Under Iraq’s 2005 constitution — intended to chart the country’s new path as a democratic state after the 2003 US-led invasion — Baghdad and the Kurdish region are supposed to co-ordinate oil and gas production and exports.
The region is also entitled to a share of revenue based on its population.
But vague language in the constitutional articles has led to an increasingly bitter row over oil and gas rights. This led Baghdad to reduce the region’s share of oil revenue to 12.67 per cent in 2018, from 17 per cent previously.
The rival governments are now seeing their worst crisis since March 2014, when former prime minister Nouri Al Maliki cut off the region’s oil revenue over Kurdish plans to increase independent exports.
The revenue were later restored, only to be cut or delayed for months on end, in part because of the dispute and in part due to crashing oil prices between 2014 and 2018.
In February, the federal supreme court ordered the semi-autonomous Kurdish region to hand over oil extracted from its territories to the federal authorities.
Then earlier this month, a commercial court in Baghdad annulled contracts between the Kurds and foreign firms, after the Iraq's Ministry of Oil filed a judicial complaint.
Authorities in the semi-autonomous Kurdish region's capital Erbil have accused Baghdad of heaping “unjust pressure” on them and announced their own legal action.
A 2007 Kurdish oil and gas law, approved by the Parliament in Erbil, says the regional government is entitled to “formulate the general principles of petroleum policy” and “approve petroleum contracts”.
Baghdad has long maintained that the contract type chosen by the Kurdish regional government is not compatible with the country’s constitution.
The supreme court ruling in February said the 2007 law adopted by Erbil was unconstitutional.
Iraq exports an average of 3.3 million barrels of crude oil per day, while production in the semi-autonomous Kurdish region amounts to just over 450,000 bpd.
But analysts say politics play a major role in the dispute in Iraq. Political figures have failed to reach agreement on choosing a president and a prime minister since October elections.
“When it comes to oil, each side uses their respective powers as carrots and sticks depending on the political atmosphere of the day,” said Bilal Wahab of The Washington Institute for Near East Policy think tank.
“At times when there was political accord, the courts were rather quiet. When there was political discord, however, the reverse was true,” he told AFP.
The nullification of oil contracts between the Kurds and four international oil companies from Canada, Britain, Norway and the US at the start of July has inflamed the row.
“For Baghdad to be chasing IOCs out of Iraqi Kurdistan does not serve to show Iraq as a major producer welcoming of foreign investment,” said Yesar Al Maleki, an analyst at the Middle East Economic Survey research and news outlet.
In a fightback, the Kurdish regional authorities in June initiated judicial proceedings against the federal government.
One lawsuit targets Oil Minister Ihsan Ismail, accused by the Kurds of trying to “intimidate” foreign firms operating in the semi-autonomous Kurdish region.
The regional government has accused Baghdad of taking “illegal” and “politically motivated” actions.
For Mr Wahab, Kurdish and federal government officials fail to appreciate “how much they are damaging the overall reputation of Iraq's energy industry”.
“Questioning the sanctity of contracts … adds legal risk to a slew of other regulatory and governance risks that ail the Iraqi energy industry,” he said.
The dispute “repels much-needed foreign investment”, Mr Wahab said.
Despite the legal action, the semi-autonomous Kurdish region says it is open to a negotiated solution.
The Erbil government is setting up two companies specialised in oil exploration and marketing that would co-ordinate with Baghdad, an official said.
Baghdad's Ministry of Oil, meanwhile, marked a small victory after oil giants Baker Hughes, Halliburton and Schlumberger committed not to initiate new projects in the semi-autonomous Kurdish region.
The ministry says the companies are also working to “liquidate and close” existing contracts.
In recent weeks, tensions have risen further after a series of unclaimed rocket attacks targeting oil and gas installations in the semi-autonomous Kurdish region.
Experts say these aim to put pressure on the Kurdistan Democratic Party, the largest in the semi-autonomous region, which has allied to nationalist Shiite cleric and politician Moqtada Al Sadr, who has now withdrawn his MPs from government in Baghdad.
“The timeline of events evidently shows that this whole crisis started because the KDP took the side of the Sadrist movement … opposing the Iran-backed Shiite Coordination Framework,” Mr Al Maleki said.
He expects a compromise will be reached to resolve the oil dispute because “Iraq is a country of compromise”.
“Until then, the supreme court ruling will hang like the sword of Damocles over the Kurdish regional government,” Mr Al Maleki said.