Iraq's government said it would move to end a major contract with Exxon Mobil after the US oil giant signed a deal with semi autonomous Kurdistan to explore fields there which Baghdad on Wednesday called a violation of the law.

Exxon's agreement in Kurdistan and Baghdad's response have set up a power struggle between the Iraqi central government and multinational oil companies over the potential resources in the northern Kurdish region.

Baghdad and Kurdistan's regional government are in a long running political dispute over oil and land rights and the central government says all foreign oil deals signed with the Kurdistan region are illegal.

Mr Abdul Mahdy Al Ameedi director of the oil ministry's contracts and licensing directorate said that "Exxon has violated the ministry directions and instructions concerning the companies working in Kurdistan. It's a violation of the contract and the law. As a consequence the oil ministry will take steps to end the contract. But this operation will need arrangements."

It was unclear what steps the oil ministry may be able to immediately take against Exxon as Baghdad seeks to manage the challenge by the US major to its national oil policies.

Exxon has a multi-billion dollar contract with Iraq's oil ministry to develop the 8.7 billion barrel West Qurna Phase I oilfield in the south one of dozens of large contracts Iraq hopes will help rebuild its war battered crude industry.

Challenging Exxon will be a tricky balancing act for Prime Minister Mr Nuri Al Maliki's government as it seeks to rebuild the economy and oil production which is currently around 2.9 million barrels per day.

Trying to end the Exxon deal could lead to long legal negotiations that would sour the appetite of other investors. Exxon has gone to international arbitration before, for example, in Venezuela over a nationalization move.

Mr Ameedi said that there had been no response from Exxon to the Iraqi government's communications with the company regarding the Kurdistan deal. Exxon hasn't answered us yet. The Kurdish government had also been talking to US oil company Chevron and Italian operator Eni.

He said that we know that there is communication between them. There are talks. Chevron has said it continues to be interested in pursuing opportunities in Iraq but that it will not discuss specifics.

(Sourced from Reuters)