On the surface, Iraqi Kurdistan is every oil explorer's dream.
Nearly untouched until recently, relatively secure and ruled by a local government eager for foreign partners, the semi-autonomous region has become a target for fresh investment. Among the most recent investors to place bets are the UAE company RAK Petroleum and Tony Hayward, the former BP chief executive who called Kurdistan "one of the last great oil and gas frontiers".
But underlying the promise of the region's estimated 40 billion barrels of reserves is a long-running dispute between the regional government in Kurdistan and the federal seat of power. At the heart of the disagreement is who gets to decide the future of Kurdistan's oil riches - Erbil or Baghdad.
"Constitutionally, Iraq is a federal state. Practically speaking, it's not," said Luay Al Khateeb, the executive director of Iraq Energy, an organisation that promotes the development of the oil industry. "This is what's creating rather challenging issues between federalists and centralists, leaving them to futile debates with no outcome."
The volleys began in 2009, when Kurdistan halted oil exports because Baghdad deemed the contracts between it and foreign producers illegal. This year, Erbil resumed exports and some companies began receiving their first payments from Baghdad for exports. But this week, after the oil flow fell from 160,000 to 50,000 barrels per day (bpd), each side offered a different explanation.
Abdul-Kareem Luaibi, the Iraqi oil minister, told Reuters that the stoppage would hurt the national economy, while the government in Erbil blamed it on "serious technical difficulties".
Throughout the dispute, US$10 billion (Dh36.72bn) in foreign investment has come to Kurdistan, according to the regional government. Traditionally the domain of small, risk-taking producers, Kurdistan is seeing interest grow from larger companies such as Marathon, Repsol and Hess.
OMV, the Austrian producer in which Abu Dhabi holds a one fifth stake, drills in three fields there and has stakes in two more.
RAK Petroleum finalised a deal this month to take on a larger stake in DNO International, the Norwegian producer that was among the first to strike oil in Kurdistan. And last week, Vallares, the energy investment vehicle backed by Mr Hayward and Nat Rothschild, a British-born financier, announced that its first target would be Genel Enerji, a Turkish producer in the region.
Those companies - along with Heritage Oil, Gulf Keystone and other producers - have chosen to throw in their lot with Erbil, knowing that they risk being denied access to fields in the south because the oil ministry in Baghdad has said such companies would be blacklisted from field auctions. The ministry is offering concessions with an estimated 10 billion barrels in reserves to more than 40 bidders in what it says will be its last auction for some time.
For such companies, the risk of being denied entry to southern Iraq is outweighed by a more open investment climate in oil and other sectors, said Mr Al Khateeb.
"In terms of local regulations, the way they legislate companies, the level of bureaucracy, attractiveness - it's all different from Baghdad," he said from London. "It's less bureaucratic and more safe. Investment incentives are more attractive." They are waiting for a national oil law to clarify the relationship between Baghdad and Erbil. A draft submitted to the parliament last month drew ire from Kurdistan, which said it had not been consulted on the document.
"The country politically is not settled yet," said Hazim Sultan, the former director general of the oil ministry's reservoirs and fields development directorate who now runs a consultancy in Amman. "Unless an oil law is finally approved by the parliament, things will continue to be volatile." Amid the disagreements, oil companies are taking a wait-and-see approach.
"It makes sense for all parties for the issues to be resolved," Bijan Mossavar-Rahmani, the chairman of RAK Petroleum and DNO International, said in July.
"The trick is to have staying power, to behave in a responsible and transparent way, and at the end I think this will be a very, very successful foray into Kurdistan."
