OIL AND CORRUPTION IN IRAQ

(ENS) -- Masked men infiltrate the village of al-Milih, 75 kilometers west of Kirkuk, and approach an oil pipeline that passes nearby. Under cover of darkness, they steal oil from an opening they drilled into the pipeline weeks earlier.

Over a period of weeks, this scene is repeated nightly.

Despite the presence of special oil ministry units, pipelines around Kirkuk are destroyed and hundreds of tons of oil stolen every day by tribe members from surrounding villages, such as al-Milih, Wadi Zghetun, al-Muradiyya, al-Saduniyya, al-Kanaina and al-Safra.

The "oil protection units" were deployed to guard the pipelines after the government cancelled previous failed agreements with tribal forces to protect them. But in spite of this, oil is stolen from pipelines stretching from the al-Riyadh sub-district, 55 km west of Kirkuk, to the al-Fatha area 90 km to the west.

Tribal sheikhs who profit from the stolen oil are likely to obstruct new measures planned by local authorities, including a special protection force, to stop the sabotage of the pipelines. Locals employed to protect the pipes are often from the same groups as those who are stealing the oil.

Ever since a British controlled company discovered oil in Kirkuk in 1927, the fate of the city has been tied to black gold.

A thirst for oil drove Saddam's Baath party to assert control over Kirkuk, driving out thousands of Kurds and replacing them with Arabs. Before the fall of the old regime, the fields around Kirkuk produced nearly 850,000 barrels per day, more than 30 percent of Iraq's total production at the time.

In the first few years after the fall of former Iraqi president Saddam Hussein's government, Sunni insurgents -- many of whom as former soldiers had guarded oil routes under the old regime -- blew up the pipelines to wreak havoc.

Since then, insurgents have realised that stealing oil is also damaging, and is far more profitable than pure destruction.

Today, Kirkuk's oil wealth is evaporating.

Qais al-Mifraji, a 34 year old farmer in the village of al-Safra, 63 kilometers west of Kirkuk, describes how the pipelines are destroyed.

"The insurgents usually come at night and plant a bomb to detonate the export pipeline," he said. "But if they want to steal, they just break it and fill their tankers. No one can stop them."

The riddled pipes partially explain why four years after the U.S. invasion, Iraq has not been able to match its pre-war crude production level of 2.5 million barrels a day. In 2006, production averaged 2.1 million barrels per day, mostly from oil fields near Basra in the south, which have not suffered the non-stop sabotage taking place in the north.

Kirkuk now produces just 180,000 barrels a day. It could produce at least 400,000 more a day which, at current market prices, would net Iraq $7 billion in revenue per year.

Over the second half of last year, one stretch of pipeline connecting Kirkuk with the Turkish Mediterranean port of Ceyhan -- the main outlet for Iraq's northern oil exports -- pumped oil for only 43 days. The rest of the time, the pipeline lay idle, leaking crude through dozens of holes drilled along its 320 kilometer run through the Iraqi desert.

Another pipeline has been tapped into 39 times so far this year, according to the state-owned Northern Oil Company, NOC, which operates the Kirkuk field.

Qadir Omer Rahman, director of the oil products distribution department in Kirkuk, said that the 80 kilometer long pipeline from Kirkuk to the refinery in Bayji has suffered many attacks.

"Those who protect and guard the oil pipelines are recruited from the people of the villages through which the pipelines pass," he said. "They are the ones committing these acts of terror and smuggling, with the help of other groups."

Unemployment and poor living conditions spurred Ayad Hamid al-Ubaidi from Hawdh village, who is in his thirties, to join the gangs who target pipelines and steal oil.

"There is no one who can give us our rights," he said. "We have to use our own hands to obtain our rights."

Rahman estimated that about 800,000 gallons of oil are lost every month because of sabotage, which he said severely affects the provision of petroleum products to Kirkuk and the Kurdistan region's three northern governorates.

Each stage of oil production in the north is hampered by criminal activity.

