BEIJING/LONDON China National Petroleum Corp (CNPC) has emerged as the frontrunner to take over Iraq's West Qurna-1 oilfield from Exxon Mobil, a move that would diminish Western oil influence in Iraq a decade after the U.S.-led invasion.
U.S. oil major Exxon (XOM.N) is giving up its stake in the giant southern oilfield after clashing with the central government in Baghdad over exploration contracts it had signed with the autonomous Kurdistan region in the north.
Iraqi and Chinese sources said CNPC unit Petrochina (0857.HK) (601857.SS) is negotiating for Exxon's 60 percent in the $50 billion West Qurna-1 project and that there are rival bidders. Royal Dutch Shell is a minority partner.
"CNPC has shown interest; they are there. And from our side, there is no problem with them taking on a bigger position. We are not sensitive about this," a senior Iraqi official said.
"These are service contracts, not production-sharing contracts (which give companies an ownership stake), so it doesn't matter if they have 10 fields or one."
For energy-hungry China, a major buyer of Iraqi crude, access to reserves is a strategic imperative, and Beijing is prepared to accept tougher terms and lower profits than Western oil majors and even Russian firms such as Lukoil (LKOH.MM), which have to answer to shareholders.
Iraq has the world's fourth-largest oil reserves and wants to at least double its production in the next few years and ultimately challenge Russia and Saudi Arabia as the world's biggest oil nation.
China's stealthy advance in Iraq, supported by piles of cash, has already given it a formidable position in prized southern oilfields, and through Chinese oil company Sinopec (0386.HK), its reach has extended into the northern Kurdish region.
By taking on West Qurna-1, Chinese companies would come to dominate Iraq's oilfields with roughly 32 percent of the reserves found in service contracts awarded to foreign companies, up from 21 percent now.
"PetroChina is in talks to buy the stake from ExxonMobil. There are rival bidders," a source familiar with the Chinese company said. "A decision is expected from ExxonMobil soon."
Iraq has already signaled it would favor bids by CNPC and Lukoil if they decided to buy Exxon's stake and that it had received "positive signals" from both companies they would consider making an offer.
But Russia's Lukoil (LKOH.MM) has made no commitment so far. Russia's second-largest crude producer is already developing West Qurna-2.
FEAR OF WAR
Control of oil resources is at the heart of a dispute between Iraq's Arab-led central government and the autonomous region run by ethnic Kurds in the north, which Baghdad accuses of usurping its constitutional right over oil.
Kurdistan has upset Baghdad by signing deals directly with oil majors such as Exxon and Chevron (CVX.N), providing lucrative service contracts and better operating conditions than in Iraq's south.
By turning its focus to Chinese and Russian companies, Baghdad would be extending a push for a more independent foreign policy, which Prime Minister Nuri al-Maliki initiated after the last U.S. troops left the country a year ago.
Exxon's departure would all but wipe out the American presence in Iraq's southern oilfields. Occidental Petroleum (OXY.N) has a small stake in the Zubair oilfield development project.
With oil majors now shifting their focus northward to sign deals with Kurdistan and away from Iraq's southern oilfields, leaders on both sides are warning of the risks that the dispute could slide into an ethnic war.
As tensions rise, industry sources suggest Exxon might have a change of heart and decide to stay in southern Iraq. Earlier this year, Baghdad said it had called on U.S. President Barack Obama to persuade Exxon not to invest in Kurdistan.
"I would be surprised if Exxon actually exits. I'm betting on some twists and turns ahead," said a Western oil executive, who works for a rival. "They might get nervous in the north."
At the heart of the dispute is the oil wealth under the swathe of land know as the "Disputed Territories" along the vague internal border that includes the ethnically mixed city of Kirkuk, known to some as the "Jerusalem of the Kurds".
Baghdad has warned Exxon and other companies that deals struck with Kurdistan are illegal. The Kurds say the constitution's federalism guarantees their right to develop their region's oil resources.
"The government will take all necessary measures to stop Exxon working, especially in the disputed areas. They should know this is a red line they can't cross," one Iraqi oil official said.
"If they think they can do that, then they will face dire consequences. They should expect everything including confiscation of their equipment and face the results of violating the constitution," he added.
U.S. officials and Iraqi President Jalal Talabani have mediated to prevent a confrontation across the line dividing the two regions. Neither Baghdad nor Kurdistan appear to have the appetite for an open conflict that would risk oil exports.
"Fortunately cooler heads have prevailed for now," said a senior oil industry source. "Unfortunately President Talabani may not be around to mediate in the future."
Talabani suffered a stroke earlier this week, and may be unable to return to work for a prolonged period, at a time when tensions between Baghdad and Kurdistan are rising.
(additional reporting and writing by Patrick Markey; Editing by Jane Baird and Alison Birrane)