Photos of PAP drinking their milkshake near a Chinese oil field in Iraq.

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Iraq inaugurates oil deal with China's CNPC
(Adds CNPC comments)

By Ahmed Rasheed
http://www.reuters.com/article/rbssEnergyNews/idUSLB36965920090311?pageNumber=2&virtualBrandChannel=0

WASIT, Iraq, March 11 (Reuters) - Iraq inaugurated a $3 billion oil project on Wednesday with the Chinese National Petroleum Company (CNPC), activating the country's first major oil deal with a foreign firm since the fall of Saddam Hussein.

Oil Minister Hussain al-Shahristani joined Chinese officials at the al-Ahdab field in south-eastern Wasit province, which should eventually produce 110,000-130,000 barrels of oil a day.

CNPC will operate Ahdab under a contract, initially signed under Saddam, which the Iraqi government renegotiated last year to gain better terms by changing it from the production-sharing agreement reached in 1997 to a set-fee service deal.

Shahristani pushed the button on a seismic survey of the field and said the project, worth $3 billion, would begin drilling four appraisal wells "within months."

"The majority of oil extracted here will be used for export in order to add revenues to the budget," he said, adding part of Ahdab's oil would help fuel a nearby power station.

Zhi Yulin, CNPC's top official in Iraq, said the deal would include a total of 138 wells and that drilling rigs would reach the field in two weeks.

The project, while modest in terms of total output, is a milestone for Iraq as it seeks to reinvigorate its oil sector, which offers vast potential but is hindered by the effects of years of sanctions, underinvestment and war.

The government of Prime Minister Nuri al-Maliki is courting top foreign firms in two bidding rounds for long-term service contracts for major oil and gas development fields.

It hopes that, as violence recedes in most parts of Iraq, foreign investors will set aside security concerns and will be drawn by the world's third-largest proven oil reserves.

Some industry officials have complained about the terms offered by the government, which wants service contracts rather than the production-sharing deals oil companies prefer.

Iraqi oil production now stands at 2.4 million barrels per day, below levels before the U.S.-led invasion, but Shahristani hopes to increase it to a long-term goal of 6 million bpd.

Exports, which have been slowed by technical problems, are now lower than the post-invasion peak of 2 million bpd last May.

Iraq needs to boost exports more than ever to make up for the slump in oil prices that has clouded its budget outlook. Iraq relies on oil for more than 95 percent of state revenues.

CNPC, which is the parent company of PetroChina, began construction at Ahdab in January. No drilling has started "I have assured (CNPC) that if they are able to accelerate execution of this project, we will give them the chance to participate in developing other oilfields," Shahristani said.

The CNPC official said that, despite continued violence in Iraq, the company was pursuing other oil deals in Iraq.

"Security is quite challenging for us, but we see more opportunities than challenges here in Iraq," he said.

In addition to the Ahdab deal, the government has also negotiated a natural gas deal with Royal Dutch Shell. (Writing by Missy Ryan; Editing by James Jukwey)