It is not only the oil and its products which are stolen by outsiders. Pumps, transformers, generators and other valuable machinery and spare parts are frequently looted.

Oil company workers are coming increasingly under fire from militias. Pipeline repair crews have been shot at and hit by roadside bombs. Sunni insurgents have been dropping leaflets in Kirkuk warning all government employees, including oil company workers, to quit or to face death.

Last summer, Adi al-Qazaz, then NOC's director-general, went to Baghdad to visit the oil ministry. After his meeting, he was kidnapped by gunmen on the street, never to be seen again.

While some NOC employees are threatened, others are suspected of cooperating in stealing both crude and refined oil. Truck drivers, as well as managers of fuel stations, are taking their share of the illegal business, draining supplies for Iraqi citizens who struggle to find cooking oil and fuel.

A source in the NOC, who spoke on condition of anonymity, said that there is a mafia-like group operating inside the company which smuggles large amounts of oil through pipelines, in cooperation with individuals inside the company.

"When an explosion occurs in a pipeline and oil leaks from it, the people in charge neglect it, leaving the leak for several days until a large amount of oil has been taken from it," he said.

Much of the smuggled crude oil is sold to merchants in Erbil through local brokers. They meet to do their deals in a restaurant in the sub-district of al-Gwer, 40 kilometers west of Erbil, according to Ahmed al-Jobouri, an oil tanker driver.

At small domestic refineries, the crude is transformed into refined fuel and then sold on the black market. Some will then be smuggled across the border.

According to the NOC source, "The revenue from oil smuggled into Turkey is used to support the Turkoman Front in Iraq, and revenue from oil smuggled to Syria is used to support the insurgent groups in Iraq."

Fuel is heavily subsidised in Iraq. Petrol stations receive limited supplies and citizens are given vouchers entitling them to buy a certain amount each week at the official low price. But because there is not enough subsidised fuel, most Iraqis end up buying oil products on the black market.

A source in the Bayji refinery near Kirkuk, who spoke on condition of anonymity, said that some officials from the General Company for Oil Products, which is in charge of issuing paperwork for the subsidies, sells authentic as well as false receipts to merchants.

The stolen fuel is then smuggled and sold on the black market, either inside Iraq or across the border in Syria or Turkey.

There is also small-scale smuggling. Salah Ali, who has been working as a tanker driver for six months, said receipts are issued at the Bayji refinery for 36,000 liters per tanker, which is their official load.

But they are then filled to their full capacity of 40,000 liters, and the additional 4,000 liters are sold on the black market for five times the price of regular fuel.

Similar activities go on at the smaller refinery in Kirkuk, said Irfan Kirkukli, the deputy chief of security on the city council.

"Several trucks carrying oil products smuggled from Kirkuk have been seized," he said. "Vehicles have been caught smuggling 160 canisters of cooking gas from Kirkuk to Erbil, for example."

Some petrol station owners, he said, sell their share of state-subsidized fuel to black market dealers.

"Many such cases have occurred in Kirkuk and legal action was taken against [the culprits]," he said. "The filling stations weren't given [further] allotments and their owners were fined."

To protect the pipelines and prevent illegal smuggling of fuel, several measures are to be implemented. Kirkukli said a special protection force to guard the pipelines will be formed, consisting of members of the Iraqi Army, oil protection forces and the tribes from the areas where the pipelines pass through.

Officials in charge of particular pipeline sectors will have to pay fines if their stretches are damaged or oil is stolen. Kirkukli also said that funds have been allocated to support oil infrastructure and to build observation towers along the pipelines in western and southern Kirkuk.

Sami Amin Othman, the Kurdish chief of the oil protection force in Kirkuk, has recently hired 290 new security guards whom he plans to deploy along the pipelines.

This, however, has already created unrest among the local Sunni Arab chiefs in the area. They seem to be afraid of losing power because the new guards will be paid directly by the government and not contracted through them.

Because the people hired to protect the pipelines are often from the same groups that sabotage the pipes, and tribal bonds are often stronger than national loyalty, the illegal drilling is expected to continue.

