An oil exploration deal between U.S. oil giant Exxon Mobil and Iraq's autonomous Kurdish region is fueling political tensions in a country where a post-U.S.-troop withdrawal spike in violence and political turmoil is clouding the climate for foreign investments sorely needed by Iraq.
Baghdad's anger over the deal highlights the long-simmering power struggle between the Kurdish and central governments. The dispute is building momentum as Iraqi Premier Nouri al-Maliki faces criticism over his stewardship of a country where, years after the 2003 U.S.-led war to topple Saddam Hussein, development remains a distant dream for millions.
The deal "will certainly contribute to further complicating the relationship" between the Kurds and Baghdad, said Gala Riani, Middle East and North Africa Regional Manager at the London-based IHS Global Insight.
It "may also raise tensions in border areas which have already become more restive as a result of the withdrawal of the U.S. troops," he said.
While the Kurds have sought control over the oil within their northern territory, Baghdad insists the resource should overseen by the central government. About 30 percent of Iraq's 143.1 billion barrels of proven reserves of conventional crude sit in the Kurdish region.
The dispute has festered unresolved since the U.S.-led coalition ousted Saddam Hussein in 2003. Parliament has failed to signed off on a draft national oil law on sharing the resources since 2007, angering the Kurds and making foreign majors leery of investing. Baghdad's last two international oil licensing auctions drew limited interest by deep-pocketed firms like Exxon Mobil, Royal Dutch Shell and BP PLC.
Under the Kurdish deal, Exxon Mobil, would explore for crude in six patches in northern Iraq, including land claimed by both the Kurds and Arabs in northern Ninevah province.
More broadly, the issue of the disputed territory, which stretches from across the country from the Syrian border to the Iranian border, is one of Iraq's most nagging post-Saddam era problems. American forces for years acted as a buffer between the Kurds and Arabs in the area by building partnerships between Iraqi army forces and their Kurdish counterparts known as the peshmerga. But after the U.S. troops' withdrawal, officials warn violence could flare there.
Parliament speaker Osama al-Nujaifi, a Sunni Arab nationalist from Ninevah and an outspoken opponent to Kurdish land ambitions, called the granting of the exploration blocs an "unacceptable violation" of Ninevah's administrative boundaries and demanded it be annulled. Opposition to the Kurds' moves is one of the few things that unite Sunni Arabs and the Shiite parties that dominate the Baghdad government.
A day earlier, a Ninevah provincial delegation to Baghdad files an official complaint to the government, according to provincial councilman Abdul-Rahim al-Shimmari.
Baghdad and the Kurdish government have already nearly come to blows over oil fields in this disputed region. In 2008, a 24-hour standoff developed between their respective security forces over a section of an oil field in Kirkuk, an ethnically-mixed area the Kurds want to annex.
Baghad warns it could punish Exxon Mobil and that the company's existing contracts could be in jeopardy. But so far it has taken no punitive measures.
Many analysts doubt that it will, considering Baghdad's profound need for foreign investment.
Outside the Kurdish zone, Exxon Mobil and Shell are already developing one of Iraq's biggest oil fields, the 8.6 billion-barrel West Qurna Stage 1 field in southern Basra province. Exxon Mobil is also expected to lead a multibillion dollar project in Basra, a Shiite stronghold, that will help make available the water needed for oil development.
Baghdad's oil policy is not a "long-term sustainable program that would attract foreign capital into Iraq," said Fadel Gheit, chief economist with Oppenheimer & Co.
Although Iraq sits atop the world's fourth largest proven reserves of conventional crude, decades of sanctions, war, sabotage and negligence have battered the sector that generates about 95 percent of the government's foreign revenues. Iraq hopes to boost its output to 12 million barrels per day by 2017 from about 3 million a day now. Such a surge will only be possible with help from foreign majors.
Despite its oil resources, electricity remains spotty, at best, years after Saddam's ouster and the country faces chronic problems with unemployment and private sector growth largely because of daily violence and rampant corruption.
Western companies have so far been wary of significant investments in a country where violence has recently spiked, and where tensions are growing between Sunnis and Shiites.
During the last two international licensing rounds, Western majors expressed little appetite, and Baghdad signed contracts with a host of state-run companies from China, Angola, Algeria and others. Few of those companies are seen as having the capital or experience of the Exxons or Shells of the world.
Exxon Mobil has not commented on the deal since it was announced by the Kurds in mid-November. Officials from the company did not respond to requests for comment.
If the deal goes forward, it would be an enormous vote of confidence for the Kurds' oil policy and could open the door for other majors to jump in.
"This is a further step for the Kurds' autonomy in the federated Iraq," Theodore Karasik, an analyst at the Dubai-based Institute for Near East and Gulf Military Analysis said.
For the company, the deal's benefits are obvious. It allows Exxon Mobil to retain a share of the profits from the oil produced while the service contracts offered by Baghdad provide the firms with a flat fee per barrel of oil produced for their services.
The Kurds win the coup of netting a major company. They have unilaterally signed scores of oil deals, mostly with mid-sized companies. Baghdad considers all of these deals illegal and has blacklisted the companies involved.
The Kurds and Exxon Mobil appear to be betting the Baghdad government will be forced to acquiesce.
They "are now in a position where they could essentially force Baghdad to accept the status quo and the two separate regulatory systems that exist in the country," said Riani.