After more than 15 months, ExxonMobil has finally taken its first tentative steps towards upstream development in the semi-autonomous Kurdistan region of Iraq.

In late 2011, the company signed exploration and production sharing contracts for six blocks in the region, including two in ethnically mixed areas that are disputed by the federal and regional governments. Since then, it has been attempting to balance its interests with the Oil Ministry, which includes the development of one of Iraq’s largest oil fields, and with the Kurdistan Regional Government (KRG). Baghdad has made it clear that it will not tolerate the firm working for both sides.

Baghdad has made it clear that it will not tolerate the US firm working for both sides

Tensions between Erbil and Baghdad have risen at the same time, with occasional violence amid spiralling rhetoric. The original deals with ExxonMobil were signed in the absence of an oil and gas law to govern Iraq’s energy sector, which would legalise the contracts and create a mechanism for exports and payments. The law has been stuck in parliament since 2007 with little prospect of consensus.

But the US firm is now signing further agreements for land to build a base camp for operations and applying for work permits in Kurdistan. Upstream drilling work could begin soon, which would make the firm’s choice of preferred partner clear.

Lined up on the other side of the Baghdad-Erbil fault line is the UK’s BP, which is pressing ahead with a proposal to develop the Kirkuk oil field, another contentious issue which could escalate into a major crisis. There is a wider dispute over the Kirkuk governorate, which is home to Arabs, Kurds and Turks, and straddles territory claimed by both the KRG and Iraq.

ExxonMobil’s next step, either withdrawing from its development in south Iraq or pursuing its Kurdish ambitions, could be a major turning point in the Baghdad-Erbil relationship.