Sheikh Ziyad Hasan, who formerly served as a contractor protecting the pipelines, confirms that people from the area sabotage the pipelines and profit from the oil. Many locals, he said, lack the motivation to prevent thefts.

"They believe that this oil serves the Americans and the new government, and that it does not benefit the people," he said.

Police and government officials are accused of taking a cut of the lucrative oil smuggling business run by clans and overseen by militia groups in the southern city of Basra.

Rival Shia groups have divided up control of the city's resources -- including the country's only seaport as well as its largest oilfields -- in a precarious power arrangement which could implode at any time. The warring militias control the illegal oil exports from Basra, the gateway to Iran and the Gulf states, and are reportedly linked to global networks.

Maritime police complain they lack resources to capture the smugglers, but others accuse police of cooperating with mafia gangs to smuggle oil. Some local officials say they are under orders not to arrest gang members because of their links to the authorities and the militias.

Analysts blame smuggling for causing high inflation in Basra, Iraq's second largest city, with the prices of everyday products soaring and living conditions deteriorating for most of inhabitants.

The Rumaila oil fields south of Basra are said to produce 1.6 million barrels of oil per day, of which 400,000 barrels are for domestic consumption and 1.2 million are exported.

The lawless environment has allowed large quantities of oil to be smuggled into neighboring Gulf countries. According to American oil expert Jerry Kiser, Iranians benefit from 300,000 barrels a day smuggled across the border from southern Iraq.

Political parties in Basra took part in Iraq's 2005 elections, and British forces stationed there helped build up its institutions before handing the city back to be governed by the locals. While today there is a veneer of conventional governance in Basra in the shape of a provisional council and the police force, the city is in effect run by warring militia groups who have carved up control of its resources.

The ruling Fadhila party -- which has leading Shia cleric Sheikh Mohammed al-Yaqubi as its spiritual leader and Basra governor Mohammed al-Waili as a member -- oversees the government's oil protection force, as well as the oil production infrastructure and export terminals.

Waili is also head of Iraq's Southern Oil Company, a state-run entity that administers oil affairs in the southern provinces.

Militia forces loyal to radical Shia cleric Muqtada al-Sadr, meanwhile, dominate the local police force, the facilities protection service and the Basra port authority. The Sadrists control the Abu Flus port, a major center for exports of crude oil sold on the black market, while Fadhila supporters run the port of Abu al-Khassib, which is deeper and accessible to larger vessels.

Local tribes cooperate with the Fadhila party, which offers them protection in turn for a share in the business.

Assim Jihad, spokesperson for the oil ministry, denied that large-scale smuggling is taking place in Basra. But he conceded that of the 1.6 million barrels a day exported by Iraq through Basra harbors last April, 100,000 barrels -- worth about five million dollars -- went missing each day.

He blamed the missing amount not on smuggling but on wastage -- "useless materials like water and gas that are contained within crude oil but are not counted as part of the total amount."

However, many of those interviewed for this report claim to be cogs in a sophisticated oil smuggling operation, run by clans and controlled by militias.

An oil-smuggling infrastructure already existed in Saddam's time. During the Nineties, when United Nations sanctions were imposed on Iraq, illegal oil shipments were the easiest way to earn cash and smuggling was officially condoned.

"We use the same methods that we used during Saddam," said one veteran smuggler. "Instead of Baathists and generals, it is now Shia militias and their cronies who are doing the business."

Oil is stolen from warehouses with the complicity of influential people, and also from sabotaged oil pipelines. Both refined and crude oil is transported via makeshift pipelines or trucks to the port area at Abu al-Khassib, a southern suburb of Basra. There, powerful clans have built underground tanks on their farms, which serve as temporary storage until the oil is pumped into small pontoons.

From there, the oil is taken in small quantities in speedboats to both state-run and private tankers waiting at the mouth of the Gulf on al-Faw peninsula.

Crude, more profitable to smuggle than refined products, is sent using the above method to refineries in Yemen, the United Arab Emirates, and even as far as India.

