OREANDA-NEWS. Moves by Iraq's semi-autonomous Kurdistan Regional Government (KRG) to pave the way for a bond issue have opened up a new front in the ongoing battle between the central and regional governments over control and exploitation of oil resources.

The KRG has selected Goldman Sachs and Deutsche Bank to assess investor interest in what would be the region's first bond sale. But Baghdad says the move would be a breach of the Iraqi constitution.

"This is unconstitutional, since the bonds are guaranteed with Kurdish oil … and the constitution states that this oil is owned by the Iraqi people. The guarantees have to be federal," the Iraqi central bank's general manager for investments Muneer Omran told Argus.

"We [the central bank] will not guarantee these bonds. I do not know what guarantees they [the KRG] will get," Omran says.

The KRG says it has passed a "law to raise funds through borrowing" and the two banks will organise meetings with potential investors with the view to a potential bond issue in the "near future".

The move follows the KRG's warnings last month that, if Baghdad does not transfer what Erbil claims is its fair share of the federal budget, it will take the necessary measures to look after its own interests.

Baghdad and Erbil officials went head to head at a conference in London earlier this month over interpretations of a December deal on oil exports. KRG oil minister Ashti Hawrami said the KRG only received 35pc of the oil export revenues it was owed for January-May. But Baghdad accused Erbil of calculating what is was owed on the basis of the assumed $56/bl oil price and 3.3mn b/d export target in the 2015 budget to reach a monthly entitlement of over $1bn, not actual oil prices and exports. Baghdad maintains it is paying Erbil based on what the KRG is handing over to Iraq's official crude marketer Somo, adding that those volumes are well below the 550,000 b/d year average the agreement between the two sides stipulates.

Since that row erupted again, the KRG has been prioritising its own exports from the Turkish port of Ceyhan – which Baghdad regards as "smuggling" – by halting crude transfers to Somo's tanks and loading tankers independently. The KRG has exported around 319,000 b/d of crude from Ceyhan in June to date, with exports totalling as much as 347,000 b/d in the week to 24 June. This is more than double the 142,000 b/d the KRG exported in May.

That prioritisation means Somo's Kirkuk exports have fallen by 55pc from May to 216,000 b/d this month. Only 11pc of the 589,000 b/d of Kirkuk allocated to Somo for June has loaded so far this month.

In addition to facing pressing social and security needs, Erbil owes international energy firms operating on its territory $3bn in overdue debt. Exporting crude on its own account provides it with funds to address these demands. It may be that some proceeds from a bond issue would be used to clear debts to oil companies.

Baghdad is also targeting to issue bonds to raise over $5bn to help cover part of its $25bn budget deficit. The finance ministry has hired three international banks to arrange for the debt sale and has already met with credit rating agencies Fitch Ratings and Moodies to determine a credit rating for the country. Baghdad is planning a roadshow in end of July or early August after which the bonds will be issued.