• Reuters
• Thursday February 14 2008

(Recasts after news conference, adds details)

By Yoo Choonsik and Rhee So-eui

SEOUL, Feb 14 (Reuters) - Kurdistan agreed on Thursday to award South Korean companies an oil-for-construction deal, estimated at $12 billion, risking a sharp reaction from Baghdad, and said it had the constitutional right to do so.

The Kurdistan government's prime minister told reporters after signing a tentative agreement on the deal in Seoul he did not expect the Iraqi federal government to block the fresh deal, which he said was in line with Iraq's constitution.

The deal comes after Baghdad last month halted oil exports to South Korea's largest refiner, SK Energy, and Austria's OMV AG in response to what it says are illegal oil exploration deals with the Kurdish regional government.

"We have done nothing against the Iraqi constitution. The constitution has given us the right. We would not have done it if it were unconstitutional," Kurdistan Prime Minister Nechirvan Barzani told reporters through an interpreter.

The news boosted shares in one of the 10 South Korean companies involved in the deal by the maximum daily stock market limit of 14.8 percent, although the two sides have yet to undertake a feasibility study and negotiate on more details.

State-run Korea National Oil Corp (KNOC) is leading an oil development consortium with four other South Korean companies, while Ssangyong Engineering & Construction Co Ltd is the leader of a construction consortium with four others.

Ssangyong shares ended up 2,700 won ($2.86) at 21,000 won, outperforming a 2.2 percent gain in the junior Kosdaq market's benchmark index The four other listed firms among the 10 involved saw shares rise modestly.

DISPUTE WITH BAGHDAD

KNOC, which has been spearheading the energy-poor country's effort to secure stable oil supplies, also said it had ascertained with international lawyers that the deal was in compliance with the Iraqi constitution.

"We have confirmed with international lawyers that any regional government in Iraq can sign such an oil development deal with companies as long as 83 percent of the proceeds are allocated to the other regions of the country," Kim Seong-hoon, executive vice president at KNOC, told reporters.

Prime Minister Barzani said the time when the federal government makes every decision on regional issues was over and that the country was now entering into a new federal system.

Iraq's largely autonomous oil-rich north Kurdistan area has set up the Kurdistan regional government, which has its own structures and officials.

He said he would try to resolve the dispute with the central government on the issue smoothly, but did not elaborate.

"As far as I know, the latest suspension of crude exports to South Korea was not made by the full central government but by an individual (minister)," he said.

A final contract is due to be signed in the next two months. Once it is signed, the construction consortium will build roads, water development facilities and power plants in Kurdistan, which Ssangyong's chairman said Kurdistan values at about $12 billion.

"I can't give the value as for now but details will become available within the next 60 days," Ssangyong's Chairman and CEO S. Joon Kim told reporters.

Ssangyong teamed up with Doosan Construction & Engineering Co , Kukdong Construction Co, UI ENC and Anheung Development Co; while the KNOC group includes UI Energy Corp, Samchully Co, Daesung Industrial Co, the Kurdistan government said.

KNOC led another consortium including SK Energy, which secured exploration rights from the Kurdish regional government for the Bazian oilfield, triggering Baghdad's export halt.

South Korea has said its stationing of troops in Iraq would help its companies win more business projects in the war-torn area and once had the third-largest foreign troop deployment in Iraq after sending 3,600 soldiers in 2004.

It now has some 1,200 troops in the Kurdistan area and plans to further reduce that number to 600 this year. (Editing by Keiron Henderson/Ramthan Hussain) ($1=945.1 Won)