BAGHDAD: British energy giant BP and China's Chinese National Petroleum Corp (CNPC) International Ltd won a deal to develop Iraq's biggest oilfield but had to slash its fee as Baghdad's tough terms put off other investors in the country's first major energy auction since the US-led invasion in 2003.

General view of an oil refinery in the southern Rumaila area. Energy giant BP and China's CNPC International Ltd have been unveiled as the first foreign firms in decades to win contracts to invest and develop in Iraq's war-battered energy sector. [Agencies]

Other companies, including firms from China and India that are eager to get a share of the world's third largest oil reserves, balked at the fees and Iraq failed to strike deals on the remaining seven oil and gas fields on offer.

The controversial auction of Iraq's prized assets took place on the same day that the US troops who toppled Saddam Hussein quit Iraq's cities and left security chiefly to the country's own forces. The sale aims to raise funds for reconstruction as Iraq also takes greater charge of its economy.

"Today we have seen that the Iraqi Oil Ministry and international oil companies are living on different planets," oil analyst Ruba Husari said.

The results of the auction were not a disappointment, said Oil Ministry spokesman Asim Jihad.

"The participation of these well-known, major companies is a good sign and it reflects the desire of these firms to invest in the Iraqi oil sector," Jihad said.

Iraq's Oil Ministry asked companies to submit revised bids at the end of the auction. Seven did, but they were not made public. The bids would be handed to the Iraqi cabinet for a decision, an official close to the process said.

The sale was billed as the first chance since Iraq nationalised its oil in 1972 for major foreign companies to get a run at the country's hydrocarbon reserves, much of which are untapped. But many Iraqi critics said it was a bad bargain.

Foreign companies servicing the fields will be paid per barrel of oil produced above a certain amount.

BP and CNPC Grab Sole Deal

The BP-led consortium including the CNPC, was the only foreign group to strike a deal -- for the 17-billion barrel Rumaila oilfield, Iraq's biggest, in the Shi'ite south.

The deal only went down after an Exxon Mobil-led group rejected the government's proposed fee.

The Oil Ministry failed to find takers for another huge field, Kirkuk, and for the smaller Bai Hassan, Maysan and Zubair fields, after Chinese, Italian, British and US-led consortia rejected its terms. The companies also wanted a much higher fee for each extra barrel produced than it was willing to pay.

No bids were received for Iraq's Mansuriyah gas field and no deal was agreed on the Akkas gas field.

The BP/CNPC alliance had to accept a fee of $2 for every barrel of additional oil produced, compared with $3.99 in its initial offer. It also projected being able to boost output from Rumaila to an ambitious 2.85 million barrels per day, compared to the government's target of 1.75 million barrels per day.

The only group to bid for the Kirkuk oilfield, which lies in a northern region contested by minority Kurds and the Arab-led government in Baghdad, was led by Royal Dutch Shell. Shell wanted to be paid $7.89 per extra barrel of oil while the Iraqi government offered $2 again.

"The expectations of the Iraqi government and the oil companies are mismatched," one oil executive, who asked not to be named, told Reuters.

Security Still an Issue

Foreign companies working in Iraq will have to contend not only with security risks from a still stubborn insurgency, but also discontent within ruling circles and political uncertainty.

Some Iraqi lawmakers condemn the deals as illegal and even officials in the state-run oil industry have criticised the government for selling Iraq's vast oil wealth short, especially as the country has already invested heavily in the fields.

Years after Saddam's removal was supposed to unleash Iraq's oil potential, the auction marked the first big moment for the Oil Ministry, which is under growing pressure to boost disappointing output of around 2.4 million barrels a day.

Tuesday's tender was a central plank of Oil Minister Hussain al-Shahristani's aim to boost oil output to 6 million barrels per day in five years. Shahristani said he was pleasantly surprised at how ambitious some of the projections were from oil companies for potential increases to production at the fields.

Iraq has proven oil reserves of 115 billion barrels, but the true amount of hydrocarbons sitting beneath its desolate deserts could be far greater.

The auction, delayed by a day by a sandstorm, was broadcast live from a hotel in Baghdad's fortified Green Zone in a process Iraqi oil officials insisted would be fully transparent.

Later this year, Iraq is due to offer another set of fields that are even more appealing since they are undeveloped.