British oil explorer Heritage Oil (HOIL.L: Quote, Profile, Research, Stock Buzz) said on Wednesday it has discovered up to 4.2 billion barrels of oil in the Kurdish area of Iraq, adding to pressure on Baghdad and the autonomous region to unblock a legal impasse stalling oil projects.

Heritage said in a statement following the results of its first drilling on the Miran West field that it could contain 2.3 to 4.2 billion barrels of oil-in-place and have recoverable reserves of up to 3 billion barrels.

Its shares were up 22 percent at 491 pence at 1520 GMT, having reached a high of 518 pence earlier in the session, despite doubts about the legality of Kurdish oil contracts.

Today's news is transformational for Heritage, Richard Griffith, oil analyst at Evolution Securities said, adding he had raised his target price for the shares to 800 pence from 500 pence.

Analysts at Ambrian also raised their target price and Credit Suisse said the find could be worth an additional 130 pence to its target share price.

Heritage hopes to be producing 10,000 to 15,000 barrels of oil per day by the end of the year, using trucks to move the crude to a pipeline in Kirkuk for export.

ln time the company hopes to link into Iraq's export pipelines. A field of this size could normally sustain production of hundreds of thousands of barrels a day when fully developed.

However, even the modest near-term goal is dependent upon the Kurdish Regional Government (KRG) securing a deal with Baghdad on oil revenue sharing.

The Iraqi government has described the contracts the KRG signed with western companies as illegal and is blocking the export of Kurdish oil to world markets.

Heritage's find may make Baghdad's position harder to sustain, Samuel Ciszuk, Middle East Energy analyst said.

This strenghten the Kurds' hands for sure ... how can you allow a situation with large shut in reserves in Kurdistan and falling production elsehwere in Iraq, he said.

The current impasse means oil producers in the Kurdish region, such as Norway's DNO (DNO.OL: Quote, Profile, Research, Stock Buzz) and London-listed Addax Petroleum (AXC.L: Quote, Profile, Research, Stock Buzz)(AXC.TO: Quote, Profile, Research, Stock Buzz), can only supply the Kurdish market, which consumes a few thousand barrels a day.

Heritage's chief financial officer, Paul Atherton, told Reuters in a telephone interview that he was confident a deal would be struck soon to allow companies like Heritage receive licences to move their crude out of the region and to connect up to the main export pipelines.

Atherton said Heritage would be able to fund the development of its Kurdish fields out of cash on its balance sheet and from cash flow from early production from the fields.

Further drilling will be needed to confirm the exact reserves at Miran West but Heritage also plans to drill the adjacent, similarly-sized, Miran East structure and said Wednesday's result boosted its hopes for the second structure.

Shares in UK-listed Gulf Keystone (GKP.L: Quote, Profile, Research, Stock Buzz), which is drilling for oil near Heritage in Kurdistan, jumped 10.5 percent to 15.75 pence.

Analysts at Credit Suisse reiterated their view that Heritage would be a logical acquisition for one of the Chinese state oil companies, which in recent years have been snapping up energy assets across the globe, to fuel China's economy. (Additional reporting by Ahmed Rasheed in Baghdad; Editing by Greg Mahlich)

Credit Suisse Iraq