NORTHEAST of Baghdad, a steady stream of foreign investors is already heading for Arbil to pay tribute at the headquarters of Kurdistan's regional government (KRG).

They are attracted by the promise of oil in a region relatively free of violence and the KRG is obliging, awarding licences to several exploration groups, including Western Oil Sands, a Canadian company, and DNO, of Norway.

Last month, the Norwegians claimed the discovery of 100 million barrels after testing their first well in an area close to the border with Turkey.

The news created a storm in Baghdad, where resentment is growing at the Kurdish authority's decision to award licences independently of the Oil Ministry in the Iraqi capital. Hussein al-Shahristani, the Oil Minister, insisted that only his ministry could hand exploration rights, while Sunni opponents of independent-minded Kurds called for amendments to Iraq's new federal constitution, which gives extensive but sometimes contradictory rights to both regional and federal authorities over the nation's hydrocarbons.

The KRG rejected the Baghdad interpretation and insisted that regional governments had jurisdiction over undeveloped oilfields.

The DNO discovery has encouraged many who believe that the geological trend that made the massive and ageing Kirkuk oifield extends to the north and east. It would suggest that Iraq's oil reserves may be much greater than current estimates and it would, in turn, give a huge economic boost to the Kurdish region.

That creates a political challenge for the KRG and a huge headache for the central Government in Baghdad. Few doubt that the ultimate goal of the Kurds is independence from their Sunni and Shia countrymen, but for the time being the KRG is happy to engage in the federal process and take advantage of American financial aid. As the prospect of oil revenues draws nearer, calls for greater independence may increase.

By Carl Mortished
http://business.timesonline.co.uk