The price of the oil depends on how far the smugglers carry it towards deep water, where the risk of being caught is greater.

Each stage of the export process is controlled by militias and political figures -- from extracting the oil from the refineries or terminals, to bringing it safely past the border guards and navy vessels.

"You need someone to protect you," said a captain, who specializes in smuggling. "You need influence; otherwise you will be killed immediately."

The local smugglers' main fear, he said, is being stopped by British naval patrols, because they cannot be bribed, while the Iranian coastguards and the Iraqi navy are involved in the business.

Iraqi maritime forces that police the Iraqi-Iranian waters of the Shatt al-Arab say local oil smugglers are linked to regional and international networks.

Colonel Ahmed al-Maliki, the head of the maritime police in Mantaqa Rabaia, close to the Shatt al-Arab, refers to his opponents simply as "Iranians," but there is some doubt over exactly whom the Iraqi policemen are fighting. While Iranians are reported to be involved in the illicit trade, it is also possible that the smugglers are paying Iranian police to let them use that country's flag as cover.

When chased by Iraqi coast guards, the smugglers run into Iranian waters. Iraqi police face trouble if they give chase, as this would be a violation of the international border that runs along the middle of the Shatt al-Arab.

On April 26 this year, two policemen were killed and seven others were arrested when they came under fire from Iranian coastguards while trying to apprehend suspected oil smugglers at sea. Such clashes are frequent in the Shatt al-Arab, which flows into the Gulf.

"This was not the first time that the Iranians shot at us for chasing smuggling gangs and caused human and material losses on our side," said Maliki.

He and his colleagues are discouraged at being prevented from making arresting and at the loss of life they suffer in such incidents.

"Our work has changed since 2003 from guarding the borders against intruders to chasing global smuggling networks. Yet we still have the same poor resources," he said.

Most of the maritime forces' equipment was damaged or looted during the 2003 invasion of Iraq and has not been fully replaced.

"The smugglers use high-powered speedboats, while we only have small cruisers that aren't suitable for chasing the gangs," said Maliki.

Another method of shifting crude out of the country is via tankers docked at the oil terminals themselves.

This is done by filling the ships with more than the amount noted in the accompanying documents. This is possible as the lack of modern electronic devices means the load is measured by a gauge called a "dhara" Ð a long ruler inserted into the tank.

The officials at the terminal represent all the parties and militias who control the loading of tankers. A surveyor, officially in charge of controlling the filling process and inspecting the consignment, is bribed to pass it off as legitimate.

Members of the Basra Centre for Reconstruction, an NGO founded in 2006 to invest in the reconstruction and modernization of Basra, accuse the police of cooperating with the criminal gangs who run the smuggling trade.

The center -- whose members are mainly engineers, researchers, journalists and economists -- has identified about 50 cases in which senior police officers were accused of facilitating smuggling operations valued at an estimated 50 million dollars over the last two years.

The center's findings were reported to the Basra directorates of police and counter-smuggling. The Integrity Commission, a body of the central government responsible for following administrative corruption cases, issued arrest warrants and sent the cases to court. Meanwhile, a group of journalists interviewed several employees of the Southern Oil Company and local policemen suspected of corruption.

The director of the center, Zahir Abdul-Khaliq, said the identity of the smugglers is no secret and suggests the police could catch them if they wanted.

"All the smugglers are known figures, so if the police can't arrest them at sea, why don't they do it on land?" he asked.

Local security officials claim that they are hindered from making significant arrests by their bosses' political ties.

"We mainly arrest small smugglers, but we have been prevented from even watching the big gangs by verbal orders from our administration," said Suhail Khidhir, an employee of the counter-smuggling directorate. "These big gangs are linked to government institutions and the parties."

A source within the Southern Oil Company, who preferred to remain anonymous, said the main players behind oil smuggling are figures linked to the Fadhila party, the Supreme Islamic Iraqi Council, the Sadrists, and clans close to them, such as the Ruwaymi, Ashoor and Yusif.

