(Corrects diplomat's name to James Jeffrey from Jeffrey James)
By Peg Mackey and Isabel Coles
LONDON/ARBIL, Iraq Feb 8 (Reuters) - Exxon Mobil has hired a former U.S. ambassador to Iraq as a consultant, diplomats and industry sources said, as the U.S. major faces a dilemma over whether to operate in the south of the country or honor its deals with the autonomous Kurdistan region.
Iraqi Prime Minister Nuri al-Maliki last month made Exxon an offer in a bid to woo back the company, which had seemed intent on pulling out of the $50 billion West Qurna 1 oilfield in the south under the central government's jurisdiction.
The substance of Maliki's offer to Exxon is not known, but industry sources describe it as substantial and say it is likely to involve much sweeter contract terms. The condition is that Exxon quit the northern Kurdish region.
It was unclear whether James Jeffrey was hired specifically to handle the dilemma and its fallout, but industry sources and diplomats said it was likely to work in the central government's favor.
"He probably has better relations in Baghdad than in Arbil," said a former U.S. diplomat on condition of anonymity.
Since signing for six blocs with the Kurdistan regional government in 2011, Exxon has put itself on one of Iraq's deepest faultlines: between the northern enclave and Baghdad, which says only it has the authority to grant oil contacts and control crude exports.
The Kurds argue their right to their own oil policy is enshrined in the country's federal constitution, drawn up following the U.S.-led invasion of 2003.
Iraqi oil officials and Kurdish politicians have said publically they are certain Exxon will choose them over the other.
Baghdad has the advantage of pursuing a goal aligned with the foreign policy of the United States, which has actively discouraged the KRG from pursuing its own oil policy, fearing it will precipitate the break-up of Iraq.
Tensions between Iraqi Kurds and the Shi'ite-led government are such that both sides deployed their respective armies to reinforce positions along their disputed internal border last year.
U.S. officials say the solution lies in a national oil law that has been caught up for years in a power struggle between Sunni, Shi'ite and ethnic Kurdish factions, which has intensified since U.S. troops withdrew in December 2011.
The head of Iraq's parliamentary oil and energy committee told Reuters in an interview on Thursday that passing legislation to govern the world's fourth largest oil reserves was "at the bottom of the government's list."
"Exxon's made some big hires to patch up mistakes, which could indicate they may be willing to scale down in Kurdistan" another diplomatic source told Reuters.
As the first major oil company to risk Baghdad's ire by venturing north, Exxon afforded the Kurds a victory in their ongoing turf war with the central government.
Although it would be a symbolic blow if Exxon left, the region is now host to a number of other majors such as Total , Russia's Gazprom Neft and Chevron Corp , and is determined to get greater energy autonomy. (Editing by James Jukwey)