Disputed Iraqi city fears oil will only fuel woes

KIRKUK, Iraq (Reuters) - Iraqi officials may have high hopes for what the vast oilfields near the city of Kirkuk can yield, but residents of the violent area have a different take on a resource they say has brought nothing but trouble.

The Oil Ministry plans to boost production in Kirkuk, with 13 percent of Iraq's proven reserves and a fifth of its output, and elsewhere in Iraq by luring major foreign energy firms for the first time since Saddam Hussein kicked them out in 1972.

Decrepit, trash-filled and dotted with crumbling buildings, paint peeling off their walls, the city certainly looks like it could use an injection of cash. Locals are skeptical.

"Kirkuk is like a camel," said local councilor Mohammed al-Jubouri, an Arab. "The camel carries gold and riches on its back, but ends up eating spiny shrubs scavenged in the desert."

Shared between Kurds, Arabs and Turkmen, the city north of Baghdad is at the heart of a power struggle between Iraq's Shi'ite Arab-led government and minority Kurds, a row that has replaced sectarian strife as a top threat to Iraqi stability.

Kurds claim Kirkuk as their historic capital and want to absorb it, with other disputed territories, into their largely autonomous northern region, an idea rejected with the city's Arab and Turkman residents and Iraq's government in Baghdad.

Like other ethnically mixed cities in the north, Kirkuk has suffered ongoing insurgent attacks even while security across much of the rest of Iraq improves. Major recent bombs, including two last month that killed 100 people between them, may have already stoked reprisal killings, police chief Jamal Bakr said.

"NOTHING BUT SUFFERING"

Oil is pivotal to the dispute. U.S. officials think Kirkuk may hold as much as 4 percent of the world's remaining reserves.

"We, all Kirkukis, wish oil would just go away ... It all the time brings us nothing but suffering," Kurd councilor Awat Mohammed told Reuters in the rundown provincial headquarters.

"Our conflicts are over oil. You see the city: can you imagine it is so rich? It looks like cities of the Middle Ages."

Nonetheless, Baghdad plans to push ahead with overhauling the oil sector in Kirkuk, an industry that has left the city encircled by cordoned-off mud fields ablaze with gas flares.

"I don't think anything here will improve with more oil investment," said Margaret William Yusuf, an Iraqi Christian living in Kirkuk. "It goes to the government and then it's every man for himself. It just means more fighting over us."

In a bidding round for six oil and two gas fields held at the end of last month, two of the fields on offer -- Bai Hassan and Kirkuk -- were in the Kirkuk area. None of the foreign firms present walked away with a contract for those fields.

Only one field was awarded: Rumaila, Iraq's largest producing field, went to a BP-led consortium.

Though a consortium led by Royal Dutch Shell bid for Kirkuk, they balked at the low fees Oil Minister Hussein al-Shahristani was willing to pay firms to develop the fields.

The Kurdish regional government (KRG) has condemned the Oil Ministry for putting fields in Kirkuk, as a disputed area, on the auction block without its consent.

"Keeping these issues unresolved are causes for uncertainty about Iraq. It's incumbent on all parties to find ways by which we can go beyond the impasse," Deputy Prime Minister Barham Salih, a Kurd, told Reuters in the Kurdish city of Sulaimaniya.

"The very fact that there is a dispute ... over Kirkuk is impeding the investment needed to boost oil production."

A United Nations report on Kirkuk delivered in April outlined options for settling the conflict, but it hasn't appeared to have ended the impasse over the city's future.

Kirkuk Governor Abdul Rahman Mustafa, a Kurd, told Reuters so far no party was ready to give any reaction to that report.

But Iraqi officials like to point out those who predict Kirkuk to be Iraq's "next war" have been doing so for some time.

"Analysts on the eve of the 2003 war predicted Kirkuk to be the powder keg that will ignite civil war in Iraq," Salih said. "It did not happen. The communities of Kirkuk stayed together. (We) ... are adamant not to let this thing get out of hand."

(Writing by Tim Cocks; Additional reporting by Ahmed Ali, Sherko Roauf and Abdul Rahman Taher; Editing by Sophie Hares)