Baghdad is flexing its muscles as it threatens to enforce a blacklisting policy against foreign companies that sign oil contracts with the regional government in Iraqi Kurdistan.
A deal struck by ExxonMobil to explore for oil in the semi-autonomous region of northern Iraq has inflamed relations between Erbil and Baghdad, and put pressure on Baghdad to cancel ExxonMobil's multibillion-dollar contract in the south or face the prospect of other oil companies entering Kurdistan.
"Exxon has violated the ministry directions and instructions concerning the companies working in Kurdistan," said Abdul Mahdy Al Ameedi, the director of the Iraqi oil ministry's contracts and licensing directorate.
"It's a violation of the contract and the law. As a consequence, the oil ministry will take steps to end the contract. But this operation will need arrangements."
Royal Dutch Shell also ended talks for exploration blocks in Kurdistan, although its withdrawal came before Baghdad began making public threats to punish ExxonMobil, said a person with knowledge of the matter who wished to remain anonymous. Shell expects to close a US$17 billion (Dh62.44bn) gas deal with Baghdad soon, and signing a contract to explore in Kurdistan could have put that deal at risk. It also holds a stake in the 8.7 billion-barrel West Qurnafield alongside the main operator, ExxonMobil.
Until recently, Kurdistan had remained unofficially off-limits to the oil majors because of Baghdad's policy of blacklisting any company that enters into what it sees as unconstitutional contracts with the government in Erbil. In September, Baghdad disqualified Hess, a US producer, from bidding in its first auction for unexplored fields because the company had signed a production-sharing deal with the Kurdistan Regional Government.
Baghdad's long-running dispute with Erbil over whether the Kurdistan contracts are legitimate has spread to revenue-sharing for oil production, which has constrained operations in promising Kurdish oilfields said to be holding reserves of as much as 45 billion barrels.
But since news of the ExxonMobil deal broke this month, Kurdistan has been vocal about asserting control over energy assets in the north and is understood still to be in talks with Chevron, a major that does not hold contracts in the south.
If Baghdad opts to take away ExxonMobil's contract in West Qurna, ExxonMobil could bring its case forward for international arbitration. But enforcing any arbitration award could be tricky because Iraq has not signed up to the international convention that protects the rights of foreign partners.
"The political realities may be more important than the language of the contract," said an oil and gas lawyer who asked not to be identified. "Exxon is a very, very intelligent company … so they would have done all their homework to make sure that they're doing the right thing."
ExxonMobil has yet to comment publicly.