(Refiles with interview day)
By Peg Mackey
BAGHDAD, Jan 16 (Reuters) - Iraq plans tough measures against the country's Kurdistan region and foreign oil companies working there to stop "illegal" crude exports in an escalation of its standoff with the autonomous enclave, the oil minister said in an interview on Wednesday.
Oil exports and contracts are at the heart of a wider dispute over territory, oilfields and political autonomy between Baghdad's Arab-led government and Kurdistan, where ethnic Kurds run their own regional administration.
Abdul Kareem Luaibi said Baghdad intends to sue Genel Energy - the first company to export oil directly from Kurdistan - and may slash the government's allocated budget to the region unless it halts what he rejected as smuggling.
Speaking from his office in the oil ministry in Baghdad, Luaibi said it was "high time" for the Kurdistan Regional Government (KRG) to stop "this very dangerous behaviour".
Luaibi also revealed a preliminary agreement with oil major BP to revive the giant but ageing northern Kirkuk oil field, which - apart from being at the centre of a feud between Kurdistan and Iraq - is suffering massive output declines.
Iraq's government insists it alone has the sole authority to export crude oil and sign deals, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.
Kurdistan has upset Baghdad by signing deals directly with oil majors such as Exxon Mobil and Chevron, providing lucrative production-sharing contracts and better operating conditions than in the south.
Last week, the KRG gave permission to Genel to truck exports directly from Kurdistan's Taq Taq oilfield to Turkey, bypassing the federal pipeline system linking Kirkuk with the Turkish Mediterranean port of Ceyhan. The trade is small, but symbolic.
Baghdad responded swiftly. Iraq's state-run oil marketer SOMO issued a statement saying it had the right to take legal action against companies exporting crude independently of the central government.
"We are going to proceed with judicial proceedings against this company and all others dealing with smuggled oil," said Luaibi. "It's our right to stop them."
He said the ministry, via SOMO, has sent a letter to Anglo-Turkish explorer Genel detailing its position.
Genel declined comment.
The move to truck oil directly to Turkey came after Kurdistan exports were halted via the Baghdad-controlled Iraq-Turkey pipeline due to a dispute over central government payments to oil companies working in Kurdistan.
Baghdad has made one payment in 2012 to companies, but Iraqi officials said last month they would not pay oil firms a second installment because Kurdistan had failed to reach agreed production under a deal made in September.
Luaibi said that may prompt the central government to cut back on the 17 percent of the federal budget it allocates to Kurdistan for its share of national oil production.
"The KRG is trafficking a considerable amount of oil through Turkey and Iran. This is very dangerous behaviour that violates the terms of the constitution," said Luaibi.
"We can't carry on paying 17 percent of the budget to the region with this continued misconduct. The cabinet may decide to cut the 17 percent (unless the KRG restarts exports through the federal system)," he said.
Kurdistan's deals with oil majors like Exxon have also prompted the central government to warn companies they may risk losing their assets in the south of the country.
Baghdad issued Exxon an us-or-them ultimatum a year ago - the U.S. major opted to sell its 60 percent stake in the West Qurna-1 oilfield in southern Iraq and China National Petroleum Corp (CNPC) has emerged as the front-runner to buy it.
Luaibi said Exxon had yet to inform the ministry of oil as to whether it had found a buyer.
"The subject is not settled yet," he said. "There will be no retreat from the ministry of oil. Our position is very clear: We would be very happy for them to stay at West Qurna, provided they cancel all their contracts with the KRG."
Despite the tension, output growth at West Qurna-1, where Royal Dutch Shell is minority partner, continues, he said.
"The contract is going smoothly - there is good progress," said the oil minister, with production running at about 400,000 barrels per day (bpd).
Luaibi said he saw growing instability in the so-called disputed territories, the ethnically mixed areas where both Baghdad and Kurdistan claim jurisdiction, and where some of Exxon's fields are located.
"Exxon is going to face real opposition from the residents of those regions," he said. "I have personally informed them accordingly."
Working in Kurdistan would cause "great harm" to Exxon's reputation, not least because the region is marketing its crude oil through "smuggling" via Turkey and Iran, he said.
Kurdistan is expected to provide 250,000 bpd to Iraq's 2013 oil export target of 2.9 million bpd. Luaibi said Iraq's exports and production would fall accordingly without the Kurdish crude.
In 2012, the KRG was to contribute 175,000 bpd to the federal budget, but handed an average of 61,000 bpd, resulting in a loss of $4.5 billion, he said.
Iraq, the world's fastest growing oil exporter, still expects impressive gains this year, he said, with production due to start up at the southern oilfields of Majnoon, operated by Shell and Garraf, which is run by Malaysia's Petronas.
After stagnating for decades because of war and sanctions, Iraq's oil output began to rise sharply in 2010 after Baghdad secured service contracts with companies such as BP, Eni , Exxon and Shell.
Production averaged 2.9 million bpd last year, with exports of 2.4 million - growth of 600,000 bpd since the expansion.
Luaibi and a ministry team have revised plateau production rates at core southern oilfields in line with a lower overall target of 9 million bpd, versus an original 12 million.
The target for West Qurna-2, operated by LUKOIL, has been revised to 1.2 million bpd versus an original 1.8 million bpd, said Luaibi. The amended contract - which has been extended to 25 years from 20 - will be signed on Thursday.
LUKOIL would like a Chinese company, possibly CNPC, to succeed Norwegian group Statoil as its partner in West Qurna-2 and Luaibi said the ministry had no objection.
Revised production targets have also been agreed for Majnoon and Zubair, run by Eni, and the amended contracts will be signed in the coming weeks, he said.
The target for Iraq's biggest southern oilfield Rumaila, where BP is in charge, is now under negotiation.
BP, which enjoys first-mover advantage at Rumaila, will also have leverage at the Kirkuk oilfield, where output slumped to 280,000 bpd from 900,000 bpd in 2001 after years of injecting water and dumping unwanted crude and products into the field.
"Yesterday we sent the basic principles of the agreement to the Council of Ministers for approval," he said. "BP's plan is to stop the decline in a very short time and then to increase production."
Iraqi officials have said they would like BP to raise capacity at this 77-year old workhorse to around 600,000 bpd in five years.
At the start, BP will make a "special allocation" of $100 million to help stop Kirkuk's decline and carry out surveys to get a clear picture of the field.
"We have made a proposal for short-term assistance which they appear to like and we're progressing on from that," said Michael Townshend, President of BP in Iraq. "It's early days."
The initiative comes as Baghdad aims to strengthen its position in a dispute with Kurdistan over ownership of northern Iraqi fields. But Luaibi said politics was not a factor.
Kirkuk is composed of three main geological formations, or domes: Khurmala (controlled by the KRG), Baba and Avana. BP would be working at Baba and Avana, said Luaibi.
"It's very important the ministry is not dealing on a political level," he said. "This is about the technical well-being of the oilfield." (Editing by Patrick Markey, Richard Mably)