Foreign oil companies jockeying for position in Northern Iraq are taking a great risk signing contracts with Iraq's Kurdish Regional Government (KRG), given Turkey’s ongoing conflict with the Kurdish rebels and Iraqi Oil Minister Hussein al-Shahristani’s threats to cancel the deals as long as the oil bill is not passed.

"It’s a very dangerous situation. The oil law is not fully implemented because some factions in the government do not see eye to eye and any oil company that tries to sign a contract with any of these regional governments would be really putting itself in a penalty box," Fadel Gheit, an analyst at Oppenheimer & Co. in New York told New Europe.

The Iraqi oil minister, backed by the Iraqi cabinet and the prime minister, is saying that these contracts are illegal; however, the Kurdish leaders are going on with them. "The Kurdish government wants to go on with these contracts in order to bolster their financial situation as a viable independent state in the future so it is all politics behind it," Muhammad-Ali Zainy, former chief engineer and manager in Iraq's Ministry of Oil, now with the Centre for Global Energy Studies in London, told New Europe.

"There must be some kind of a settlement through the Iraqi government because the Kurdish region is landlocked and they cannot really transport their oil across Iran or Turkey or Syria so it has to go through Iraq," Zainy said.

Despite the uncertainty, Northern Iraq has emerged as attractive to midsize European and American companies hoping to get in line ahead of others. Hungary's MOL is one of a range of companies, including Austria’s OMV, which concluded deals with the KRG at the start of November. MOL spokeswoman Catalina Roman told New Europe the contracts are legal. "I talked to my colleagues that took care of the contracts with the lawyers and they consider them to be in the legal frame and this is it," she said.

In Brussels, a European Commission official said contracts are a question of private companies and companies have to make contracts according to the law.

In Washington, US State Department spokesman Rob McInturff took a firmer stance, saying the US’s primary concern here is supporting the government of Iraq’s progress on the new hydrocarbon framework law. "That’s our primary concern and we are continuing to advise companies that there will be significant risk -- legal risk and political risk -- for them to sign contracts in the region ahead of the passage of a federal law that lays out hydrocarbon framework in Iraq. It sounds like that there have been a couple new contracts out there, US and non-US companies that have been going in and looking for business, and we would just continue to caution that there is significant risk there at this point," McInturff told New Europe.

But none of the oil companies that really count, basically the seven sisters, have made a move so far. "BP, Chevron, Royal Dutch Shell, Exxon, Total, ConocoPhillips and ENI are smart enough to know that you don’t rush into a situation that is very uncertain," Gheit said.

Meanwhile, Turkish aircraft are dropping leaflets in northern Iraq urging Kurdish fighters to surrender. Gheit noted that the situation could flare up very quickly. "If Turkey attacks the Kurdish area in the next few days or few weeks that will cast a shadow on the whole process," he said.

A Turkish diplomat told New Europe Ankara opposes any kind of contracts between foreign companies and the Kurdistan government.

The European Commission official said it’s not a question of security of supply of energy. It is a question of geopolitics. "European companies are involved but here it is more of a geopolitical issue and the situation around Iraq and not only Iraq but the relationship between Turkey and Iraq and the Kurds. Here the problem is not gas; here the problem is war," he told New Europe.

Gheit said safety, the rule of law and sanctity of contracts must be met in order for oil companies to be able to explore Northern Iraq fields successfully. "Iraq is a mess," he said. "I don’t think that oil companies will be eager to send a geologist or engineer to be kidnapped and slaughtered – no way, no way. I used to work for an oil company and I can tell you they can pay as much as they want, but nobody wants to come back in a wooden box."