* Baghdad desperate for income after oil price fall
* Cash need may drive deal on oil exports with Kurdistan
* Deal could pave way for gas exports to Europe
By Ahmed Rasheed and Simon Webb
BAGHDAD/DUBAI, May 19 (Reuters) - Baghdad's desperation for more cash to rebuild after years of sanctions and war could provide a long-awaited catalyst for a deal with minority Kurds on oil and gas exports.
Iraq's Oil Ministry on Monday rejected an $8 billion Kurdish plan to fill the Nabucco pipeline with gas for Europe, the latest spat in a long feud with the largely autonomous Kurdistan region over control of massive oil and gas reserves.
But it has made a concession on oil exports from the region, after two years of deadlock.
"Iraq is desperate for oil export money and hard currency, a potential driver for a deal with the Kurdish region that is much stronger than anything we've seen previously," said Samuel Ciszuk, analyst at IHS Global Insight in London.
Facing domestic pressure to boost income hit by the oil price slump and to increase sluggish output, Oil Minister Hussain al-Shahristani gave permission earlier this month for the Kurdish north to start modest oil exports of 60,000 barrels per day from June 1. The Kurdish region said the flow could quickly reach 100,000 bpd.
But the two sides have yet to agree the key issue of how revenues would be shared. How that is resolved has implications for the Kurdish region's plan to export gas to Europe, as well as for future oil and gas contracts throughout the country.
WHO GETS WHAT?
The exports stem from production sharing contracts the Kurdistan Regional Government (KRG) has signed with foreign firms, which Baghdad maintains are illegal. The oil ministry says only it has authority to validate contracts; the KRG says its deals are constitutional.
If Baghdad agreed to pay the companies from oil and gas revenues according to the contract terms, it would effectively validate the deals and concede ground to Kurdish and other regional claims to control over resources.
The oil ministry says income should go to a central pot and then be distributed as for the budget, of which the KRG gets 17 percent. The KRG, if it could, might use that to pay the firms. "That would be the death of all other exploration agreements in the Kurdish region," Ciszuk said.
KRG contracts with oil firms call for them to be paid 18-20 percent of total revenues. It would be short if forced to pay with its share after the pot is divided. "It's unfair to even suggest that Kurdistan repay the oil firms using its 17 percent share," Ali Hussain Balou, a Kurd who heads the Iraqi parliamentary oil and gas committee, told Reuters. "Any (Iraqi government) support for that idea would only complicate the problem and push things into a deadlock."
The committee's Arab deputy, Abdul-Hadi al-Hasani, said the firms involved, Norway's DNO International and Toronto-listed Addax Petroleum, should be paid their drilling costs rather than their contract entitlement. That would be a compromise until an oil law was passed, he added.
Iraq's cabinet approved an oil and gas law in 2007 that would help resolve deep disputes casting a shadow on the future of a country struggling to emerge from six years of violence. But disagreement between Baghdad and the KRG has delayed the legislation's passage to parliament.
Once exports flow, the two sides were likely to come to some pragmatic agreement on revenues, analysts said. Both sides need to see more income as Baghdad has been forced to cut the federal budget for this year three times due to oil's slump to around $60 a barrel from a peak over $147 last year. Iraq relies on oil for about 95 percent of income.
SLUGGISH PRODUCTION
Shahristani is under pressure to compensate for a decline of around 250,000 bpd in output from a post-war peak hit last May. Kurdish output could plug the gap more quickly than any other source available to the minister.
Iraq has the world's third-largest oil and tenth-largest gas reserves, but needs billions to overhaul energy infrastructure. Even a deal on revenues from these exports may be insufficient to point the way for future deals and for any gas supplies to Nabucco, analysts said.
The deals with DNO and Addax were signed before the draft oil legislation was agreed, so Baghdad may be more inclined to allow them to go ahead than those signed later, analysts said. "I think that the oil ministry is quite careful not to set a precedent that will encourage firms to continue signing deals with the KRG," said Valerie Marcel, associate fellow at international affairs institute Chatham House.
Baghdad has its own plans to supply gas to Europe from other fields, another reason it would resist the Kurdistan plan. The firms hoping to export gas to Europe may go ahead with plans to build a pipeline to Turkey under KRG auspices and with no federal approval. But buyers and especially transit country Turkey, itself combating Kurdish separatist aspirations, would be reluctant to purchase without Baghdad's nod.
"That would be encouraging Kurdish separatism," said Al Troner, Managing Director of Asia Pacific Energy Consulting. "That would be a very hard sell in Turkey." (Additional reporting by Shamal Aqrawi in Arbil and Missy Ryan in Baghdad; Editing by Anthony Barker)