LONDON: Kurdistan has begun selling its oil into international markets in independent export deals that further challenge Baghdad's claim to full control over Iraqi oil after first signing independent exploration deals with foreign oil majors last year.
The move is likely to enrage the government, which is still locked in a battle with Exxon Mobil over its independent deal with Kurdistan last year to explore for oil in six Kurdish blocs. But it also paves the way towards greater Kurdish autonomy as Baghdad has long insisted it alone has the right to market Iraqi oil and gas products.
By involving two of the world's largest trading houses, Trafigura and Vitol, Kurdistan has made it difficult for Baghdad to retaliate, as it depends on those firms for a proportion of its refined oil imports like gasoline and diesel. If Baghdad were to decide to shop elsewhere, it could face paying much higher prices for its fuel.
Trafigura snapped up the first cargo of Kurdish light oil -- known in the industry as condensate -- offered for delivery in October via the intermediary Powertrans. The oil was trucked across the country from a Kurdish field to Turkey, where it loaded at the start of the month.
Vitol was quick to follow, becoming the second major oil firm to buy Kurdish oil marketed independently of Baghdad, picking up a second 12,000 tonne cargo of condensate for loading at the end of the month. At around $890 a tonne, each shipment is worth over $10 million.
Iraqi officials say any deals independently agreed with Kurdistan are illegal and trading Kurdish oil and gas products without the central government's consent amounts to smuggling.
"Iraq maintains its right to legally pursue all those who participate in smuggling the property of the Iraqi people locally or internationally," said Iraq's government spokesman Ali Dabbagh, commenting on the Kurdish sales of oil to the Swiss trading houses.
Trafigura declined to comment, while Vitol confirmed it had bought a parcel of Kurdish origin for loading in Turkey, declining to comment any further on the deal.
"The small parcel was bought in a public tender, FOB Toros terminal, Turkey. No further comment," spokesman Mark Ware said.
In addition to supplying Baghdad with products, Vitol also has two term deals to buy Iraqi crude in 2012 for a total of around 22,000 barrels of oil per day (bpd).
Kurdistan's potential as a major oil producer and exporter has proved to have greater weight with foreign oil firms than warnings by Baghdad that signing contracts with the autonomous region could put their contracts in the south at risk.
Exxon Mobil has been followed by other majors including Chevron, Total and Gazprom, as production-sharing deals with Arbil are seen as a far better arrangement than Baghdad's fee-for-service contracts.
Similarly, on the trading side, better prospects in the north have caught the attention of major oil traders, who are now prepared to risk Baghdad's anger to gain a foothold in Kurdistan while the region heads towards greater autonomy.
"Because this flow (exports from Kurdistan) is meant to be huge. Crude, naphtha, LPG, condensate, but yes, very political," said an oil trader, commenting on the logic for risking relations with Baghdad.
So far, Kurdistan's export volumes are tiny in comparison to its daily exports via national pipelines, moving around 1,000 tonnes of oil per day (about 8,000 bpd) to Turkey by truck, but deliveries are on the rise.
A Kurdish industry source in Arbil said condensate volumes were expected to reach 1,500 tonnes per day (about 12,000 bpd) by the end of October and more trucks would be made available towards the end of the year.
Kurdistan began its own exports of oil over the summer, swapping condensate for refined products such as diesel and kerosene with Turkey to help plug a product shortfall it says was created by Baghdad.
The trade agreement was endorsed by Ankara, but Baghdad said the deliveries by truck were illegal.
Kurdistan, autonomous with its own government and armed forces since 1991, gets central government funding and uses national pipelines to ship its oil.
The process has however been stop-start over the years due to a long-running feud between Baghdad and Arbil over oil and land rights. Exports were halted in April in a dispute over payments from Baghdad to companies working in the region and restarted in August.
In September a new deal was agreed with the central government on crude exports (set at 200,000 bpd in the last quarter of the year) and supply of refined oil products.
On Monday, Iraqi Kurdistan said it had agreed to raise exports to 250,000 barrels of oil per day (bpd) in 2013 if Baghdad pays operators in the autonomous region.
However the recent agreements solve only a few points of a broader feud between Baghdad and Kurdistan over oil exports, energy policy and territory.