UPDATE 1-Iraq to reduce fees paid to foreign oil companies

BAGHDAD, March 29 (Reuters) - Iraq will exclude oilby-products from foreign oil companies' revenues in newcontracts expected to be awarded in June, an oil ministryofficial said on Thursday, effectively reducing production feesthey receive from the government.

Oil producers in Iraq currently receive a fee from thegovernment linked to production increases, which include crudeand oil by-products such as liquefied petroleum gas and dry gas.

OPEC's second largest producer after Saudi Arabia decided tochange the contracts after a glut caused oil prices to crash in2014, reducing the government's ability to pay the fees.

Iraq has invited foreign companies to bid for contracts toexplore and develop petroleum reserves in 11 new blocks as itseeks to boost output capacity.

The new terms, announced at a press conference by AbdulMahdi al-Ameedi, head of the ministry's licensing and contractsoffice, include other provisions which will reduce companies'profit.

The new contracts will 'establish a linkage betweenprevailing oil prices and cost recovery', Ameedi said.

They will also introduce a royalty element, he added.

Companies including BP, Exxon Mobil, Eni, Total and Royal Dutch Shell helpedgrow production in the past decade by over 2.5 million barrelsper day to about 4.7 million barrels per day.

The semi-autonomous Kurdistan Regional Government producesoil and gas from fields under its control in northern Iraq undera production sharing model more profitable to companies.

The new contracts offered by Baghdad will also set a timelimit for companies to end gas flaring from oil fields theydevelop on territory under its control.

Iraq continues to flare some of the gas extracted alongsidecrude oil at its fields because it lacks the facilities toprocess it into fuel for local consumption or exports.

Iraq hopes to end gas flaring by 2021, which costs nearly$2.5 billion in lost revenue for the government and would besufficient to meet most of its unmet needs for gas-based powergeneration, according to the World Bank.(Reporting by Moayed Kenany; Writing by Maher Chmaytelli;Editing by Elaine Hardcastle)