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Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)
Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)

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Kurdistan: A lot of oil, a lot of risk Add to ...

The Game of Risk The election next year will provide an indication of the country's immediate future, including its ambitious plans to boost oil production.

"We think the development is going to go much more slowly than most people believe," Mr. Priddy says.

The fragile Sunni-Shiite coalition stitched together by Mr. al-Maliki - a Shiite himself - has largely fallen apart, and several parties are now vying for power, representing either narrow sectarian interests or new versions of Mr. al-Maliki's coalition.

Tensions between Kurdish and Arab Iraqis remain high, notably around the issue of control in the oil-rich province of Kirkuk. The absence of a federal oil and gas law poses an additional concern.

The chairman of the Iraqi parliament's natural resources committee has warned that the oil contracts entered into by the current government might not be accepted by the government that will be formed after the election.

Washington-based Mr. Priddy points out that foreign investment still is very unpopular with the Iraqi public, and opponents of Messrs. al-Shahristani and al-Maliki will push those populist buttons to win power.

The government hopes that the commitment of billions of dollars in investment brings the promise of jobs for a population that has had little good economic news in the past 20 years.

Kurdish Roulette In Iraq's Kurdish region, a flock of mainly smaller players, led by Canadian-listed firms such as Heritage Oil Corp. and WesternZagros Resources Ltd., have staked their ground and are exploring.

Kurds have built a prosperous enclave in war-battered Iraq, and now maintain their own, semi-autonomous state within a state, largely free from the sectarian warfare that has bedevilled the country since the U.S.-led invasion of 2003.

In the Kurdish provinces, companies have been dealing directly with the regional government, which has been awarding exploration licences. Now, those firms find themselves in the middle of a battle for control of the industry between Baghdad and Erbil.

In Kurdistan, companies are "trying to enter Iraq through the window," says Oil Ministry spokesman Asim Jihad, conveying the image of a thief in the night. "They should come in through the front door. They should deal with the central government, not the KRG," the Kurdistan Regional Government.

They also find themselves not far from the emerging conflict between Kurdish and Arab Iraqis, and can't rule out the risk of physical violence.

Simon Hatfield, chief executive officer at Calgary-based WesternZagros, was among the first to begin exploration in Kurdistan, back in 2005, when the U.S.-led forces were still battling a major insurrection in the south. "If we had waited two or three years like other companies, we'd have had lots of competition," he says. Now, "it's like a California land rush. … We went north because it was less dangerous than the rest of Iraq. It felt like a different country."

His company has never had a terrorist incident, he says, yet it continues to employ heavy security. There are shifts of several guards around the drilling site and at the company office in Suleymania. When company executives visit, they travel in convoy and are accompanied by armed guards at all times.

"It's better to present a hard target," Mr. Hatfield explains, even if the risk seems low. "Terrorists will always go for the soft target."

When oil exports from the Kurdistan region started flowing on June 1, it looked as if the wrangling between Baghdad and Kurdistan was settled. The federal oil sales agency agreed to handle the exports, and the Kurds agreed to a federal revenue-sharing formula that, reportedly, gave the KRG 17 per cent of the revenue.

Two months after the export taps were turned on, Heritage Oil announced it had struck a $2.5-billion deal to take over Genel Energy, a Turkish oil player and among the very first to invest in the Kurdistan region.

The new Heritage would be among the region's biggest players with excellent access to prime oil fields.

It was, by all accounts, a huge vote of confidence in the region. But what no one had reckoned on was the determination of the federal government not to honour the KRG contracts.

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