UPDATE 2-Iraq to sign $1.2 bln oil service deal with China

(Adds gas deal talks, quotes, background, recasts)

By Ahmed Rasheed

BAGHDAD, Aug 19 (Reuters) - Iraq will soon sign its first big international oil deal since the fall of Saddam Hussein, a $1.2 billion oil service contract with China, oil minister Hussain al-Shahristani was quoted as saying on Tuesday.

The deal covers a small field producing just 90,000 barrels per day and replaces an earlier deal signed under Saddam. But the terms described by Shahristani give a clue to the tough line Baghdad is likely to take in deals with other foreign firms.

It replaces a production sharing agreement that would have given a Chinese firm a long-term stake in profits from the Adhab oilfield with a services contract in which the Chinese receive fees for work, but Baghdad keeps the future profits.

"We have held talks with (the Chinese) for a year, and the terms of the deal were changed to a service contract. The Chinese have agreed on that, with a value of $1.2 billion," Shahristani told the an-Noor newspaper.

Foreign firms are keen to have access to the OPEC country's oilfields, the world's third largest. But with oil prices high Baghdad has been negotiating from a position of strength, while war has kept firms from setting up a presence in Baghdad.

The oil minister is travelling to China at the end of this month to discuss the deal, which was orginally signed in 1997 between Iraq and the China National Petrolium Company (CNPC).

The original deal was valued at $670 million at a time when oil prices were much lower than today, but it would have become far more lucrative for the Chinese if they were allowed to keep the production sharing terms at today's prices.