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* Former BP CEO Hayward working with KRG as head Genel
* Iraq wants to raise output to 600,000 bpd from 280,000
* KRG also seeks to raise output on its side of field
By Peg Mackey and Andrew Callus
BAGHDAD/LONDON, Jan 17 (Reuters) - BP's deal todevelop an Iraqi oilfield that straddles the border with theautonomous Kurdish region puts it in the front line of asectarian stand-off, in which rivals and its former CEO havechosen the other side.
Under the draft agreement revealed by Reuters on Wednesday, BP will undertake work to arrest decliningproduction at the Kirkuk oilfield.
Kirkuk's oil riches are at the centre of a crisis within thenational government of Sunni, Shi'ite and Kurdish parties overhow to share power amid increasing worries the country mayrelapse into wide-scale sectarian bloodshed.
At least 25 people died on Wednesday in a Kirkuk suicidebombing.
BP will be working on the Baghdad-administered side of theborder on the Baba and Avana geological formations. Kirkuk'sthird formation, Khurmala, is controlled by the KurdistanRegional Government (KRG).
"From a political perspective, this would move BP close tothe fault line. But there are also very solid technical reasonsfor the oil ministry to have BP at Kirkuk," a western oilexecutive working in Iraq said on Thursday.
Kirkuk output has slumped to 280,000 bpd from 900,000 bpd in2001 after years of injecting water and dumping unwanted crudeand products into the field. Iraqi officials have said theywould like BP to raise production capacity at this 77-year oldworkhorse to around 600,000 bpd in five years.
BP's former chief executive Tony Hayward, now heading a newcompany, and a number of rivals including Exxon Mobil and Chevron have cast their lot with the Kurdish side ofthe dispute.
In an interview with Reuters in September,Kurdistan Energy Minister Ashti Hawrami said he wanted to deployoil companies on a project to raise Khurmala's output to as muchas 300,000 barrels a day (bpd) from its current 85,000 bpd.
Hawrami also said the KRG, with autonomy and its own armedforces since 1991, would also be interested in capturing the gasthat is now being flared from the Avana dome.
CLOSE RELATIONSHIP
At the start of its project, BP will make a "specialallocation" of $100 million to help stop Kirkuk's decline andcarry out surveys to get a clear picture of the field.
"We have made a proposal for short-term assistance, whichthey appear to like and we're progressing on from that," Michael Townshend, president of BP in Iraq, said on Wednesday."It's early days."
BP has arguably the best relationship with Baghdad among theworld's top international oil companies through its contract atthe huge Rumaila field in the south of the country, far from thedisputed Kurdish north.
The KRG's oil exports and contracts are at the heart of awider dispute with Baghdad's Arab-led government over territory,oilfields and political autonomy.
Iraq's government insists it alone has the sole authority toexport crude oil and sign deals, but Kurdistan says theconstitution allows it to agree to contracts and ship oilindependently of Baghdad.
Iraq Energy minister Abdul Kareem Luaibi has said Baghdadintends to sue Genel Energy - the first company toexport oil directly from Kurdistan - and may slash thegovernment's allocated budget to the region unless it halts whathe rejected as smuggling.
Genel is led and part-owned by Hayward, the former head ofBP who quit the company after the U.S. Gulf oil spill of 2010.
BP's rivals Exxon, Chevron, Total and others haveangered and alienated Baghdad by signing lucrativeproduction-sharing contracts with the KRG on better operatingconditions than in the south.
Baghdad issued Exxon an us-or-them ultimatum a year ago. Theresult was the U.S. major opted to sell its 60 percent stake inthe West Qurna-1 oilfield in southern Iraq. China NationalPetroleum Corp (CNPC) has emerged as the front-runner to buy it.
