* Project designed to raise oil extraction rates
* But red tape, cost disputes slow it down
* Some mature fields already suffering from lack of water
* Project may not now be enough, even if completed
* Some oil majors now building own facilities
By Rania El Gamal
DUBAI, Sept 17 (Reuters) - A lack of water threatens Iraq'splans to raise its oil output, boost its stumbling economy andbecome a leading producer in the region after Saudi Arabia.
A multi-billion dollar common seawater injection schemedesigned to boost production from the giant export oilfields inIraq's south is snarled up in red tape and acrimony.
The seawater injection project is core to the development ofthe southern fields - which account for most of Iraq'sproduction - and aims partly to flush oil to the surface andovercome declines in production at fields such as Rumaila, WestQurna, Zubair and Majnoon.
While the Islamist insurgency has hit oil exports fromIraq's northern pipeline, the southern oilfields have not beenaffected by Baghdad's fight with Islamic State.
But the shortage of water is hurting production at two mainsouthern fields: West Qurna-1 and Zubair, official and industrysources told Reuters.
Further production declines from both mature fields looklikely if water scarcity persists, the sources said.
Output from West Qurna-1 - operated by ExxonMobil -has fallen almost 40 percent to around 300,000 barrels per daycompared with last year, an industry source said, adding that ashortage of water was one of the reasons.
Zubair, run by Italy's ENI, is feeling the paintoo. A source at state run South Oil Company said productionfrom Zubair had fallen, but declined to give further details. Itwas currently pumping around 280,000 bpd, the source said.
"100 percent correct," another Iraqi oil source in Baghdadsaid when asked if lack of water was a reason behind theproduction decline in the two oilfields.
Infrastructure and logistical constraints, as well assecurity worries, have already forced Iraq to cut its 2014 oiloutput target more than once -- to 3.7 million bpd from aninitial target of 4.5 million bpd, excluding Kurdish oilexports. Saudi Arabia's output was around 9.6 million bpd inAugust, according to OPEC figures.
The water injection project, where the first phase isdesigned to pump 5.2 million bpd of treated seawater from theGulf to the fields, was originally supposed to be completed bythe end of 2013. It is now not due to come online before2018-2019, the sources say.
When the plan was announced in 2010, U.S. oil companyExxonMobil was chosen to take the lead in coordinatinginitial studies for the plan.
But red tape and disputes over cost delayed the plan formonths, and Exxon was removed from the project in 2012 due todisagreements over the economics of the deal. State-run SouthOil Co. has since taken over project management.
Apart from the project itself, hurdles to approvingcontracts for service work, such as building new pipelines anddrilling wells, as well as getting visas and customs clearanceare top complains by oil executives working in the south.
"It is not just getting the water to the field, it isgetting the pumps and pipes to get it into the ground, and thennew kit to separate out the larger quantities of water," said asecond industry source.
"Quite a bit of the fate of production is in the hands ofthose who have the inclination to speed up the process."
Officials at South Oil Company could not be reached forcomment and an oil ministry spokesman said he had no immediatecomment and was still looking into the matter.
PRODUCTION FALLS
Zubair produced 315,000 bpd on average during the secondquarter of this year, according to a document by South Korea'sKOGAS, a partner with Eni at the field.
Madhi Abdul Razzaq, head of the joint management committeefor West Qurna-1 told Reuters in March last year that outputfrom the field was 480,000 bpd and it had been projected toreach 600,000 bpd by the end of 2013.
In June, former Oil Minister Abdul-Karim al-Luaibi toldreporters in Vienna that output from West Qurna-1 was around350,000 bpd. He gave no reason for the drop.
"Oil production has definitely been impacted but I have notseen any indication of what's happening with the common seawatersupply project, absolutely none," the first industry sourcesaid.
Rumaila oilfield, which accounts for almost half of Iraq'sproduction and is operated by BP, gets around500,000-700,000 bpd of treated water from the Qarmat Alifacility, which covers its water needs, at least for now.
Even relatively young oilfields such as West Qurna-2, run byLukoil, and Majnoon, led by Royal Dutch Shell, may start feeling the pressure by 2016-2017 as theyneed water to manage their reservoirs and lift output, theindustry sources said.
Revisions to some of the existing contracts between Baghdadand foreign oil companies include a provision that protects thecompanies in case Iraq cannot supply the water needed to boostoutput, two sources told Reuters.
But the long delays to the project mean that even when theseawater project comes online, it may not be enough to meetdemand, one industry source said. Oil majors are already seekingalternatives and are building their own water facilities.
"The issue is not just the delay, but the impact the delayis having," said another industry source. "The longer you leavethe project, the demand (for water) increases, so effectively bydelaying the project, it becomes more difficult to execute."
(Additional reporting by Aref Mohammed in Basra; Editing byAndrew Torchia and Susan Thomas)