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By Peg Mackey
LONDON, Aug 28 (Reuters) - BP expects to sign aninitial deal in early September to revive Iraq's northern Kirkukoilfield, an industry source said, a move that could affectregional politics because the field straddles the border withthe autonomous Kurdish region.
A deal at Kirkuk would allow the British major - already atwork at Iraq's biggest producer, Rumaila, in southern Iraq - tonegotiate access to significant reserves in the north. Baghdadwould get a trusted, experienced partner to help arrest a hugedecline in output from Kirkuk.
"It's an initial 18-month deal to offer support, which willprovide an opportunity for BP to negotiate a longer-termdevelopment contract," said the source, who is familiar with thenegotiations.
BP declined to comment.
The company would work on the Baghdad-administered side ofthe border on the Baba and Avana geological formations. Kirkuk'sthird formation, Khurmala, is controlled by the KurdistanRegional Government (KRG) and being developed by the IraqiKurdish KAR group.
BP's involvement at Kirkuk has been under negotiation formore than a year. When Baghdad first revealed the preliminaryarrangement in January, the KRG rejected the pact as illegal,because it had not been consulted.
The UK major is comfortable with its decision to proceed,the source said. "BP expects some noise from the KRG, but it'sconfident the government in Baghdad has a sensible way forwardover Kirkuk."
Among the world's international oil companies, BP could havethe best relationship with Baghdad through its contract at thehuge, $30 billion Rumaila oilfield project.
Baghdad hopes BP will eventually sign a technical servicecontract at Kirkuk like the one for Rumaila, an Iraqi oil sourcesaid. The company expects, however, to negotiate bettercommercial terms for this contract, the industry source said.
Iraq awarded a series of service contracts in late 2009 tothe likes of BP, Eni and Exxon Mobil, whichreceive slim margins on Iraq's fee-based development contracts.
"The terms will have to reflect the complexity of the fieldand the need for intervention to arrest the decline," said thesource, who requested anonymity.
At the start, BP will spend up to $100 million to help stopKirkuk's decline and carry out surveys to get a clear picture ofthe field.
A small team of up to 30 people from the company will visitand work in Kirkuk once the final contract is signed.
Output at this 78-year-old field has slumped to around280,000 barrels per day (bpd) from 900,000 bpd in 2001 afteryears of injecting water and dumping unwanted crude and productsinto the field.
Iraqi officials have said they would like BP to raiseproduction capacity to around 600,000 bpd in five years.
But the pace of development at Kirkuk will be slower than atthe giant southern fields of Rumaila, Zubair and West Qurna-1where BP, Eni and Exxon have helped to raise output by 600,000bpd in just two years.
"There will be no radical development," said the industrysource. "This is an old, big field that's in decline and needs alot of attention."
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. But that has not deterred the UK major.
"BP's sense is that everyone in Kirkuk is highly dependenton the resources there, so the development of the oilfield isextremely important," the industry source said.
Exxon, Chevron and Total, among other companies,have angered and alienated Baghdad by signing lucrativeproduction-sharing contracts with the KRG on better operatingconditions than in the south.
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 tosign deals and export crude oil, but Kurdistan says theconstitution allows it to agree to contracts and ship oilindependently of Baghdad.
BP has no interest in pursuing upstream opportunities inKurdistan, although Air BP is taking part in a tender to supplyfuelling services at an airport in the Kurdish capital of Arbil,industry sources said.
