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* July output at 2.8 mln bpd vs 2012 level of 2.9 mln
* Exports to drop by 500,000 bpd in Sept. due to port work
* Modest production growth expected to return in 2014
By Peg Mackey
LONDON, July 29 (Reuters) - Iraq's oil revival is stalling, and unless momentum is regained, Baghdad will report an output decline for 2013, its first after two years of robust gains, much to the relief of rival Gulf producers.
Swift work since 2010 at Iraq's southern oilfields by the likes of BP, Exxon Mobil and Eni raised output by 600,000 barrels per day (bpd) to 2.9 million bpd in 2012, turning Iraq into the world's fastest growing exporter.
Even more impressive gains were expected this year. When Baghdad revealed a bold target of 3.7 million bpd at the December 2012 meeting of the Organization of the Petroleum Exporting Countries (OPEC), Gulf delegations were worried. A whiff of a market-share battle was in the air.
But a host of infrastructure and security problems will make OPEC's second-biggest producer struggle to keep pace with last year's rates. Unless big gains are made, Iraq's output will fall below 2.9 million bpd.
"Iraqis will be annoyed if the government is losing billions in (potential) oil revenues," said a senior Iraqi oil executive, requesting anonymity.
Oil provides the lion's share of Iraq's government revenues and foreign exchange earnings.
For OPEC, however, "This is good news. It delays the challenge from higher Iraqi production for another year," said a Gulf delegate to the group, who requested anonymity. "And it's good for the oil market. Prices will stay above $100 and that's acceptable for everyone."
The rise of U.S. shale oil and a slackening of demand could force OPEC to cut supply by up to 1 million bpd next year, analysts have said.
But slower growth from Iraq and ongoing outages from Iran and Libya will mean that big cuts from other members - mostly Saudi Arabia - are not needed.
July marks the third straight month of declines in Iraq's production and exports, with output at 2.8 million bpd.
Its production is expected to return to growth next year of 400,000 to 500,000 bpd, industry sources say, which would raise its average output to around 3.3 million bpd - still far below an official target of 4.5 million bpd.
While militant attacks are thwarting flows in the north, poor maintenance and technical problems are slowing progress in the south, the main driver of Baghdad's oil expansion.
"Development in the south is passing through a very slow phase; momentum has been lost," the senior Iraqi oil executive said. "We hope the fourth quarter will be more energetic."
At the giant Rumaila oilfield, Iraq's biggest producer and one of its oldest, the loss of output from old wells and major repairs at ageing de-gassing stations - core to the production process - have held the field back, Iraqi oil officials say.
Unreliability of southern export equipment and weather-related snags during the first quarter also resulted in major cutbacks at Rumaila, which is operated by BP along with China National Petroleum Corp, industry sources have said.
Iraq still has insufficient storage capacity, so when Basra Light exports are halted or sharply reduced, production at the oilfields has to be cut back sharply too - in the case of Rumaila by as much as 200,000 barrels a day, they said.
Once wells are shut in, they take a long time to restart, so Rumaila is still clawing back to higher rates. Production is now running at about 1.35 million bpd, similar to the average for 2012. The aim this year is to average 1.45 million bpd.
Iraqi oil officials still hope to see the country's overall production reach 3.4 million bpd by the end of this year. Baghdad is targeting production of 9 million bpd by 2020.
Reaching that growth will require huge investment, and the international oil companies that signed up to tap Iraq's reserves - the world's fifth biggest - have held back on plans to increase spending because of the lack of sufficient pipelines and port facilities to raise exports, industry sources said.
Oil exports this year have already fallen below last year's average of 2.4 million bpd, with July sinking to about 2.25 million bpd. Iraq's 2013 budget is based on exports of 2.9 million bpd.
And shipments of southern Basra Light will fall by some 500,000 bpd in September when work is carried out at the vital southern oil export terminal.