By Ahmed Rasheed and Serena Chaudhry
BAGHDAD (Reuters) - A dispute between Iraq's central government and its autonomous Kurdish region over oil exports has worsened in recent days, exposing a dysfunctional relationship that is holding back a long awaited post-war investment boom.
Iraq's Kurdistan region announced on Sunday it was halting its exports of about 50,000 barrels of oil per day because firms operating there were not getting paid by the central government.
The central government responded on Monday by accusing the Kurds of smuggling their oil abroad, mainly to Iran, and wrecking the central budget by denying it revenue.
The amounts involved are slight so far - Kurdish oil now accounts for barely 2 percent of Iraq's 2.3 million barrels of exports per day.
But the dispute over who has the right to exploit Kurdish oil in the future could effect far bigger deals involving billions of dollars in investment from companies like Exxon Mobil - and the political stability of Iraq itself.
The Arab-led central government has long-running disputes with the Kurds over oil rights, political autonomy and contested territories. Those quarrels have intensified since the last U.S. troops withdrew last year, and now threaten to disrupt investment that Iraq hopes can more than double its oil output in the next few years, turning it into an energy superpower.
The latest exchange erupted on Sunday after Kurdistan said it was halting its oil shipments in protest against what it said was the central government's failure to make payments to oil companies working there.
"There is an agreement. You take and pay. They want to take but not to pay. How can that be?" Kurdistan's Energy Minister Ashti Hawrami told Reuters in a telephone interview on Monday.
Iraq's deputy prime minister for energy, Hussain al-Shahristani, said the loss of Kurdish exports "will cause a budget deficit, and the government should act to preserve Iraqi resources".
"Most of the crude produced in the region is being smuggled though the borders, and mainly to Iran," he told reporters.
Hawrami dismissed smuggling claims.
REGION FLOURISHING
The Kurdish region has flourished as the only part of Iraq spared the extreme violence since the U.S.-led invasion of 2003. It runs its own internal affairs with its own security services, receiving 17 percent of Iraq's total oil revenues from Baghdad.
In return for its share of Iraqi income, the Kurds are required to sell any oil exports through Baghdad. But Iraq's lawmakers have been deadlocked for years over an oil law that would explain how that would work.
Kurdistan claims the right to negotiate its own contracts with foreign oil firms, and has offered production-sharing deals that many firms consider more attractive than the terms offered by Baghdad.
But the central government considers such deals illegal, and long barred firms that operate in the Kurdish region from legally exporting their oil, forcing them to sell oil on the domestic market at a low price.
An interim deal reached last year allowed Kurdish exports of 175,000 barrels per day with Baghdad collecting the proceeds and reimbursing the foreign firms their costs. But the two sides have disputed the amount of oil that was being sold and the amount of payments due to the firms.
Sunday's export halt appears to scupper that deal.
Shares of Norway's DNO, which is active in Kurdistan, dropped 1 percent on Monday.
EXXON LETTERS
Baghdad and the Kurds also traded claims on Monday over Exxon, the only oil major to sign oil deals with both sides.
The central government was furious last year when Exxon announced an exploration agreement with the Kurds, and has threatened to bar it from future deals and even reconsider its role in a huge project in southern Iraq. It says Exxon has frozen its work in the Kurdish region.
Iraq's oil minister Abdul Kareem Luaibi told reporters on Monday Exxon had written two letters since March 5 confirming it had halted work in the Kurdish region. But Kurdish Energy Minister Hawrami told Reuters Exxon was still operating there.
"Exxon Mobil are maintaining their contract in Kurdistan, nothing has changed,...Exxon is active," Hawrami said.
With violence easing from its long war, Iraq wants to ramp up oil production. In March it reached crude output of 3 million bpd, its highest level since before the 2003 invasion that toppled Sunni dictator Saddam Hussein.
Major companies have signed service contracts with the central government to develop vast oilfields in the south.
But Kurdistan's profit-sharing contracts are tempting for firms that complain of red tape and infrastructure bottlenecks in the south. In addition to Exxon, France's Total has discussed Kurdish deals.
The oil dispute feeds into growing political discord between Baghdad and the Kurdish capital of Arbil, where Kurdish President Masoud Barzani has steadily stepped up criticism Iraq's Prime Minister Nuri al-Maliki, a Shi'ite Arab.
Barzani's Kurds are part of the power-sharing coalition with Shi'ite and Sunni Arabs that kept Maliki in office in Baghdad after an inconclusive election in 2009.
Since U.S. troops left in December, the coalition faced a crisis when Maliki's government sought the arrest of the top Sunni politician, vice president Tareq al-Hashemi, accused of running death squads.
Hashemi fled to the Kurdish region, where Barzani refused to send him back to Baghdad to stand trial. Hashemi left the Kurdish region on Sunday for Qatar, prompting Baghdad to demand that the Gulf country extradite him to face trial.
In a speech last month, Barzani accused Maliki of consolidating power under his personal control, and threatened to consult the Kurdish public over ties with Baghdad.
(Writing by Patrick Markey; Editing by Peter Graff)
