Delicate Balancing Act for Western Oil Firms in Iraq LONDON - Iraq's re-emergence as an oil power is inevitably sending ripples through the industry and the surrounding region. The country has surpassed Iran as the second-largest OPEC producer after Saudi Arabia, raising questions about whether other oil-producing countries may at some point need to trim production to accommodate a rising Iraq. But the more immediate tensions are between the federal government in Baghdad and the semi-autonomous Kurdistan Regional Government, which is headquartered in Erbil in the north of the country. The Kurds, who suffered terribly under Saddam Hussein, are determined to maintain their autonomy from Baghdad - not least by developing their own oil resources. Baghdad insists that only it has the authority to grant access to the country's natural resources. But the Kurds are succeeding in bringing in the world's top oil companies against Baghdad's wishes. Strains between the two governments were on display Wednesday at the Oil and Money Conference convened by the International Herald Tribune and Energy Intelligence Group, a provider of independent analysis and data to the global energy industry. Hussain Al-Shahristani, the Iraqi deputy prime minister, who has been instrumental in devising contracts to rehabilitate Iraqi oil fields, confirmed in a session with reporters that Exxon Mobil was in the advanced stages of organizing a sale of its 60 percent stake in a premier Iraqi project, the West Qurna-1 field, to buyers approved by the Iraqi government. Exxon and Iraq have been at loggerheads since Exxon signed an exploration deal with the Kurdistan government last year. Baghdad, and Mr. Al-Shahristani in particular, does not recognize Kurdish contracts with the oil companies and says they are illegal. An Exxon Mobil spokesman, Patrick J. McGinn, declined to comment. Mr. Al-Shahristani also warned the French giant Total and other companies that they faced being forced out of their Iraqi projects for having feet in both camps. "They must either decide to present their contract to the federal government or they are in breach of their contract" with Iraq, he said. But Mr. Al-Shahristani is losing the battle. Exxon, Total, Chevron and Gazprom have all decided that Kurdish oil deals have sufficient profit potential to be worth risking Baghdad's ire. Philip Lambert, who heads the London-based advisory firm Lambert Energy, said in a talk at the conference that the boom in deals in Kurdistan, compared to a relatively moribund environment in Iraq proper, was a sign that the environment in Kurdistan is healthier. One reason: As Mr. Al-Shahristani acknowledged, Baghdad's contracts are among the toughest in the world. They offer such low returns that - along with continued security risks and infrastructure problems - companies are figuring that they would be better off making deals with the Kurds. Under Kurdistan contracts oil companies can earn $3 to $5 per barrel, compared to about $1 per barrel on those in southern Iraq, according to Wood Mackenzie, a consulting firm in Edinburgh. So far the large companies have been signing exploration deals with Kurdistan, leaving several years for the two governments to reach deals before their blocks start producing. Iraq, of course, is far more important to the global oil picture today, with more than 3 million barrels a day of production, while Kurdistan is struggling to export 200,000 barrels per day. But exploration in Kurdistan is still at a relatively early stage, having only started after Saddam's ouster in 2003. Companies looking for oil there have enjoyed a high success rate. Despite Mr. Al-Shahristani's prickliness, there are signs that Baghdad and the Kurdistan government could be reaching an accommodation. Under an agreement reached last summer, Kurdistan has been putting oil into the main Iraq-Turkey pipeline. These exports had been suspended over payments disputes between Baghdad and Erbil, leaving companies like Genel Energy, now headed by the former BP chief Tony Hayward, with no other option but to sell their oil cheaply in the Kurdish market or truck it to Turkey. Baghdad has also begun making payments and is counting on the Kurds to supply 250,000 barrels per day to the pipeline in 2013. A Kurdish adviser, who asked not to be named, said in an e-mail that by all appearances both sides want the arrangement to work. Kurdistan's success in attracting the big oil companies does seem to be influencing thinking in Baghdad. Mr.Al-Shahristani said there was nothing in Iraqi law that prevented Iraq from awarding so-called production sharing contracts that give companies a slice of the output of fields for exploration. Companies prefer these contracts to the service deals that Baghdad has offered so far, which give companies a per-barrel fee for renovating old fields like West Qurna and Rumaila, the largest field, where BP has already produced a billion barrels. At the conference, Mr. Al-Shahristani dismissed suggestions that Iraq would have trouble replacing Exxon, saying that serious international companies were interested. But Baghdad's "our way or the highway" approach could threaten Iraq's huge oil ambitions. During his talk in London, Mr. Al-Shahristani suggested that he had dialed back his expectations for Iraqi oil production over the next few years to about 9 million barrels per day from the unrealistic 12 million barrels per day that Iraq would achieve if the oil companies delivered on the contracts they have signed. Iraq is a member of the Organization of Petroleum Exporting Countries but does not have a quota, in recognition of its need for revenue to rebuild. Mr. Al-Sharistani said that once Iraq had reached 4 million to 5 million barrels per day, it could start discussing its production with the other OPEC members. "We don't think that Iraq is going to be squeezing any country out of the market," he said.