(Adds comments from planning minister) By Claudia Parsons and Mariam Karouny BAGHDAD/BEIRUT, Feb 26 (Reuters) - Iraq's cabinet on Monday endorsed a draft oil law crucial to regulating how wealth from the country's vast oil reserves will be shared by its ethnic and sectarian groups, a move hailed as a major political milestone. Passing a law to help settle potentially explosive disputes over the world's third largest oil reserves has been a key demand of the United States, which has linked it to continuing support for the Shi'ite-led national unity government of Prime Minister Nuri al-Maliki. Deputy Prime Minister Barham Salih told Reuters that Iraq's leaders had pledged to have the law enacted by the end of May. The draft has to be approved by parliament first. "The political leadership have committed to have the law and other associated laws and regulations be implemented by the end of May 2007 -- admittedly tough, and a gruelling schedule, but economic and political imperatives of the country require all of us to rise to the challenge," Salih said. "The cabinet endorsement ... represents a major breakthrough for Iraq's political and economic transition," added Salih, who is also head of the committee that drafted the law. Speaking later to reporters, Maliki said: "The benefits of this wealth will form a firm pillar for the unity of Iraqis and consolidate their social structure." Salih said that as previously agreed, revenues would be put in a central account and distributed according to population. Most of Iraq's proven oil reserves are in the Shi'ite south or the Kurdish north. That has left Sunni Arabs in central and western Iraq fearful they would miss out on any windfall should security improve enough to substantially boost production. Planning Minister Ali Baban, a Sunni, said all main political forces in the government agreed the draft. "This law will add a real and practical dimension to the ... the unity of the Iraqi people," he said. Iraq needs billions of dollars in foreign investment to revive the oil industry. Officials missed a self-imposed deadline of the end of 2006 to agree the law amid Kurdish concerns about the relations between the regions and Baghdad. The draft would allow the Kurdish regional government (KRG) to review existing contracts it has signed with foreign firms to ensure consistency with the terms of the new law, Salih said. KURDISH CONCERNS ALLAYED Agreement on the law had been held up partly because officials from Kurdistan, where relative security has encouraged more development than elsewhere in Iraq, had said they wanted assurances a new federal council will not invalidate their existing contracts, including with Norway's DNO. "The existing contracts signed by the KRG will be reviewed by the KRG to be made consistent with the premise of the law," said Salih. "A commission of independent experts will ratify consistency in case of contention." Regional authorities in Iraq would also be able to negotiate oil contracts with foreign companies. "Negotiations can be conducted by the regional authority in accordance with procedures and guidelines established by the Federal Council of Oil and Gas," said Salih. "The negotiations and contracts will have to be based on the main criteria of maximising revenues for Iraqi people." The law will also restructure the Iraqi National Oil Company (INOC) as an independent holding company and establish a Federal Council as a forum for national oil policy. INOC will have affiliated regional operating companies and the oil ministry will be the regulator for the sector. "The law ends decades of excessive centralised control over the industry which was often the impediment to development for the sector," Salih said. Iraq has the world's third largest proven oil reserves but has been hampered in developing them by decades of sanctions under Saddam Hussein and nearly four years of violence since the U.S.-led invasion in March 2003. The world's top oil companies have been manoeuvring for years to win a stake in Iraq's prized oilfields such as Bin Umar, Majnoon, Nassiriyah, West Qurna and Ratawi -- all located in the south of the country. Russia's LUKOIL would be prepared to start work at West Qurna if Baghdad were to validate its deal struck under Saddam, analysts said. China's contract for the al-Ahdab oilfield, signed during the same period, is under review.
