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Iraq In 'Serious Crisis,' Says Kurdish Leader; Oil Ambitions Complicate Ethnic Tensions

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War-torn Iraq, with the second-largest oil reserves in the world, is trying to take bold steps to develop them. But it's hobbled by dissent and ethnic strife, as well as a loose constitution that gives rise to conflict between local and national governments.

Development, if it comes at all, looks likely to advance at a very slow pace.

Prominent companies including Royal Dutch Shell (NYSE: RDS.A), as well as Exxon Mobil, ( XOM ), the biggest U.S. oil major, are trying to tap into Iraqi oil, most notably in Kurdistan, the semi-autonomous region to the north.

The problem: they don't know who deal with. Both Kurdish regional and Iraqi officials claim ownership of the roughly 20 percent of Iraq's oil reserves near Kirkuk.

Iraq has roughly 115 billion barrels of oil in proven reserves -- and just recently produced more than 3 million barrels of oil a day, for the first time in several decades. The Kurdish Regional Government, based in northern Kirkuk, has 2 billion barrels, the U.S. Energy Information Administration estimates.

Former Iraqi dictator Saddam Hussein oppressed the Kurds, a non-Arab but Muslim people who are also considerable minorities in Syria, Turkey and Iran and have long sought an independent Kurdistan.

Iraq, with a land mass slightly more than twice the size of Idaho, is home to peoples who don't like each other. Between Kurds and Arabs, tensions run deep. An estimated 4 million Kurds live in Iraq out of a total population of roughly 32 million.

Relations between Sunni and Shia groups, both Muslims, throughout the country have deteriorated since the country's Prime Minister, Nouri Al-Maliki, a Shia, issued an arrest warrant for Iraq's Vice President Tariq al-Hashemi, a Sunni, on charges of inciting terrorism.

Kurdish officials granted Hashemi asylum and allowed him to escape the country via a chartered flight.

Meanwhile, Iraq's official president, Jalal Talabani, is a Kurd.

Power Sharing Goals Fail

At the heart of the Kurdish-Arab dispute is a constitutional provision that Kurdish President Massoud Barzani said last week hasn't been implemented by Baghdad. Speaking in Washington, he said the provision is designed to set governing and power-sharing agreements between the two governments. The law would also repatriate strategic oil-rich parts of Iraq to Kurdistan.

The constitution was cobbled out between the administration of U.S. President George W. Bush, who invaded Iraq in 2003, and representatives of the interim government. It was finally ratified in 2005.

Barzani's comments came as tensions between Iraq and Kurdistan intensified, and followed an announcement that a reconciliatory meeting between Kurds, Shia and Sunni groups had been canceled.

"We cannot anymore wait for unfulfilled promises and undelivered promises. There has to be a specific and a certain timeline for this to be delivered," Barzani said. "Therefore, what we will do is we will work on the preferred option: to [work] with the other Iraqi groups to find a solution. If not, then we go back to our people and put all of these realities in front of the people for the people to be free to make their own decision."

In effect, Barzani, the son of one of Saddam Hussein's most bitter enemies, the late Mustafa Barzani, issued a general threat to Iraq's central government. In Iraq, history keeps repeating itself.

'The Problem Is Kirkuk'

Now that Kurdistan is targeting fast exploitation of its oil reserves, Iraq's northern oil fields could become prime flash points between the Kurdish Regional Government and Baghdad, warned Najim Abed Al-Jabouri, a retired Iraqi Major General and International Fellow for Near East studies at the National Defense University.

"The big problem is Kirkuk and the disputed areas," Al-Jabouri said. He forecast "big problems" in the future regarding the ownership of that city and its resources.

Al-Jabouri said Kurdistan claims oil-rich and valuable parts of northern Iraq, like Kirkuk, as part of its sovereign territory.

Kurdish regional authorities don't have a close relationship to Iraq's prime minister. Relations are so bad that certain communities and mayors in the region don't observe the central government's laws, Al-Jabouri added.

Kurdistan and Iraq are at odds over oil revenues and mineral rights. Regional ethnic differences have been the source of violent tensions in the past.

Since 2003 and Hussein's demise, Kurdistan has become an active player in the shaping of a new Iraq. Old tensions die hard and Iraq's central government doesn't want to lose control over the country's energy resources.

During the height of Saddam Hussein's rule, he ousted Kurds from major urban areas like Kirkuk so that Sunni Arabs could move in, recalled Marvin Zonis, professor emeritus at Booth School of Business at the University of Chicago and an expert on Middle Eastern politics.

Iraqi History Repeats Itself

Under Hussein, the intent was to consolidate Arab rule over the country's resources. Now that his regime is gone, Kurdish officials worry that Prime Minister Al Maliki may follow in his predecessor's footsteps.

"Al Maliki has become as authoritarian without the violence that is characteristic of Saddam Hussein," Zonis said, who added the prime minister is "squeezing out Sunnis" from the government.

Zonis said Maliki has won the loyalty of the country's armed forces, and essentially has his own militia.

Barzani, the Kurdish boss, said Al Maliki is guiding Iraq toward another dictatorship.

Despite the tensions, Zonis doesn't think they will escalate to violence. Both sides, he said, have shed enough blood and he suspects they will be wary of further fighting. They prefer the profits from oil.

In Washington last week, Barzani said he's still willing to iron over ongoing differences, and reaffirmed his government's commitment to upholding the country's current constitution - but with a warning.

"This government is one that came into being as a result of the blood we have shed and we will not leave it for any other," the Kurdish leader said. He added, "If we were able to address the problems and solve then, that is the most preferred option. Otherwise the current status quo in Baghdad is in no way our option and we will not accept that as an option."

Last week the Kurdistan government halted the import of crude oil, originally developed in Kurdistan, to Iraq pending Baghdad's payment to oil companies working there.

The halt prompted Iraqi minsters to accuse Kurdistan of smuggling oil to Iraq's arch-nemesis - Iran.

Barzani called the rising tensions a "serious crisis."

Iraqi ministers last week championed a minor success over the Kurdish government by announcing Exxon Mobil had frozen its oil exploration deal with the Kurds - a claim disputed by Kurdish officials.

Kurdistan is trying to bring in outside companies to help boost its oil production, but Iraq doesn't recognize contracts drafted without the approval of Baghdad.

The Kurds are also considering building an oil pipeline to Turkey, which if completed, would be seen as a slight by Iraqi officials, to the country's sovereignty.

"It's really dicey," Zonis said, who added the U S. tried and failed to create a democratic, peaceful and unified country. "This is all testimony that we have lost the war in Iraq."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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