Iraq launched its first major energy auction since the 2003-led invasion on Tuesday, awarding its largest field to a BP-led group but doling out far fewer contracts than expected due to tough payment terms.

Most companies, including firms from resource-hungry China and India eager to get a share of the world's third largest oil reserves, balked at lower-than-expected fees and Iraq failed to strike deals on the remaining seven oil and gas fields on offer.

The controversial auction took place on the same day that U.S. combat troops withdrew from city centers, giving local forces lead responsibility for a nation still gripped by violence and which desperately needs oil income to rebuild.

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

Oil Ministry spokesman Asim Jihad said the results were not a disappointment.

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, he said.

Iraq's Oil Ministry asked firms to submit revised bids at the end of the day in hopes deals could be struck for remaining fields. Seven bids were revised, but were not made public. The bids will now be given to Iraq's cabinet for a decision.

The sale was billed as the first chance since Iraq nationalized 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 CHINESE GRAB SOLE DEAL

A BP-led consortium including China National Petroleum Corp (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 was clinched only after an Exxon Mobil-led group rejected the government's proposed fee. BP, too, was forced to reduce the fee it will accept before it won Rumaila.

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 U.S.-led consortia rejected its terms. The companies also wanted a much higher fee for each extra barrel produced.

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

It's a big disappointment, IHS Global Insight Middle East Energy analyst Samuel Ciszuk said. Iraq had hinged its whole development on this licensing round ... the fact that only one field has been awarded is very disappointing. It's a flop.

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 hotly 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 with a stubborn insurgency and discontent within ruling circles.

Minority Kurds, and some in Iraq's parliament, condemn the deals as illegal. Even officials in the state-run oil industry have criticized the government for selling Iraq's vast oil wealth short, especially after investing 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 bid 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 beneath its desolate deserts could be far greater.

The auction, delayed 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.

But some foreign firms present expressed concerns after the bidding about what they saw as a lack of transparency in leaving a decision on outstanding deals to the cabinet.

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

(Additional reporting by Aseel Kami and Khalid al-Ansary in Baghdad and Tom Bergin in London; Writing by Michael Christie; Editing by Christian Wiessner)

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