BASRA, Iraq/BAGHDAD (Reuters) - Just weeks ago, U.S. energy giant ExxonMobil looked poised to move ahead with a $53 billion project to boost Iraq’s oil output at its southern fields, a milestone in the company’s ambitions to expand in the country.

But now a combination of contractual wrangling and security concerns, heightened by escalating tensions between Iraq’s bigger neighbor Iran and the United States, has conspired to hold back a deal, according to Iraqi government officials.

The negotiations have been stymied by terms of the contract that Baghdad objects to, said four Iraqi officials involved in the discussions who spoke to Reuters on condition of anonymity due to the sensitivity of the matter.

The main sticking point, they said, was the means by which Exxon proposed to recoup its development costs, with the company aiming to share the oil produced by two fields - something Iraq opposes, saying it encroaches on state ownership of production.

One of the Iraqi negotiators said Baghdad would not sign anything with the current terms proposed by Exxon.

ExxonMobil declined to comment on the terms of the contract or the negotiations, with a spokeswoman in Texas saying: “As a matter of practice, we don’t comment on commercial discussions.”

The deputy oil minister for upstream affairs, Fayadh Nema, said on Wednesday that talks were ongoing and he expected a deal soon.

The negotiations have also been held up by two separate evacuations of Exxon staff from Iraq, a result of escalating regional tension between the United States and Iran.

The first was in May after hundreds of U.S. embassy staff were sent home over unspecified security threats from Iran, which backs a number of Shi’ite armed groups in Iraq. The second was this week following a rocket attack thought to have targeted the company which local officials blamed on Iran-backed militias.

Tehran has not commented on the attacks, but the evacuations highlighted the persistent instability in Iraq that is hindering business, fueled by the U.S.-Iran tensions.

Iraq one of the only nations in the world to have friendly relations with both Washington and Tehran; the arch-enemies are its two biggest allies and Baghdad is caught in the middle as they vie for influence in the country.

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Many Iraqi officials say the stalling of talks with Exxon and disruptions to its staffing point to the limits of American power in Iran’s smaller neighbor, and that U.S.-Iran tensions have led to a series of security incidents including unclaimed attacks on oil tankers in the Gulf.

“Exxon pulled its staff from Iraq in response to regional unrest. The question is how they will run a $53 billion project with constant regional instability,” said an Iraqi oil official who oversees foreign companies’ operations in the south. “They might abandon work again and that will hurt our energy sector.”

CONTRACT WRANGLES

Iraq is the second-largest oil exporter in OPEC and has long-term aims to boost output curtailed by decades of war and sanctions. Such projects are among the most valuable prizes in the world for international oil companies.

An initial agreement would be a boost for Exxon’s plans to expand in Iraq. Under the deal, it would build a water treatment facility and pipelines needed to boost oil output capacity. It would also get the rights to develop at least two southern oilfields - Nahr Bin Umar and Artawi.

In May, U.S. Secretary of State Mike Pompeo discussed the deal with Iraqi Prime Minister Adel Abdul Mahdi twice in three days, during a telephone call and a surprise visit to Baghdad, a separate Iraqi government official told Reuters.

Mahdi said last month that Iraq was close to signing the $53 billion, 30-year energy agreement with project leader Exxon and its partner for the deal, PetroChina.

But the officials who shared details with Reuters over the proposals from the American oil major said there were differences between the two parties that could prevent even a preliminary agreement anytime soon.

Exxon has proposed a production-sharing agreement whereby it recoups its development costs by sharing the output of the Nahr Bin Umar and Artawi fields with the government.

However Iraq has largely opposed such contracts and over the past decade has favored so-called service contracts where companies are paid at a fixed dollar-per-barrel rate.

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“We told them that we totally reject any production-sharing mechanism as it contradicts government energy policy,” said an official who is part of the negotiating team.

The official added it was too early to say what kind of contract Iraq would favor. The country has also in the past struck infrastructure deals with investment contracts where companies take a slice of profits.

Another official involved in the talks said Exxon’s production-sharing model included a proposal to sell some Iraqi crude itself, rather then through the state oil marketer SOMO, a plan the government strongly rejected.

POLARIZING OIL DEAL

Relations between Washington and Tehran have deteriorated since U.S. President Donald Trump withdrew last year from a 2015 nuclear deal between Iran and world powers agreed by his predecessor Barack Obama, and reimposed and extended sanctions.

The complications facing the Exxon deal have come against the backdrop of a rapid escalation in recent weeks, with Tehran rejecting accusations by Washington it was behind attacks on oil tankers and facilities in the Gulf.

Tensions reached further heights this week when Iran shot down a U.S. military drone that it said was on a spy mission over its territory, an incident that fanned fears of wider military conflict in the Middle East. Trump said on Thursday that Iran had made “a very big mistake”.

In a sign of the frustrations felt by Baghdad, Iraqi Oil Minister Thamer Ghadhban said in May that Exxon’s decision to evacuate all its foreign staff from the country then was “unacceptable and unjustified”.

He said it was a political move rather than a genuine security precaution, without elaborating, and that it had hampered the dealmaking.

“Now they are out of the country, why should I run after them?” he said at the time.

Exxon did not comment on Ghadhban’s characterization of its temporary evacuation of Basra staff as “political”.

The U.S. State Department did not immediately respond to a request for comment on whether U.S. Iran policy might have affected the deal.

The tussle for influence in Iraq between Washington and Tehran is reflected in Iraqi politics, with the proposed $53 billion deal a polarizing issue.

Basma Baseem, an Iraqi lawmaker and a member of the parliament energy committee said Iraq should push forward with the deal with Exxon to help Iraq develop its energy sector.

“It’s a major company with billions of dollar of assets and investments across the world and a cutting edge expertise in the oil industry,” she added. “Iraq can benefit significantly from this large deal.”

However politicians from Iran-aligned Shi’ite Muslim parties portray the deal as extortion, calling it “a new occupation” by the United States.

“The government is under a lot of pressure from the Americans to sign long-term energy and power deals,” said lawmaker Kareem Alewi of the Iranian-backed Badr Organization, one of the Iraqi parliament’s two biggest groupings.

“This is a trick to control our economy.”