April 16, 2008 | By BEN LANDO | UPI Energy Editor

WASHINGTON (UPI) -- Iraq's central and Kurdish region governments have reached a deal on an oil law, including a method for weighing the validity of the oil deals the Kurds have signed with foreign firms, the top government spokesman told United Press International.

Ali al-Dabbagh said an agreement has also been made on the classification and funding for the Kurds' security forces, the Peshmerga, which will become a battalion within the Iraqi Ministry of Defense. And he said the sides agreed to allow the U.N. process for determining the future of oil-rich Kirkuk and other disputed territories to play out.

"There is an understanding between the central government and the regional government for the oil law," Dabbagh said in a telephone interview from Brussels, where Iraqi Prime Minister Nouri al-Maliki is meeting with EU officials. Maliki's governing coalition has seen defections and opposition growing over the past year. Dabbagh said political parties have recently pledged support, and meetings in Baghdad with top Kurdistan Regional Government officials have led to "a new atmosphere."

The oil law and oil deals have been a source of contention in Iraq's political and civil society. Opponents of the KRG deals are led by National Oil Minister Hussain al-Shahristani. The oil law has seen many versions and incarnations, each with steadfast supporters and opponents.

This has led to fits and starts in moving forward a law establishing the post-Saddam Hussein rules for governance of Iraq's oil and gas sector -- including four versions stalled in the Parliament's Energy Committee -- that will decide the flashpoint issues of central or decentralized control over the oil strategy and to what extent foreign oil companies will be allowed a role in the nationalized oil sector.

Dabbagh said the agreement is on the version of the oil law approved by key KRG and central government leaders in February 2007. But the deal was foiled by an Oil Ministry decision to classify Iraq's discovered oil fields and exploration blocks, detailing authority for development between the central government and producing provinces and regions in a manner with which the Kurds disagreed.

It was further altered by the Shoura Council, a legislative review body, which led to increased tension and multiple versions.

Meanwhile the Kurds made unilateral moves in the prospective oil sector in their three-province region. The KRG is further in its political, economic and security evolution than the rest of Iraq because of the no-fly zone following the 1991 Gulf War. Since 2004 the KRG has signed more than 20 deals to explore for and develop oil and gas. Most were signed last year, as was a regional oil law, prompting Shahristani to increase his critique to outright condemnation. He called the deals illegal and has so far made good on a threat to blacklist any firms that sign Kurd oil deals from gaining contracts for the rest of Iraq.

None of the companies made the short list, announced Monday, of those allowed to submit bids in an upcoming round of oil and gas field tenders.

The February 2007 oil law draft establishes a federal oil and gas council that would serve as a policymaking body. Dabbagh said the council would decide national versus local control over oil and gas fields and exploration blocks, as well as the legitimacy of the KRG oil deals.

"This is going to be reviewed and is going to be checked whether they are workable with the new law or not," he said. "If not they should be amended in order to have them matching with the new regulation of the oil law."

He said a revenue-sharing law and legislation reconstituting the national oil company and reorganizing the Oil Ministry will "be passed simultaneously (with the oil law) and as a sort of compromise package."

There are still issues to iron out before an agreement is finalized, he said.

Kirkuk, the oil-rich area just outside the official KRG territory, is among land whose proper governance is disputed. The Kurds maintain it's historically theirs and say wrongs perpetrated by Saddam, such as forced removal and district redrawing, should be reversed. Arabs and Turkomen, among others, dispute the Kurds' claim. The 2005 constitution called for a referendum allowing the voters in the disputed territories to decide their future by the end of last year. Political and technical hurdles still have not been cleared. The United Nations in December brokered a six-month extension but will likely need more time. It's to announce a plan next month.

"Nothing has been agreed yet," Dabbagh said amid reports this issue was part of the Kurd-central government parley over the oil law.

The Council of Ministers must approve the law before it is passed to Parliament for final consideration, which is sure to include heightened debate and deliberation since there's not one view on either the decentralization or privatization issues. Many favor continuation of a central government-guided oil strategy with oil flow under Iraqi control.

The Peshmerga, the security force largely kept to the KRG area, will be funded based on "a certain principal," Dabbagh said. There had been a row over whether the KRG should fund the force from the revenue redistributed to it from the central government or from another source also from Baghdad. "It's going to be a support from the budget directly. ... There will be a certain battalion and division created in Kurdistan, it will be under the order of the Ministry of Defense."