* Baghdad, United States oppose pipeline
* Will reduce Kurds' reliance on Baghdad
* Completion expected in Sept
* Poses threat to ties with Turkey -Baghdad official
* Dispute over revenue sharing
By Isabel Coles and Ahmed Rasheed
BATILE, Iraq/BAGHDAD, July 1 Sparks fly as workmen weld together a pipeline set to carry crude from the self-ruled Kurdistan region of Iraq to Turkey, defying the central government and shifting the energy balance of power in the region.
Some 600 km away, Iraqi officials in Baghdad's heavily fortified oil ministry are threatening dire consequences if the pipeline is completed, but appear powerless to prevent the Kurds exporting oil without their consent.
Turkey's courtship of the Kurds has strained relations with Baghdad, which says the pipeline would set a precedent for other provinces to pursue independent oil policies, potentially leading to the break-up of Iraq.
"They tell us to finish it as soon as possible because they don't want the Iraqi government to do something... (but) it cannot do anything," said an engineer at the site in the northern Kurdish province of Duhok. "This is very important for Kurdistan because it will benefit the economy."
At an estimated cost of $200 million, the 281-kilometre (174-mile) pipeline will reduce the autonomous region's reliance on Baghdad.
For the Turks, it will open up a new energy corridor and allow them to scale back their dependence on Russia and Iran for oil and gas.
Neither side has been deterred by the United States, which has urged both the Kurdistan Regional Government (KRG) and Turkey to abandon the project.
"The export of oil and gas is not a monopoly of any single entity to be decided in Baghdad," KRG Natural Resources Minister Ashti Hawrami said in a speech in London last month. "Indeed, it is our duty as Iraqis under the federal constitution to pursue export routes for oil and gas to secure our future."
A trench dug through fields parched by summer heat marks the future course of the pipeline, which was initially designed to supply gas but later converted for oil and re-routed toward Fishkhabour, a strategic point where the borders of Iraq, Turkey and Syria converge.
It is a highly sensitive region in the eye of three overlapping storms: civil war in Syria, the contested frontier between Arab Iraq and Kurdistan, and a three-decade-long conflict involving with Kurdish rebels in southeastern Turkey.
Workmen now laying the final stretch of the pipeline are on track to finish in September, with initial flows of 200,000 barrels per day (bpd) expected.
Once it reaches Fishkhabour, now just 10 km away, it remains to be seen whether the pipe will be tied into the existing line running from Kirkuk to the Turkish port of Ceyhan at a metering station controlled by Baghdad, or beyond there, either before the Turkish border or after it.
"I think it will be a last-minute decision," said a Kurdistan-based industry source on condition of anonymity.
As much as 200,000 bpd of crude from Kurdistan used to flow to world markets through the Kirkuk-Ceyhan pipeline, but those exports dried up last year in a row over payments for oil companies operating in the northern enclave.
In recent years, the Kurds have signed their own contracts with the likes of Exxon Mobil, Chevron Corp and Total antagonising Baghdad, which claims sole authority to manage the exploration and exports of Iraqi oil.
The two sides recently began a new round of negotiations to resolve their differences, which are rooted in a fundamental disagreement about the degree to which power should be centralised in Baghdad.
"I believe if this (pipeline) system is up and running it will help expedite a compromise," said another industry source in Kurdistan on condition of anonymity. "At any rate, this will not stop the pipeline between the KRG and Turkey".
'MADE IN TURKEY'
Under a hot sun, three teams work in parallel, digging the way forward, welding and bending the pipeline into shape.
Workers dressed in blue overalls, many of them Iranian, pause to rest in the only refuge from the sun's scorching rays, inside the pipeline, which has the words "Made in Turkey" stamped on the outside.
"It is difficult work," said a labourer from the Iranian city of Isfahan, sweat sticking his hair to his forehead. "We came here because there is no money in Iran because of the sanctions".
Tehran, under international sanctions that have slashed its oil exports to their lowest level in decades, shares Baghdad's animosity towards Turkey and also objects to the pipeline, which would help compensate for missing Iranian crude in the market.
"If Ankara gives the green light for KRG oil to flow through the Kirkuk-Ceyhan pipeline, then all options are open for the central government, including severing ties with Turkey and taking this issue to the international community," an Iraqi government official close to the oil industry said.
Undeterred, the Kurds are already planning a second pipeline with a higher capacity of 500,000 bpd, a publication overseen by the KRG's department of foreign relations shows.
Kurdish officials say the Iraqi constitution entitles them to exploit their reserves and this year passed a law codifying their right to export unilaterally if Baghdad fails to pay oil companies' dues within a given period.
Hundreds of trucks already transport oil across the border to Turkey, circumventing the federal pipeline system and riling Baghdad, which has threatened to sue Genel Energy, the first company to export directly from Kurdistan.
As yet they have taken no action and volumes have risen to around 70,000 bpd, industry sources say.
The Kurdish region aims to raise exports to one million bpd by the end of 2015, and to two million by the end of the decade.
"In Iraq you have to force certain issues and then you let the politics follow," said a KRG official familiar with oil and gas issues. "Now the conversation is changing to: what happens to the money?"
In the past, Baghdad received the proceeds from Iraqi oil exports and passed on 17 percent of the country's revenues to Arbil, where Kurdish officials have long complained that they end up getting closer to 10 percent.
Instead, Kurdistan wants to collect the revenue, take its share, and hand the remaining 83 percent over to the central government. Baghdad rejects this and a Turkish proposal under which it would disburse the revenues.
An Iraqi oil official said the central government could be reconciled to the pipeline, as long as it manages the exports and revenues: "The Kurds' message to Baghdad is very clear: pay us, or the Turks will." (Writing by Isabel Coles; editing by Jason Neely)