* Production in 2014 set to rise by at least 500,000 bpd
* Big gains from southern Majnoon, Garraf, Halfaya
* Output this year to average around 3 million bpd
By Peg Mackey
BAGHDAD, Oct 23 (Reuters) - Iraq, OPEC's second biggest oil producer, expects a robust return to growth next year as foreign companies at work in its southern oilfields push output towards the highest level ever, a senior Iraqi oil official said on Wednesday.
Thamir Ghadhban, chairman of the advisory commission to Iraq's Council of Ministers, said flows are set to rise by at least 500,000 barrels per day (bpd) to an average 3.5 million bpd - as Majnoon - run by Royal Dutch Shell, Garraf - led by Malaysia's Petronas - and Halfaya, operated by PetroChina , ramp up.
Farther north, the Badra oilfield, run by Russia's Gazprom Neft, the oil arm of Gazprom, is also set to come on line.
"We expect a significant rise in production next year," said the senior oil technocrat.
"And if we have an increment of 500,000 barrels a day sustained over 2014, with the same level of oil price (above $100 a barrel) it will be positive compared with this year."
Production this year is likely to average more than 3 million bpd, a touch up on 2012, but by the end of the year rates are likely to reach a level of 3.5 million bpd, said the former oil minister.
After flatlining for decades due to wars and sanctions, Iraq's output began to expand in 2010 after it secured service contracts with oil titans such as BP, Shell, Eni and Exxon Mobil.
Since then, output has risen by 600,000 bpd to 3 million bpd courtesy of higher flows from the core oilfields of Rumaila- operated by BP, West Qurna-1 - run by Exxon - and Zubair, where Eni is leading development.
These vital southern oilfields, along with Majnoon and West Qurna-2 - led by Russia's Lukoil - are the main drivers of Baghdad's oil expansion.
The swift increases have helped cushion oil markets from price swings after shipments from neighbour Iran were halved due to Western sanctions and output from exporters such as Libya and Sudan proved unstable.
But Iraq's production revival has slowed this year due to infrastructure and security problems on top of an ongoing row between Baghdad and autonomous Kurdistan, keeping output far below projected targets.
The obstacles led Iraq to backtrack on an initial 2013 target of 3.7 million bpd, which - with projected growth of 700,000 bpd - unnerved regional rivals, including OPEC heavyweight Saudi Arabia. The Kurdistan Regional Government (KRG) was due to contribute 250,000 bpd.
"If you take all this together: losses in the south, losses due to sabotage on the export pipeline, plus the KRG's non-fulfillment of its obligation, you can see why the planned production and export levels for 2013 were not reached," said the Iraqi oil official.
Oil is at the heart of a dispute between the federal government and Iraqi Kurdistan over control of oilfields, territory and crude revenues.
Baghdad says it has the sole right to explore, develop and market the country's oil with regional participation in accordance with the constitution.
Sales of oil produced in Iraq's Kurdish region via the federal pipeline system have been blocked in the dispute.
Kurdistan has since been making strides towards energy independence and is due to start up its own pipeline via Turkey by the end of the year, in defiance of Baghdad.
"The federal government is opposed to this. They have declared it officially and they have conveyed their opposition to the Turkish government officially," said the Iraqi oil official.
Iraq has provided the world oil market with crucial supplies, giving consumers another option besides Saudi Arabia as the main alternative exporter.
Exports have been running at 2.4 million bpd this year, but fell to 2 million bpd last month, the lowest in 19 months. Repairs and expansion work at the strategic Basra Oil Terminal cut shipments of Basra Light crude, which accounts for most of Baghdad's export revenue.
"This is now over and exports are picking up," said Ghadhban. When completed by mid-2014, the port expansion will provide Iraq with offshore export capacity of 4 million bpd.
And if myriad infrastructure and political hurdles were to be removed, Ghadhban said output next year could soar towards 4 million bpd - overtaking Iraq's all-time high of 3.8 million, hit in 1979. But this is unlikely, said the Iraqi oil official.
"Four million would be a challenging target - a sustained average over the year of 3.5 million would be more realistic," he said.
It would also provide ample oil revenue, which accounts for the lion's share of Iraq's government revenues and foreign exchange earnings.
Production of nearly 3 million bpd earned Baghdad $94 billion in 2012 and netted $61 billion in the first eight months of this year.
"There is so much pressure on the government to provide more revenue to improve the standard of living and for services - especially in the energy and security sectors," said Ghadhban.