Kurdistan's vast reserves draw oil majors ©Reuters Unlocking potential: Kurdistan may be starting to break out of its isolation For decades, the rugged hills of northern Iraq were the sole preserve of sheep herders and the Kurdish militia known as peshmerga. Now they play host to some of the largest oil and gas companies in the world, drawn by its estimated 45bn barrels of oil. "We are driving over huge reserves," says Richard Lowe, drilling manager for oil explorer Gulf Keystone, as he crosses Iraqi Kurdistan's oil-rich northern corner. IN Iraq Off to the right, he says, lie Ain Sifni and Barda Rash, where the London-listed oil company Afren has made two big oil discoveries. On the left are vast unexplored fields. "That's where ExxonMobil will be drilling," he says. The region's oil is so plentiful it oozes out of the ground. Near Gulf Keystone's Shaikan field - one of the world's largest onshore oil finds of recent years - Mr Lowe points to crude oil leaking out of the limestone and dribbling down in thick black seeps. Barely on the oil majors" radar five years ago, the semi-autonomous Kurdish region of Iraq is now one of the biggest draws in the energy industry. But the enthusiasm is tempered by escalating tension between the region and Baghdad, which has led to border skirmishes and rows over oil. Last month, regional crude exports, which feed into a centrally controlled pipeline system, fell to a trickle because of a row over payments. Observers in Irbil, the capital of Iraqi Kurdistan, say the row reflects a broader crisis at the heart of the Iraqi government. "There are clearly big problems with its ability to govern," says one official. No one knows what's going to happen next. Despite the problems, Iraq's oil industry is seeing a major rebirth - a revival so strong that it is helping to dispel fears of a future global oil shortage. The country's production, long suppressed by war, sanctions and neglect, is expected to double to more than 6m barrels a day by 2020, according to the International Energy Agency. By the 2030s, the IEA says, Iraq will be the world's second-largest oil exporter after Saudi Arabia. The Kurdish region's contribution to this revival is small but growing. The Kurdistan Regional Government (KRG) sees production from the region, now about 200,000 barrels a day, rising to 1m b/d by 2015 and 2m b/d by 2019. That has made it Big Oil's hottest real estate. Its largest oilfields - Tawke, Taq Taq and Shaikan - have become household names in the industry. "Kurdistan is the oil exploration capital of the world," says Tony Hayward, the former chief executive of BP, now chief executive of Genel Energy, the largest independent oil producer in the region. Exxon's decision to enter the region in 2011 was a turning point, with Chevron, Total and Gazprom following in its wake. The KRG says their arrival should silence critics who question the legality of the production-sharing contracts it has signed with international energy groups. "[Exxon's arrival] is an endorsement of our policy," says Ashti Hawrami, the KRG's minister of natural resources. Baghdad says the Exxon contract and the roughly 50 other deals the KRG has signed are unconstitutional and has barred oil companies that enter the north from participating in Iraqi oil licensing rounds. It has also made life hard for oil companies operating in KRG-controlled areas who often have to wait months for Baghdad to pay them for the oil they produce. Nearly 10 years after US-led forces invaded Iraq and removed Saddam Hussein, relations between the Kurds and Iraq's Sunnis and Shia remain strained. That has translated not just into tensions between Baghdad and Irbil over oil but also skirmishes in disputed territories, including oil-rich Kirkuk, on the border between KRG territory and Iraq. The illness of Iraqi President Jalal Talabani, an ethnic Kurd, makes the situation even more febrile. Tensions flared up in dramatic fashion last November, with a shoot-out between Iraqi and Kurdish forces in the small town of Tuz Khormato in which one person was killed and several wounded. On December 17, explosions in a Shia district of the town killed at least five people and wounded 24, while a truck bomb killed seven near Mosul. New security arrangements in the disputed areas, with a joint command replaced by one led by Baghdad, have also fuelled concerns. "They're worried about what they see as the creeping militarisation of Kirkuk," says a diplomat based in Irbil. They say that makes it even less likely that there will be a proper political settlement of the status of the disputed areas. For now, there are hopes that ultimately the export issue will be resolved. These hopes rest on the KRG's plans to build a new 1m b/d oil pipeline to the Turkish border. Though there is no clear date for construction, under current proposals, it will tie in to Iraq's existing export pipeline between Kirkuk and Turkey's port of Ceyhan. But the KRG could seek to develop a separate route across the border into Turkey, effectively giving it control of its own exports. Already, Iraqi Kurdistan is shipping small amounts of oil by truck across the Turkish border. "This [dispute] will not resolve itself until Kurdistan has the infrastructure to allow it to export oil directly to Turkey and be independent from Baghdad," says one foreign oil executive active in KRG territory. Experts say such an outcome would inevitably hasten a full, comprehensive agreement on exports and oil rights because the KRG would have much more leverage in any negotiations with the central government. Despite the problems, oil companies in the region are willing to persevere. They "are used to working in very ambiguous circumstances," says one Irbil-based energy consultant. With Kurdistan, they feel the risk is worth it.