By Mohammed Abbas and Ahmed Rasheed

BASRA, Iraq (Reuters) – Next to a pipeline snaking across a desert in Iraq’s south, villas built to house an expected influx of foreign oil workers stand empty.

Nearby, a faded plaque in Russian and Arabic commemorates the opening of a pumping station in 1972, a reminder of the foreign ties that helped Iraq develop its oil industry.

As U.S. President Barack Obama confronts the legacy of a war his predecessor launched almost six years ago, Iraq has once again begun to open its vast oil reserves to foreign companies.

The country has launched a bidding round for some of its largest oil and gas fields, which it hopes will attract multibillion dollar investments. There is still some confusion over the deals, scheduled to be awarded by June.

But a lack of security, rigid bureaucracy and the absence of a legal framework is still deterring the investment Iraq needs to update its decaying oil infrastructure.

“A foreign oil workers’ compound, whether Exxon, BP, Shell or whoever, would be a bull’s-eye for an attack,” said a senior foreign oil executive who declined to be named because he is not authorised to speak to the media.

Foreigners were prime targets in the years of bloodshed unleashed by the 2003 U.S.-led invasion of Iraq, and videos of kidnapped Westerners being beheaded shocked the world.

Iraq sits on an estimated 115 billion barrels of oil, the world’s third largest reserves. But tin shacks still line the road to its oil fields, and the government is desperate to use oil income to rebuild the country.

Villas which once housed Russian workers are now in need of a refit and equipment worn down by war, sanctions and sectarian violence is hopelessly antiquated.

Deprived of foreign expertise and money, Iraqi engineers have grown adept at tinkering with old equipment and salvaging spare parts, but their maintenance is only skin deep.

“We painted the tanks, improved the checkpoint, the toilets … simple things, not fundamental things for production,” said Khodair Abd, a North Rumaila supervisor.

“There were companies supposed to come here for that, but I don’t know what happened … This is the same station that was installed in 1972,” he added.

NO MORE EXCUSES

At the South Rumaila oilfield, which has an estimated output of 800,000 barrels of crude per day, a lack of equipment means valuable gas is burned off in huge flares, the smoke streaming like jets of ink into the blue desert sky.

The violence that almost tore Iraq apart in 2006 and 2007 has fallen sharply in the past 18 months and Iraq now believes the time has come for foreign firms to start showing up.

“The excuse of a lack of security has gone. The security situation has transformed, root and branch,” said Mohammed Nasser, an engineer at the 1950s-era South Rumaila plant where antique dials, gauges and switch panels sit next to more modern pieces of electronic equipment.

Some foreign firms are taking tentative steps back in.

The Chinese National Petroleum Company CNPC.L started work this year on a $3 billion (2.1 billion pounds) project in the al-Ahdab oil field in eastern Wasit province, the first foreign firm to begin such work since Saddam nationalised the industry decades ago.

Oil major Royal Dutch Shell Plc in 2008 signed a deal with Iraq to collect the gas by-product of crude extraction that is usually burned off in Rumaila North and South, the country’s two most productive fields.

And U.S. firm Weatherford International has a deal to operate in Rumaila North and in the Zubair oil field.

But they have few if any workers on the ground in the country’s oil-rich south, which accounts for about 80 percent of Iraq’s oil production.

“We probably could do a reconnaissance visit now, but that is very different from sending people in to work at compounds and bases. We’re not ready for that,” said another oil executive who also declined to be named.

IRAQIS REMAIN CONFIDENT

In spite of such scepticism, Iraqi officials believe the country’s oil sector will ultimately prove irresistible.

“International oil companies are killing themselves to sign contracts with Iraq,” said Isam al-Chalabi, who was the Iraqi oil minister from 1987-1990.

One of Iraq’s greatest allures is the ease with its oil can be pumped. The Oil Ministry has said it only costs around $2 a barrel to extract Iraqi crude.

With oil prices below $50 a barrel, down from a high of $147 six months ago, the low cost of production gives the country a huge advantage over producers who pump their crude out of deep sea wells, for example.

Of the 35 companies qualified for a first bidding round of oil field servicing tenders last year, 30 have paid for technical information about eight oil and gas fields.

“That implies there is a real desire to work in Iraq,” Oil Minister Hussain al-Shahristani said when announcing a second round at the end of December.

He did not see any impediment in Iraq’s failure to agree on a law to give foreign companies access to profit-sharing deals, clarify taxation, and define how oil resources are divided between Baghdad and the provinces.

He is not the only optimist: “I’m confident Iraq will become a rich oil state and that our grandsons will enjoy a welfare state like they currently do in the Gulf countries,” said Sabah Ghani, 65, an Iraqi businessman.

“It won’t happen in record time.”

(Additional reporting by Simon Webb in Dubai; Writing by Mohammed Abbas; editing by Michael Christie, Nick Vinocur and Sara Ledwith)