Smuggling diesel and fuel oil is far simpler although ultimately less profitable than smuggling crude. This trade goes in two directions, both in and out of Iraq.

Damaged refineries and the growing number of cars in Iraq have led to severe shortages of fuel, which is sold at heavily subsidized rates by the government. The state imports petrol at 65 US cents a liter and sells it to the public at just 25 cents a liter.

The deficit and the discount retail price of petrol and diesel have created a black market fed by the smugglers.

Inside Iraq, petrol is stolen from refineries and smuggled abroad where it can be sold at a profit. At the same time, fuel is being smuggled into the country and sold either on the black market or to the Iraqi state using false documentation.

"The reason behind the lack of fuel is that it's being stolen and smuggled," said an employee of the Southern Oil Company, who spoke anonymously out of concern for his safety. "[Officials also] falsify the amount imported."

According to the Southern Oil Company, the country imports more than 10 million liters of petrol, diesel and kerosene a day from neighbors Iran, Kuwait, Saudi Arabia and Turkey. But between 10 percent and 20 percent of these legal imports will end up being diverted and sold on the black market. Some of the fuel assigned to government institutions, for example, is resold illegally.

Meanwhile, additional amounts of fuel are being brought into the country by smugglers. Some is sold on the black market; other consignments will be dressed up as legal imports with the right paperwork, and sold to state purchasers.

Ali al-Bahadli, a petrol tanker driver working in the smuggling business, says forgery is the order of the day. "Dozens of the tanker trucks coming into Iraq are not real. They are only registered on paper," he said.

As the smuggling of Basra's oil continues, economic conditions are worsening for the city's residents.

Khalil al-Sarraji, professor of economics at the University of Basra, said smuggling is a drain on the Iraqi economy as the lost income creates a hole in the treasury's revenues and reduces the capacity to re-invest in the oil industry.

"Large parts of our economy and wealth have vanished into a legal vacuum from which the state is absent," said Sarraji.

"Law enforcement is non-existent and the spoils are shared by politicians, militias and smuggler gangs. This causes high inflation in the provinces and wrecks decent living conditions for the public."

Consumer prices have soared, and bread that cost two US cents two years ago now costs ten cents.

Sarraji says low living standards prompt many people to get onto the bottom rung of the smuggling ladder.

"Poverty and the government's lack of care encourage young people to get involved in this business as a way of making money," he said. "But powerful mafias quickly gain control over them, and force them to work or be killed."

The German seismologist working in northern Iraq was not supposed to talk about his job. But after having spent nearly three months in an isolated camp near the Taq Taq oilfields, he could not contain himself.

"You can dig where you want," he said. "The crude gushes!"

For more than two years, foreign companies have been hunting -- and finding -- oil in the semi-autonomous Kurdish region. They may not have discovered giant fields like the famous Iraq has 115 billion barrels of proven oil reserves, but its actual oil wealth is believed to be significantly higher. Iraqi Kurdistan and the oil-rich region of Kirkuk are prime territories for speculators because of their large proven and potential reserves.

The three northern provinces of Iraqi Kurdistan are also the safest region in Iraq, an additional draw for drillers and investors. The Kurdistan Regional Government, KRG, has pushed ahead with exploration in the north by signing contracts for oil exploration with foreign companies.

That has irked oil officials in central government in Baghdad, however, and the KRG's windfall is far from secure. It is threatened by uncertainty surrounding a new national law on Iraq's oil reserves; by Turkish concerns over Kurdish strength; and by pressure from rival ethnic groups whose territories are not so blessed with natural resources.

In early 2006, the first foreign oil company began producing new oil out of Kurdistan. The Norwegian wildcatter Det Norske Oljeselskap, DNO, sealed two production-sharing agreements with the regional government in 2004, gaining a 55 percent stake in both licenses. DNO will take 10 to 30 percent of the profits; the rest will go to the region.

At first, DNO estimated that the Tawke field near the city of Dohuk held 100 million barrels and would reach peak production of 50,000 barrels a day next year. Now, it appears that the field may contain much more.

