UPDATE: Design Of Iraq's Proposed Kerbala Refinery Needs Changing-Minister

The front end engineering and design of Iraq's 140,000 barrel a day Kerbala refinery will have to be changed to reduce the fuel oil output of the proposed plant, in another setback to the struggling expansion of Iraq's domestic fuel production, said the country's deputy oil minister Ahmed Shamma Tuesday.

The Kerbala plant, one of four major new refineries planned by the Iraqi government, was originally designed to supply large volumes of fuel oil to a nearby power plant, Shamma said at the Iraq Refinery conference in London. That plant has now decided to use natural gas as a fuel, meaning the design of the Kerbala refinery will have to change to avoid producing a glut of fuel oil, he said.

An Italian consortium, including Saipem SpA (SPM.MI) and Eni SpA (E), made a preliminary agreement in July last year to develop the Kerbala refinery. The agreement was only valid for an initial six months and Shamma described talks with the consortium as "interrupted".

French engineering company Technip SA (TKPPY) did front end engineering and design for the Kerbala project. Shamma didn't say if they would be doing the redesign.

Dialogue continues with one potential investor in a 150,000 barrel a day refinery in Missan province, Shamma said. There have been initial talks over plans for a 140,000 barrel a day refinery in Kirkuk and a 300,000 barrel a day plant in Nassiriya, he said.

The total investment to build the four plants could range between $24 billion and $27 billion, he said.

Iraq will encourage private companies to invest in domestic refineries, particular international operators, by allowing them to sell fuel they produce at international prices and market it in their own retail network, Shamma said.

Iraq's refining throughput averaged 567,000 barrels a day last year and is expected to reach between 600,000 and 620,000 barrels a day this year, thanks to work to improve existing plants, said Shamma. Capacity should reach 750,000 barrels a day by the start of 2013, due to an expansion of the Basra refinery, he said.

-By James Herron, Dow Jones Newswires; [phone]; [e-mail]