DNO, the Swedish oil explorer, said yesterday that it had found more than 100 million barrels of oil after testing a well drilled at Tawke, a village near the Turkish border.

The well flowed at 5,000 barrels a day, providing reassurance that the oil-bearing rocks that contain the massive Kirkuk oilfield extend further north into Kurdistan.

DNO’s discovery gives a big boost to the economic prospects of an autonomous Kurdistan but it also raises the political stakes over who controls Iraq’s valuable energy resource.

Fears that Kurdish oil ambitions could ignite political conflict between Baghdad and Arbil, the capital of Kurdistan, were aroused last month when Hussein al-Shahristani, Iraq’s new Oil Minister, declared that all oil exploration, production and export of oil should be handled by the Iraqi Oil Ministry in Baghdad. His assertion appeared to conflict with the Kurdistan regional government’s grant of licences to foreign firms, including DNO, which in 2004 acquired exploration rights over 250 square miles of Kurdish territory.

Only a week after the Iraqi Oil Minister’s intervention, Western Oil Sands, a Canadian explorer, signed a production-sharing agreement with the Kurdistan government in an area southeast of the giant Kirkuk oilfield, agreeing to invest $45 million over four years.

Shamkhi Faraj, a director of Iraq’s State Oil Marketing Organisation, added to the tension yesterday insisting that Baghdad would market any exports of Kurdish oil.

Iraq’s new constitution is ambiguous as to which jurisdiction has the ultimate authority over mineral rights. It envisages that both federal and regional governments have the right to cut oil deals with private companies but stipulates that the revenues from oil taxation should be distributed fairly.

Kurdistan is likely to argue that it is entitled to the financial benefit of the oil from within its region as it is not receiving its share of revenues from Iraq’s southern oilfields.

Ashti Hawrami, natural resources minister for the Kurdistan regional government, said that the Kurdish people had for decades seen their oil used to finance repression. “Now, we control our own resources which we will exploit for the benefit of the people of Kurdistan region and all Iraqis,” he said.

Meanwhile, the Swedish company hopes that a second well will prove the existence of even larger reserves at Tawke at other levels.

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