DNO's most recent operation in Tawke has a flow rate of 12,000 barrels a day, 40 percent more than another well in the same area.

DNO has 80 trucks moving as much as 10,000 barrels a day from the site. The flow rate may reach 20,000 to 25,000 barrels per day, but transporting this amount of crude by road could be logistically difficult and expensive.

A second lot of drilling began in May 2006 in the Taq Taq region, south of Sulaimaniyah, and was led by Taq Taq Operating Company, also known as TTopco, and Addax Petroleum, a Swiss-Canadian company. TTopco, a joint venture with Genel Enerji of Turkey, is currently drilling its fourth oil well and hopes to drill two more by end of 2007.

The three oil wells that TTopco has already drilled are expected to produce 75,000 barrels a day, said Kemal Afaraci, an official with TTopco. Oil reserves in Taq Taq are estimated at 1.2 billion barrels.

Firms such as Canada's Western Oil Sands and Heritage Oil Corp as well as the UK's Sterling Energy are also exploring the region.

Kurdistan wants to produce 200,000 barrels a day of oil by the end of next year, and increase that to one million barrels per day within five years.

Although northern Iraq's oil reserves are not as large as the giant southern fields round Basra, the local KRG Natural Resources Minister Ashti Hawrami has said the area has "good potential", estimating reserves around 25 billion barrels of oil and 100 trillion cubic feet of natural gas.

He also held out the prospect of a second export pipeline from Kirkuk to the Turkish port of Ceyhan, which would run through Kurdish-controlled territory, thus giving it greater protection from the sabotage attacks that plague pipelines elsewhere in the country.

Kirkuk alone has 10 billion proven barrels, and Hawrami has estimated that 20 billion barrels are lying in other disputed areas in the north.

Based on these estimates, if the Kurds control the north -- including parts of Nineweh province, where the KRG already has a strong political and security presence, their potential reserves would be about 55 billion barrels, or almost half of Iraq's known oil reserves.

That would mean Iraq's Kurds would have more oil than Nigeria, Africa's biggest oil producer.

Not everyone is thrilled by this prospect.

A referendum will decide whether Kirkuk and other disputed areas should be governed by the KRG or the central government. But political disputes between Kurdish and Arab leaders over when to hold the poll could delay the vote until 2008 or later. Map of the Middle East showing Iraq with Kurdistan in the north (Map courtesy KDC) Turkey, too, is opposed to Iraqi Kurds gaining Kirkuk because it fears that a too-strong Kurdish region might encourage its own Kurdish citizens to demand political rights. Angering Turkey could weaken a pillar of the Kurds' oil strategy by denying the landlocked region an outlet for exports.

"Iraqi Kurds would have nothing if they cannot export their oil," said Soner Cagaptay, director of the Turkish Research Program at the Washington Institute for Near East Policy.

And there is a bigger obstacle which concerns all of Kurdistan's oil exploration -- a new oil law that should determine who controls the oil fields and how the revenues are shared.

The Kurds are insisting that regional authorities such as the KRG have the right to manage oil projects and draw up contracts, which has been a point of contention with some Iraqi officials.

In early July, Prime Minister Nuri al-Maliki said his cabinet had approved the oil bill and was sending it to the legislature. At a news conference, Maliki described it as the most important piece of legislation in Iraq.

But only days later, despite assurances from Maliki that the bill would soon be debated in parliament, Kurdish leaders, all Sunni factions and the 30 MPs allied to radical Shia cleric Muqtada al-Sadr spoke out against it.

Although Kurdish leaders serve in Maliki's cabinet, the KRG said it had not even seen the latest draft and did not support it.

"We hope that the cabinet is not approving a text with which the KRG disagrees, because this would violate the constitutional rights of the Kurdistan region," said the KRG statement.

The key issue for the Kurds concerns the control and management of so-called future oil fields.

