As Baghdad grapples with Sadr City, Iraqi Kurdistan busily builds 'Dream City'

The Kurdistan Regional Government is briskly pursuing oil and gas contracts and economic development, a drive that is chafing Iraq's central government in Baghdad.

Shakir Wajid showed off his company's plans for "Kurdistan Gas City" – a futuristic residential, commercial, and industrial city that will run entirely on natural gas.

"We believe there are huge gas reserves under the ground in Kurdistan," says Mr. Wajid, an Iraqi Kurd and executive with United Arab Emirates-based Dana Gas, whose company is in the final stages of negotiating over a 14.7 square mile plot of land for the $20 billion project.

Dana Gas has already invested $650 million in Iraqi Kurdistan to extract gas, build a liquefied petroleum gas (LPG) plant, and transport the fuel to new power plants in the region. "This area will transform economically in a massive way.… It will be a revolution," says Wajid from his office in the northern Iraqi city of Sulaymaniyah.

Further north in Arbil, the region's capital, authorities are finalizing a deal estimated at $12 billion with a consortium of South Korean companies that will give the energy-starved Asian country access to several oil fields here in exchange for investment in infrastructure projects in northern Iraq.

Over the past year, the Kurdistan Regional Government (KRG) has briskly awarded oil exploration and production contracts to foreign companies. The roster now includes the likes of America's Hunt oil, Austria's OMV, and Russia's TNK-BP. And all of this is happening in defiance of the oil ministry and the central government in Baghdad.

But as the government of this semiautonomous region, home to about 4.5 million people, forges ahead with its ambitions to transform this long deprived part of Iraq, it must maneuver through many external and internal challenges.

For average Iraqis, and some in the central government, Iraqi Kurdistan's actions are nothing short of its efforts to lay the foundations for independence. In many neighboring countries, particularly Turkey, which is waging a war with its own separatist Kurdish rebels, sometimes in Iraqi Kurdistan, this is cause for alarm.

Last Thursday, the KRG held rare talks in Baghdad with senior Turkish officials partly to allay these concerns.

Even inside the region, discontent is rising among many residents who see little benefit from big projects and are starting to question the motives and capabilities of the two main ruling parties – the Kurdistan Democratic Party (KDP) the Patriotic Union for Kurdistan (PUK) - that have had a grip on power for decades.

Beyond the crumbling old buildings of Arbil's center an entire district is in the making: New Hawler. Cranes stretch into the sky as foreign laborers toil on the building sites of hotels, office towers, and gated communities with names like Dream City and Italian City. Signs of wealth are everywhere. You see it in the shopping malls and gleaming cars.

At Empire World, a $365 million housing and commercial development being built by wealthy Kurdish businessmen who have benefited from US contracts in Iraq, manager Basma Azouz says villas in the project that average $250,000 are being sold at a fast clip. Many families of rich Iraqis and Baghdad-based government officials have over the past few years opted to live in the relative safety of northern Iraq.

"Have you seen the other Iraq? It's spectacular. It's peaceful. It's joyful. Fewer than 200 US troops are stationed here," says a promotional campaign for investment in the Kurdistan region.

During a recent interview, Prime Minister Nechirvan Barzani spoke with passion about his vision for the region, which he says can serve as a model for the rest of Iraq and a "steppingstone" for investment in the rest of a country that has some of the world's largest untapped oil reserves.

"We just want to rebuild our region as part of Iraq, that's it. We are not a threat to anybody. We want to be a factor of stability," says Mr. Barzani, denying that his region eyes secession.

His foreign relations adviser, Falah Mustafa, says that while 97.5 percent of Kurds in the region support the idea based on the results of an informal referendum in 2005, it would be unrealistic. "It's better for us to go for something that's achievable and viable. We did not push too hard, we did not go unrealistic."

Barzani says his government's decision to start awarding oil and gas contracts to foreign investors – before a much-delayed national hydrocarbons law has been agreed on with Baghdad – is in keeping with the spirit of the new Iraqi Constitution. He says the heart of the dispute with Baghdad is that his region is committed to a federal Iraq, which many in Baghdad seem to be backing away from.

But Iraq's Oil Minister Hussein al-Shahristani has accused Kurdistan of signing the contracts "secretly and without competition."

"It did not give Iraq the highest possible return," he says, adding that all companies that have inked deals with Kurdistan have been blacklisted.

On April 22, Barzani said he was "very optimistic" that an agreement would be reached with Baghdad even though it "may take time" to work out oil contracts and other sticking issues, such as the resolution of disputed territories.

Although average Kurds admire their youthful-looking prime minister, many see the new prosperity as feeding corruption. Ari Harsin, an Arbil journalist with the weekly Awene, says that members of the KDP and PUK hold stakes in almost every development project.

"In Kurdistan the politburos of the KDP and PUK decide where the budget goes," says Mr. Harsin. "There is no transparency. People do not understand how these oil deals are going to benefit them. Sometimes it's almost like a mafia state."