey, which seeks to establish itself as the key energy hub between East and West and has offered the KRG to build pipelines to carry its oil and gas to the Mediterranean.
That would allow the Kurds to bypass the state-owned network controlled by Baghdad.
That's ominous enough for the government of Prime Minister Nouri al-Maliki but, additionally, establishing their own export routes would give the Kurds the basis for an economy not dependent on Baghdad and constitute a giant step toward establishing an independent state.
That would have immense ramifications in the region where there are some 20 million Kurds divided between Iraq, Syria, Iran and Turkey.
Like Baghdad, Damascus, Tehran and Ankara are diametrically opposed to Kurdish statehood.
But, with Turkey's Kurds stepping up their three-decade-old separatist campaign and Syria facing possible disintegration in a civil war, events in Iraqi Kurdistan could resonate deeply.
For instance, most of Syria's oil production lies in its Kurdish region along the border with Iraq.
The unification of these two Kurdish enclaves would dramatically alter the region's geopolitical landscape.
An independent Kurdish state in Iraq would mean a reduction in Baghdad's oil exports, a major setback for Maliki's ambitious plans to boost production to 10 million-12 million barrels per day to challenge Saudi Arabia as the world's leading producer.
Iraq's Kurds produce around 140,000 bpd but plan to boost that 200,000 bpd by the end of the year and possibly 1 million bpd by 2015. This is largely due to the KRG's success in luring major international oil companies like Exxon Mobil and Chevron of the United States, Gazprom of Russia and Total of France, along with about 40 smaller foreign outfits over the last few years.
This has incensed Maliki's government since these majors all had 20-year production contracts with Baghdad to develop megafields in southern Iraq.
These contracts, awarded since 2009, give the companies fixed-rate returns on what they produce. The KRG offers production-sharing deals that are potentially far more lucrative.
So far, Baghdad's been unable to halt the drift of companies to the Kurdish zone, led by Exxon Mobil which signed up in October 2011. Maliki can't take legal action against them without risking serious damage to Baghdad's energy strategy, on which Iraq's reconstruction depends.
The KRG cut off its flow of oil into the state system in April, citing Baghdad's failure to pay foreign companies operating in the enclave.
Kurdistan began selling its oil on the international market in early October, challenging Baghdad's assertion that only central government can authorize such action. Sales valued at more than $10 million were made through two of the world's leading trading houses, Trafigura and Vitol. The oil had been trucked through Turkey.
It remains to be seen whether this will continue.
"It is important to keep in mind that when Iraq announced in August that its production had reached its highest level in 30 years, this was in no small part because the KRG had resumed exports from its fields, temporarily," observed energy analyst Jen Alic.
The Kurds resumed pumping oil into Iraq's state grid a few weeks ago but only after Baghdad paid a first tranche of payments for oil arrears owed to foreign companies in Kurdistan. That totaled $558.9 million.
The Kurds will only continue the flow if Baghdad comes through with the second tranche, about half the first amount.
"The power showdown is certainly not over," Alic cautioned.
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