UPDATE 1-Iraq to sign $1.2 bln oil service deal with China

(Adds repudiation of Russian deal, background)

By Ahmed Rasheed

BAGHDAD, Aug 19 (Reuters) - Iraq will sign a $1.2 billion oil service contract with China to replace a production-sharing deal agreed under Saddam Hussein, an Iraqi newspaper quoted oil minister Hussain al-Shahristani as saying on Tuesday.

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).

"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.

If finalised, the revised deal would be the first oil service contract signed by the new Iraqi government since the fall of Saddam in 2003.

Iraq has said in the past that it would honour the original Saddam-era deal in principle but wanted to renegotiate terms.

The original deal, valued at $670 million at a time when oil prices were much lower than today, would have given the Chinese a long term production-sharing stake in the Ahdab oil field, a small field projected to produce 90,000 barrels per day.

Foreign oil companies are seen as much keener on production sharing deals, which would give them a stake in future oil profits, rather than service contracts in which they are paid a fee for carrying out work on behalf of Iraq.

But with prices high, Iraq -- an OPEC member with the world's third largest oil reserves -- has been negotiating from a position of strength.

Iraq is negotiating six short-term oil service contracts worth about $500 million each with foreign firms or consortiums, but those deals have been long delayed. A U.S. diplomat said this week he expected most or all of them would be scrapped.

Shahristani also repudiated a Saddam Hussein-era deal with Russia's largest private oil company LUKOIL (LKOH.MM), saying the contract was political and its terms "totally unfair".

"Relating to the Russian contract, it was signed with the former regime for political reasons and scrapped by the former regime also for political reasons," he said. "It is a totally unfair contract."

(Reporting by Ahmed Rasheed)