China starts Iraq's first foreign oil work in decades

BAGHDAD Jan 2 (Reuters) - The Chinese National Petroleum Company (CNPC) started work on a $3 billion oil project in Iraq on Friday, the first foreign firm to begin such work since dictator Saddam Hussein nationalised the industry decades ago.

A CNPC delegation formally opened the al-Ahdab oi field project in Iraq's eastern province of Wasit, officials there said.

"It's a significant event which signals the first contribution of a foreign company in developing Iraq's oil fields for three decades," Wasit governor Latif al-Tarfa told Reuters by telephone.

"The Chinese engineers have located the spot where they will construct a field work site, and all the company's equipment will reach the southern port of Basra soon."

He said Iraqi security forces were prepared to protect the Chinese workers: "We will do all that is required to prove Iraq has become secure for all foreign oil companies to start developing its fields."

The Chinese will operate al-Ahdab under a service contract initially negotiated under Saddam but renegotiated last year by the new Iraqi government which obtained more advantageous terms.

The field should produce 110,000-130,000 barrels of oil per day -- small by standards in the region -- but the project is an important signal as the government enters negotiations for much larger projects announced this week and earlier in 2008.

Iraq has the world's third-largest reserves of oil, which provides nearly all government revenue. But production has dwindled and infrastructure decayed after decades of economic sanctions and war.

This week the Iraqi government put some of its most prized oilfields up for bids in 11 projects it hopes will add 2.0-2.5 million barrels per day -- roughly what Iraq produces now -- to output within a few short years.

Another set of eight contracts offered for bidding last year could add another 1.5 million bpd, potentially raising Iraq's production to more than 6.0 million bpd within a few years.

The decision to open its big oilfields to foreign firms puts Iraq at odds with the practice in other countries in the region, where the state maintains firm control of oil sectors. But Baghdad wants foreign firms to bring expertise and investment to quickly improve its decrepit oil infrastructure.

It has offered only service contracts -- under which Iraqi state firms keep all the oil while paying the foreign companies for their work -- rather than the production sharing agreements foreign companies prefer because they keep some of the output.

(Additional reporting by Aref Mohammed in Basra; writing by Peter Graff)