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UPDATE 2-Turkey stands by Kurdish oil deal, seeks to appease Baghdad

Humeyra Pamuk
Monday, 2 Dec 2013 | 7:41 AM ET

* Turkey's relations with Baghdad stgrained

* Iraq unhappy with oil deal

* Pipeline ready to begin deliveries

(Adds further quotes, interpretation)

ARBIL, Iraq, Dec 2 (Reuters) - Turkey said on Monday it stood by a bilateral oil deal with Iraq's Kurdistan region that bypassed central government but sought to appease Baghdad by drawing it into the arrangement.

Reuters reported Turkey and Iraqi Kurdistan signed a multi-billion-dollar energy package last week, infuriating Baghdad which claims sole authority over oil exports and is wary of any move that could extend political autonomy in the region.

Turkish Energy Minister Taner Yildiz met Iraqi deputy prime minister for energy, Hussain al-Shahristani, in Baghdad on Sunday to try to mend ties with a federal government which says independent Kurdish oil exports would be illegal. The affair has soured relations between Ankara and Baghdad.

"We stand by the agreement we did with northern Iraq but we hope this can be carried out through a three-way mechanism," Yildiz told a conference after flying into Arbil, the capital city of the Kurdistan region (KRG). "As Turkey, we are trying to move this forward in a careful and courteous way."

"We also would like to have the consent of the Central Government of Iraq for the commercial export of oil from the KRG to Turkey and start a trilateral cooperation scheme that will be beneficial to all."

The Turkish-KRG deal has enormous significance for major oil companies as well as for the Kurds and Turkey, which can benefit in domestic supply and onward westward export through the mediterranean port of Ceyhan.

"Turkey is trying to follow a balancing act here," a source close to the talks said. "These are really significant contracts and the Turkish Republic just doesn't sign deals like this every day.

"But Turkey...can't just look like it's acting hand-in-hand with the KRG and doesn't care about Baghdad and that's never been the case anyway...If Baghdad agrees, great. If they don't, the exports will nevertheless go ahead, I think."

The deal has political as well as economic ramifications.

The Kurdish north of Iraq has enjoyed autonomy since the 1990-1991 Gulf War when a U.S.-led coalition drove Iraqi occupying troops out of Kuwait.

TENSIONS WITH BAGHDAD

Since the overthrow of president Saddam Hussein in a second war in 2003, that autonomy has grown in a region largely saved the civil conflict that has gripped the rest of the country. Baghdad fears growing economic autonomy could drive moves towards creation of an independent Kurdish state.

Baghdad claims sole authority over Iraqi oil exports, while the KRG says it has the right to sell the oil independently and has recently built its own pipeline to export crude to Turkey.

Yildiz confirmed that the details of the deal had been agreed, but none of the officials would comment on whether the final agreement had actually been signed.

"The formalities were recently completed...the finalization of such cooperation is a great achievement for Iraq and the Kurdistan region and this process will bring us together," KRG Prime Minister Nechirvan Barzani told the Arbil conference.

He suggested the deal could work to Bghdad's benefit.

"For the first time the Kurdistan region will become a net contributor to the Iraqi national income and that's why we need to sit down with our colleagues in the Iraqi government as equal partners," he said, according to an English translation of his comments.

Baghdad might prove hard to persuade, having resisted for years Arbil's moves towards direct exports.

Officials would not say whether crude flows through the pipeline had started yet.

"Our new pipeline is complete... (It is) tried and tested and when fully operational can take 300,000-400,000 bpd," KRG energy minister Ashti Hawrami told the conference.

"We also would like our colleagues in Baghdad to work with us in harmony but this doesn't mean that we have come to a standstill, everything is moving on ... Turkey is trying to create goodwill."

Turkey which is heavily dependent on imports to satisfy its growing appetite for energy, wants Iraqi Kurdistan's oil to help diversify its energy supplies.

Turkey has repeatedly said it respects Iraq's sensitivities over territorial integrity and that increasing oil revenues will help the whole of Iraq.

Oil exports from the Kurdish region via an Iraq-Turkey pipeline had dried up due to a row over the sharing of oil revenues between Arbil and Baghdad. The deal between Turkey and the Kurds also offers a solution to the payment problems.

(writing by Daniel Fineren; editing by Keiron Henderson and Ralph Boulton)