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oil-barrels 400KHOR MOR: Kurdistan is taking its first steps towards gaining independence from Baghdad in the sale of its oil and gas with a convoy of trucks taking the condensate liquid fuel bi-products of a remote gas field directly into Turkey.

At least 15 trucks a day are loading up with high quality condensate at Khor Mor's gas plant and then trundling down a bumpy road to start the two-day journey to Mersin on the Turkish Mediterranean.

In return, Turkey is trucking back small quantities of diesel fuel and kerosene to use in the autonomous region's power plants.

"It's a very simple but symbolic start to direct oil trade between the Kurdistan Regional Government (KRG) and Turkey - and there will be more to come," said an official familiar with the barter-type operation between private companies.

"Neither side is thinking about stopping."

But Baghdad wants the trade to stop as it believes Iraq's central government has the sole right to export oil and gas produced throughout Iraq and says deliveries by truck from Kurdistan across the border into Turkey are illegal.

Ankara, however, is encouraging the swap, which began with five tankers in July. And Turkish Energy Minister Taner Yildiz says the volume could gradually build up to 200 trucks a day - roughly 40,000 barrels per day (bpd).

Industry sources say the KRG is now supplying only Khor Mor condensate, but crude oil from other fields will also be exported.

"Turkey believes that Kurdistan's export of oil and gas does not run contrary to Iraq's constitution," said the official, who asked not to be named," and Turkey is a logical exit route for the KRG," he added.

The KRG's oil can be shipped to world markets through a Baghdad-controlled pipeline from Kirkuk to the Turkish port of Ceyhan.

But the process has been stop-start over the years due to a long-running feud between Baghdad and Arbil, the KRG's seat of government, over oil and land rights.

The KRG halted exports in April in a dispute over payments from Baghdad to companies working in the region. It restarted them in August, but warned it would cut shipments by mid-September if there was no progress on payments.

SHUTTLE DIPLOMACY

Viewing oil production and export as trigger point for controversy in the region, Washington has just finished a round of shuttle diplomacy that took the State Department's special energy envoy Carlos Pascual to Arbil, Baghdad and Ankara.

On the agenda, according to sources familiar with the discussions, were the resumption of regular oil exports from the KRG, the threat by Baghdad to cut the region's budget and the reduction of refined products to Kurdistan.

The US diplomat reportedly told Ankara that the KRG may accept SOMO's right to exclusively market Iraq's oil and gas.

But a source in the KRG's Ministry for Natural Resources (MNR), told Reuters: "The KRG's position with regard to SOMO's monopoly on exporting Iraqi oil and gas is unchanged. Such exclusivity has no basis in past or present Iraqi law. Many other entities, including the KRG, should have the right to market and export oil provided that it is done in a legal, transparent way and the revenues are deposited into a common account and distributed fairly."

For now about 120,000 barrels per day (bpd) of KRG oil is being exported through the Iraq-Turkey pipeline and the KRG's energy minister Ashti Hawrami says the region's oilfields could ship up to 200,000 bpd.

The central government exports roughly 2.4 million bpd, with much of that coming from Iraq's southern oilfields.

At around 3,000 bpd, the condensate flow from Kurdistan's Khor Mor field to Turkey is a mere trickle. But if it's sold on the world market from Mersin, this very valuable product could fetch over $100 a barrel, say oil market sources.

Khor Mor - developed by the UAE's Crescent Petroleum and Dana Gas, alongside Austria's OMV and Mol of Hungary - supplies gas for power stations in the Kurdistan region, produces liquefied petroleum gas (LPG) and pumps out up to 17,000 bpd of condensates.

Arbil is also routing some of the condensate volume to Khurmala, where it is exported through the central government's Iraq-Turkey pipeline system, industry sources say.

Technicians at Khor Mor declined to comment on the final destination of the condensate because Kurdistan's MNR is in charge of the marketing effort.

Ankara has increasingly courted Iraqi Kurds as its relations with the Shi'ite-led central government in Baghdad have soured. Turkey is a major investment and trading partner for Iraq, especially for Kurdistan.

With open support from Ankara, Kurdistan has plans to begin exporting its oil along a new 1 million bpd pipeline to the Turkish border by August 2013. Production from the region is expected to rise towards the 1 million mark by then.

"The KRG needs the infrastructure - they can't have trucks bumper-to-bumper on the roads," says an oil industry source in Arbil.

Copyright Reuters, 2012