The KRG passed its own hydrocarbon investment law in 2007 - based on a contentious interpretation of the Iraqi constitution - and then independently negotiated lucrative production-sharing agreements with international oil companies.
The first companies to venture into the Kurdish region were small ones, without significant worldwide footprints. However, today several "super-major" companies such as ExxonMobil of the US, Total (France), Chevron (US) and Gazprom (Russia) have commenced operations under KRG licences. This is a direct challenge to the central government's professed authority over these fields.
Without a national hydrocarbon law there is no clear mechanism for dispute resolution and arbitration between the central and provincial governments on oil matters.
But that's not all. At the crux of the KRG-Baghdad dispute lies the central legal and political issue of Iraq's future: the long-running dispute over who controls the ethnically mixed, oil-rich area around the city of Kirkuk.
Resolving these disputes would open the way to tackling the industry's substantial infrastructure needs and problems.
The climate of violence through most of the last decade has chilled investment, and as if that weren't bad enough there were 465 bomb attacks on oil-industry facilities and pipelines from 2003 to 2007.
Destruction and a lack of investment have left Iraq with total refining capacity estimated at a maximum of 790,000 barrels per day, even including current refinery upgrade projects.