Pat Dollard | Young Americans

Related: Iraq Qualifies 35 Companies For Oil Deals

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LONDON - An agreement on a draft oil law for Iraq may finally have been reached Wednesday, which could bring major oil firms like Royal Dutch Shell and BP one step closer to investing in the war-torn and fractured republic.

Iraqi government spokesman Ali al-Dabbagh told United Press International on Wednesday that a new understanding had been reached between the central government of Iraq and the regional government of Kurdistan, after a year of bitter division over the future of the country’s oil industry.

“There is an understanding between the central government and the regional government for the oil law,” al-Dabbagh was quoted as saying. Although the law has not been officially approved by the Iraqi parliament, the announcement is a clear sign that a significant number of lawmakers are backing the legislation.

The agreement reportedly means Iraq will once again have a national oil company, along with a federal policymaking body for oil and gas to decide who controls the country’s oil fields and exploration blocks. It will also create a legal framework for foreign investment, which so far has deterred major oil companies from wading into Iraq.

“The implications of a passed oil law allowing foreign investment would naturally be huge for Iraq, the region and the oil industry,” said Samuel Ciszuk, an analyst with Global Insight, “unlocking a new chapter for Iraq, allowing it to develop and modernize its oil and gas production rapidly.”

The downside is there does not seem to be an agreement on the disputed oil-rich city of Kirkuk, which the Kurds claim belongs to them. Currently, 97% of Iraq’s proven reserves of 112 billion barrels lie outside Kurdish territory, including Kirkuk.

Al-Dabbagh said it had been agreed to allow the U.N. process for determining the status of Kirkuk and other disputed areas to play out.

A spokesperson for Royal Dutch Shell (nyse: RDSA - news - people ) refused to comment on the news, but reiterated the company’s interest in investing in Iraq. Industry insiders say companies like Shell are training workers to prepare for an eventual move into the country, which can only happen once an oil law is agreed upon and security improves. (See: “Is Big Oil Losing The Race For Iraq?”)

The Kurdish regional government and the central government in Baghdad have been at loggerheads over the past year, after last-minute amendments to the draft law in February 2007 pushed the Kurds to withdraw their support and pass their own regional law six months later.

Now it seems that the Kurds’ unilateral decision to press ahead and award production-sharing agreements to small oil companies like DNO (other-otc: DTNOF - news - people ) and Addax Petroleum (other-otc: ADXTF - news - people ) has not prevented reconciliation with Baghdad. It might mean, however, that they are restricted to Kurdish exploration, as the Iraqi oil minister has declared the agreements illegal.

Shares in Norway’s DNO, a medium-sized oil company with assets in Kurdistan, closed up 16.3%, to 10.15 Norwegian kronor ($2.05), on Wednesday. Press reports had claimed throughout the day that an oil deal was close, though the Iraqi oil ministry reportedly denied it.