By Mustafa Mahmoud and Ahmed Rasheed
KIRKUK, Iraq/BAGHDAD (Reuters) - Iraq's oil minister and the boss of BP (LSE:BP.) paid a rare visit to Kirkuk on Wednesday to win over the local government before the British company starts work on this controversial northern oilfield that straddles the border with autonomous Kurdistan.
Baghdad signed a deal in early September for BP to revive the giant oilfield, allowing the company to negotiate access to significant reserves in the north in return for helping to arrest a huge decline in output.
Kirkuk's oil riches are at the core of a crisis within the national government of Sunni, Shi'ite and Kurdish parties over how to share power. The Kurdistan Regional Government (KRG) rejects BP's deal as illegal, because it has not been consulted.
The project has, however, won crucial support from Kirkuk's governor, Najimeldin Kareem, a Kurd.
"We will provide complete support for BP to develop Kirkuk oilfield because it will generate a significant benefit for the province in relating to petrodollar revenues," Kareem told reporters in Kirkuk.
Iraqi Oil Minister Abdul Kareem Luaibi and BP CEO Bob Dudley met the Kirkuk governor to discuss the UK oil major's project before heading to the ageing oilfield - where output has slumped to around 280,000 barrels per day (bpd) from 900,000 bpd in 2001.
"BP has ambitious plans to boost production from the Kirkuk oilfield to achieve big benefits for Iraq and the people of Kirkuk," Luaibi told reporters.
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 KRG and being developed by the Iraqi Kurdish KAR group.
The agreement allows the British company - which already operates Iraq's biggest oilfield, Rumaila - to boost its exposure in the world's fifth biggest holder of oil reserves.
After touring the oilfield, Dudley visited Baghdad and met Prime Minister Nuri al-Maliki and Deputy Prime Minister for Energy Hussain al-Shahristani.
"In the four years we have worked with our partners at Rumaila, we have stemmed the rapid decline in its production and raised output to more than 1.4 million barrels a day," Dudley said in a statement.
"... (We) are intent on bringing this experience to Kirkuk to further deepen our commitment to Iraq to help manage two of the world's most significant oilfields."
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, industry sources said.
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. Iraqi officials have said they would like BP to raise production capacity to around 600,000 bpd in five years.
Iraq's central government and the KRG are locked in a widening dispute over control of oil exports, oilfields and territory that is fraying the country's uneasy federal union.
Baghdad insists it has the sole authority to sign deals and export oil, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.
Exxon Mobil (XOM.N), Chevron (CVX.N) and Total (TOTF.PA) have infuriated the central government by signing lucrative production sharing agreements with the KRG. BP has no interest in pursuing upstream opportunities in Kurdistan, industry sources said.
"Today's visit succeeded in securing the complete support from the local government of Kirkuk and that's exactly what was needed for BP to start developing the Kirkuk oilfield," a senior oil official told Reuters.
(Editing by William Hardy and Anthony Barker)