Although Article 108 of the Iraqi constitution says that "oil and gas are the property of all the people of Iraq" and are to be managed by the federal government in conjunction with regional governorates, only current oil fields, which are controlled by the central government, are mentioned, not those that might be discovered in the future.

Many arguments over the law are related to the 2005 constitution, which was written in vague terms in order to garner broad support.

The KRG has made it clear that it wants to negotiate its own contracts and opposes annexes contained in the present bill that give control of 93 percent of the oilfields to a new state-owned entity, the Iraq National Oil Company, which will be created if the law is passed.

The controversial oil bill is now on hold because parliament recessed for August.

KRG Natural Resources Minister Hawrami has maintained over the past several months that the Kurdish administration would move ahead with its own oil law and would not wait for Baghdad to pass national legislation.

The Kurdish regional parliament did just that in early August, when it passed its own law to regulate oil management in the northern region.

KRG Premier Nechirvan Barzani said in a statement that the passage of this legislation was "a historic moment that will be remembered for years to come."

The law creates a regional oil company to operate the fields in Iraqi Kurdistan and insists that the KRG should have a joint role, with the Iraq National Oil Company, in managing current oil fields in the Kurdish provinces. It demanded that the Iraqi central government doe not authorize operations in disputed areas such as Kirkuk until the referendum decides who is to govern them.

The Iraqi constitution calls for the country's oil revenues to be distributed equally, and the KRG law says that oil revenues will be sent to the central government. But it gives more regional control than some Iraqi officials would like local governments to have.

In a statement following the KRG's approval of its regional oil law, the Association of Muslim Scholars in Iraq, a leading Sunni Arab group, said in a statement that Kurdish politicians "are not the official representatives of the Iraqis or the Kurds."

The association also warned foreign companies not to work with the "so-called Kurdish government."

Most Sunni Arab-dominated regions in Iraq are not believed to have oil, and Sunni leaders support strong federal control over oil revenue and management.

The Kurds believe differently.

In a statement, Hawrami noted that "under the constitution of Iraq, oil and gas management is primarily a regional right, and our success depends upon us exercising that right. This law of the Kurdistan Region is the embodiment of that right."

There are also problems between the central government and the Kurdish authorities over current contracts. In March 2007, Iraqi Oil Minister Husayn al-Shahristani indicated that the agreement with DNO may not be valid because it has not been approved by the central government.

"All the contracts that have been signed either by the previous regime or by the northern region will have to satisfy the conditions of the new law," Shahristani said at an OPEC meeting in Vienna.

In May, Shahristani said at a conference in Saudi Arabia that any contracts signed by the Kurds before the federal oil law was passed would be considered invalid and illegal, reported news agencies.

Barzani insisted the contracts were legal, and issued a statement suggesting that his government may secede if the contracts were rejected.

"If Baghdad ministers refuse to abide by that constitution, the people of Kurdistan reserve the right to reconsider our choice," he said.

Other points of contention for Sunni and Shia leaders include how oil profits are distributed and foreign involvement in Iraqi oil policies and contracts. The Iraqi oil bill is vague on these issues.

But time is short. The White House is increasingly desperate for signs of political progress now that the United States military commander in Iraq, General David Petraeus, and Ambassador Ryan Crocker reported to Congress Monday on the progress made since more U.S. troops were sent in February. Congress and the American public are increasingly likely to put pressure on the Bush administration to pull the 162,000 U.S. troops out of Iraq.

The problems of the oil bill bode ill for the other ÒbenchmarksÓ that the Bush administration has been pressuring Maliki's government to meet.

These include provincial elections, reversing a decision by the U.S. led Coalition Provisional Authority to ban former Baath party members from holding government and military positions, and revising Iraq's constitution.

But Iraqi lawmakers show little signs of bending to accommodate Bush on an issue as crucial as oil.

"We have two clocks -- the Baghdad clock and the Washington clock -- and this is a perfect example," said Mahmoud Othman, a prominent moderate Kurdish MP in Baghdad. "This has always been the case. Washington has been pushing the Iraqis to do things to fit its agenda."