LONDON BP (BP.L) expects to sign an initial deal in early September to revive Iraq's northern Kirkuk oilfield, an industry source said, a move that could affect regional politics because the field straddles the border with the autonomous Kurdish region.
A deal at Kirkuk would allow the British major - already at work at Iraq's biggest producer, Rumaila, in southern Iraq - to negotiate access to significant reserves in the north. Baghdad would get a trusted, experienced partner to help arrest a huge decline in output from Kirkuk.
"It's an initial 18-month deal to offer support, which will provide an opportunity for BP to negotiate a longer-term development contract," said the source, who is familiar with the negotiations.
BP declined to comment.
The company would work on the Baghdad-administered side of the border on the Baba and Avana geological formations. Kirkuk's third formation, Khurmala, is controlled by the Kurdistan Regional Government (KRG) and being developed by the Iraqi Kurdish KAR group.
BP's involvement at Kirkuk has been under negotiation for more than a year. When Baghdad first revealed the preliminary arrangement in January, the KRG rejected the pact as illegal, because it had not been consulted.
The UK major is comfortable with its decision to proceed, the source said. "BP expects some noise from the KRG, but it's confident the government in Baghdad has a sensible way forward over Kirkuk."
Among the world's international oil companies, BP could have the best relationship with Baghdad through its contract at the huge, $30 billion Rumaila oilfield project.
Baghdad hopes BP will eventually sign a technical service contract at Kirkuk like the one for Rumaila, an Iraqi oil source said. The company expects, however, to negotiate better commercial terms for this contract, the industry source said.
Iraq awarded a series of service contracts in late 2009 to the likes of BP, Eni (ENI.MI) and Exxon Mobil (XOM.N), which receive slim margins on Iraq's fee-based development contracts.
"The terms will have to reflect the complexity of the field and the need for intervention to arrest the decline," said the source, who requested anonymity.
At the start, BP will spend up to $100 million to help stop Kirkuk's decline and carry out surveys to get a clear picture of the field.
A small team of up to 30 people from the company will visit and work in Kirkuk once the final contract is signed.
Output at this 78-year-old field has slumped to around 280,000 barrels per day (bpd) from 900,000 bpd in 2001 after years of injecting water and dumping unwanted crude and products into the field.
Iraqi officials have said they would like BP to raise production capacity to around 600,000 bpd in five years.
But the pace of development at Kirkuk will be slower than at the giant southern fields of Rumaila, Zubair and West Qurna-1 where BP, Eni and Exxon have helped to raise output by 600,000 bpd in just two years.
"There will be no radical development," said the industry source. "This is an old, big field that's in decline and needs a lot of attention."
Kirkuk's oil riches are at the centre of a crisis within the national government of Sunni, Shi'ite and Kurdish parties over how to share power. But that has not deterred the UK major.
"BP's sense is that everyone in Kirkuk is highly dependent on the resources there, so the development of the oilfield is extremely important," the industry source said.
Exxon, Chevron and Total (TOTF.PA), among other companies, have angered and alienated Baghdad by signing lucrative production-sharing contracts with the KRG on better operating conditions than in the south.
The KRG's oil exports and contracts are at the heart of a wider dispute with Baghdad's Arab-led government over territory, oilfields and political autonomy.
Iraq's government insists it alone has the sole authority to sign deals and export crude oil, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.
BP has no interest in pursuing upstream opportunities in Kurdistan, although Air BP is taking part in a tender to supply fuelling services at an airport in the Kurdish capital of Arbil, industry sources said.
(Editing by Jane Baird and Dale Hudson)