Iraqi Oil Minister Hussein al-Shahristani said the cabinet had approved the three-billion-dollar deal that will see China's state-owned company developing the Al-Ahdab oil field in the central Shiite province of Wasit.

"The Chinese company will charge six dollars per barrel of production as service fees which would decrease gradually to three dollars," Shahristani told reporters inside Baghdad's heavily fortified Green Zone.

He said the plan is to be produce 25,000 barrels of oil per day in the first three years.

An Iraqi oil ministry official last month told AFP that the oil field would become fully operational in three years' time and is likely to produce oil for 20 years after that.

The present agreement revives a 1997 contract signed by the former Iraqi regime of Saddam Hussein that granted China National exploration rights to the Al-Ahdab oil field in a deal then worth 700 million dollars over 23 years.

However, activities were suspended due to UN sanctions and security issues following the US-led war in 2003 that toppled Saddam.

Shahristani said Baghdad had successfully managed to change the previous joint venture contract into a mere service agreement.

"Our view is that Iraqi oil should not be shared with anyone. We will pay service fees," he said.

"This is a big achievement in the interest of the country, especially changing the joint venture into a service contract."

One reason Baghdad is yet to strike a joint venture deal with any foreign oil producer is its failure to pass the national law which has been pending in parliament since early last year.

The oil law formulates the distribution of the oil revenues among the country's 18 provinces but has sparked sharp divisions from the leaders of the rival Shiite, Sunni and Kurdish communities.

Shahristani said the deal with China Petroleum is expected to generate employment for Iraqis.

"We have put in a condition that Iraqi workers should be employed and trained" by China Petroleum, he said.

The former nuclear scientist turned minister said the oil produced at Al-Ahdab will be used for generating power in the Zubeidiyah power station which is being set up by China, also in Wasit.

For Beijing, the deal is another potential success in its sometimes controversial global quest for oil that has seen it sign a flurry of contracts in Africa and the Middle East in recent years.

China's demand for oil has grown markedly in recent years, as its economy has grown at double-digit pace and its population of more than 1.3 billion people has grown richer.

The Al-Ahdab oil contract is not expected to generate any revenues for China except the service fees, but still offers an entry into Iraq oil reserves ahead of Western majors.

At the end of June, Iraq's oil ministry threw open six oilfields and two gas fields for international bidding by 41 companies.

The deals, which are also service contracts, pave the way for energy firms based abroad to return to Iraq 36 years after Saddam threw them out.

Iraq wants to ramp up output by 500,000 bpd from the current average production of 2.5 million bpd, about equal to the amount being pumped before the US-led invasion of March 2003.

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