A batch of oil deals signed last month in Iraq's semi-autonomous Kurdish region could herald further investment, even though a prolonged political and legal deadlock between Baghdad and the Kurdistan Regional Government is far from over.
Oil company confidence in the region has grown since May when producers began to receive payments for exports after months of haggling between the central and regional governments.
Small and medium-sized oil companies Britain's Afren, U.S. firm Hess Corp. , Irish oil explorer Petroceltic and Spain's Repsol all entered agreements with the Kurdistan Regional Government (KRG) last month.
"Despite the absence of solid legal background for Kurdish deals, small companies are still taking their chances," said Hamza al-Jawahiri, a Baghdad-based oil analyst. "This is clearly a gamble."
Underscoring the continued tensions, Iraq has excluded energy companies with contracts with the Kurdish region from participating in the country's fourth energy bidding round, which is expected to take place in January.
"Nothing has changed. We still consider contracts signed with the Kurdish region illegal and every energy company involved will be blacklisted," Abdul-Mahdy al-Ameedi, the director of the Iraqi oil ministry contracts and licensing directorate, told Reuters.
"There is no chance left for these companies to work with the oil ministry."
Semi-autonomous since 1991, Kurdistan has enjoyed more security than the rest of Iraq, where the central government is fighting insurgents and militia more than eight years after the U.S. invasion that toppled Saddam Hussein.
The Kurds and Iraqi Arabs have a long territorial dispute over areas of northern Iraq, and Baghdad and the KRG still disagree over the legality of contracts signed with foreign firms and over revenue-sharing.
A lot is at stake.
The KRG puts its territory's reserves at 45 billion barrels. The figure has not been independently verified, but if accurate, it would mean Kurdistan has more oil than the North Sea has produced over the past 40 years.
Samuel Ciszuk, senior energy analyst at IHS Global Insight, said the beginning of payments in May – even though they only cover costs – was "an important breakthrough".
"I think people are feeling emboldened, especially small or medium-sized companies that are seeking to grow," he said, while acknowledging there were still "huge stumbling blocks."
Many analysts said any bets on normalization were for the long term. The immediate motivation was the desire for a possible springboard into Iraq and to book reserves in a world where opportunities are scarce and powerful national oil companies increasingly dominant.
Oil fields in Kurdistan differ from Iraqi assets as the contracts allow oil firms to book reserves, helping to satisfy share-holders hungry for signs of reserves growth.
Afren's chief executive Osman Shahenshah said the acquisition in Iraqi Kurdistan would materially boost reserves.
"We're becoming a billion barrel company from 137 million barrels at an acquisition cost of well under $1 a barrel," he said. "I'm pretty bullish that it's moving in the right direction."
Iraqi Kurdistan's oil fields saw little development during the Saddam Hussein era.
Since the dictator was ousted in 2003, companies from countries ranging from Turkey to China to the United States have moved in the region, even though the risks loom large.
With U.S. troops scheduled to withdraw from Iraq at the end of the year, disputed areas over the border from Kurdistan remain a potential flashpoint and oil is key. By some estimates, the disputed city, Kirkuk sits on top of 4 per cent of the world's oil reserves.
Chief among the issues to resolve is agreement on the country's long-delayed hydrocarbons law.
Work on the law has been stymied by differences between Iraq's central government and Kurdistan over revenue-sharing.
Gulf Keystone chief financial officer Ewen Ainsworth said he was encouraged by parliamentary debate on the oil law, which he called "significant progress".
Even without the firmer guarantee of a new oil law, the Kurdistan-focused explorer said it considered the KRG contracts legal.
"The stumbling block is more a political stumbling block, rather than a factual, legal stumbling block," Mr. Ainsworth said.
Iraq's parliament last month warned the government it would force through a new draft of the much-delayed oil law, if the cabinet further held up the original legislation.
Payments in May to foreign oil firms for exploration and extraction costs have been based on an interim agreement.
Iraq's Deputy Finance Minister Fadhil Nabi said KRG authorities received $234-million (U.S.) as a first loan to pay foreign firms on condition they submitted all receipts and details of exploration costs.
"Kurdish authorities must submit receipts of foreign firms costs so a second payment could be made and that has not happened yet," said Nazar Mahdi, an expert with Iraqi Oil Ministry..
Still, the payments already made could be incentive enough for other oil firms to take the calculated risk of moving into the region.
"Oil majors have managed to access the largest oil fields in southern Iraq," said Mr. Mahdi. "Small companies seeking deals in Kurdistan may feel getting in at the start improves their long-term prospects."
With files from Barbara Lewis in London