UPDATE 3-Iraq says oil deals must be signed with central gov

(Adds Kurdish reaction)

By Ahmed Rasheed

BAGHDAD, April 26 (Reuters) - Iraq's oil ministry said on Thursday foreign firms should sign oil contracts only with the central government until a new oil law is passed, adding that deals outside its jurisdiction would be considered illegal.

An oil industry source told Reuters the warning, made in a ministry statement after Oil Minister Hussain al-Shahristani met the Russian envoy to Baghdad, referred to contracts signed recently without the approval of the central government.

The warning comes as a last-minute dispute between Iraq's central government and Kurdish regional authorities over the draft oil law appeared to widen, after the autonomous region's oil minister said Kurds could implement their own oil laws if no agreement was reached with Baghdad.

The new oil law, which Washington sees as a key step toward reconciling Iraq's warring communities, is vital to attracting investment from foreign firms to boost oil output and rebuild Iraq's economy.

"The minister (Shahristani) clarified that Iraq will not adhere to any contract signed outside the legal framework of the active laws, which confines negotiations and the signing of contracts in oil and gas fields to the oil ministry until the new hydrocarbon law is enforced," the ministry statement said.

"Foreign companies should only sign contracts through the central government and the oil ministry. The ministry warns companies who violate Iraqi law of the consequences of their actions and any contract that is signed outside the jurisdiction of the central Iraqi government is considered illegal."

Iraq's Kurdistan regional government has signed several agreements with foreign companies, including a service contract last week with United Arab Emirate's Dana Gas (DANA.AD).

While Kurds favour agreements that would share production with foreign firms, such deals have drawn criticism from some Shi'ite and Sunni Arab nationalists.

Ashti Hawrami, the Kurdish region's minister of natural resources, said it could clinch deals with any company it chose.

"Our work was constitutional and we have complete authority to make contracts with any company that wants to come and work in Kurdistan," Hawrami said.

"If they do not want to agree on the remaining contentious points we will implement our own laws for the Kurdistan region according to the constitution," he told Reuters.

Iraq's central government and Kurdish officials are currently trying to resolve disputes over the draft oil law, which would determine control of the world's third-largest oil reserves. The law has yet to be approved by parliament.

Hawrami has said annexes to the draft law that would wrest oilfields from regional governments and place them under a new state-oil company are unconstitutional.

DNO CONFIDENT

Shares of Norway's DNO (DNO.OL), an independent producer about to start drilling for oil at its Tawke field in the Kurdish-controlled north, fell as much as 4.5 percent after the oil ministry comments appeared to cast doubt on its production agreement with the Kurdish region. Shares later pared their losses.

An oil industry source told Reuters in Baghdad that the Iraqi government had no problem with a "Norwegian firm" that had signed a deal with the Kurds, without specifying DNO by name.

In Olso, DNO said it was confident about the validity of its oil production deal with Iraq's regional Kurdish authorities.

"We have always been confident in our agreement and we can't see that anything has changed," Chief Executive Helge Eide said.

Iraq's Deputy Prime Minister Barham Salih, an architect of the draft oil law, told Reuters after the cabinet passed it in February that it would allow the Kurdish regional government to review existing contracts it has signed with foreign firms to ensure consistency with the terms of the new law.

Salih said a commission of independent experts would ratify consistency in case of contention and that regional authorities would be able to negotiate oil contracts with foreign companies based on "maximising revenues for Iraqi people."

The world's top oil companies have been manoeuvring for years to win a stake in Iraq's prized oilfields such as Bin Umar, Majnoon, Nassiriyah, West Qurna and Ratawi -- all located in the south of the country.

A fair distribution of Iraq's oil wealth is vital for national reconciliation because Sunni Arabs, who live in central and western Iraq, fear a bad deal would cut them off from any windfall should security improve enough to substantially boost production. Sunni Arabs are the backbone of the insurgency.

(Additional reporting by Shamal Aqrawi in Arbil)