The UAE's Crescent Petroleum and affiliate Dana Gas have begun supplying gas in Iraq's Kurdistan region after completing the first stage of a $650 million project, the companies said in a statement.

Gas was flowing at 75 million cubic feet per day (cfd) from the revamped Khor Mor field and supply will rise to 300 million cfd in the first half of 2009, the companies said.

The first gas will supply a power plant in Arbil, the capital of the semi-autonomous Kurdistan region. Supplies coming on stream later will go to another power plant in Sulaimaniya. The two plants will have total electricity generation capacity of 1,250 megawatts.

Supply was initially planned to begin in mid-2008, but was held up as construction of the power plants took longer than expected.

 'We are very proud of this historical milestone as the first companies from the Middle East to invest in Iraq's oil and gas sector,' said Ahmed Al-Arbeed, upstream executive director for Dana Gas in the statement.

Dana and Crescent signed the service contract in April 2007 with the Kurdistan regional government (KRG) to redevelop the Khor Mor and Chemchemal fields.

The Khor Mor field was shut after the first Gulf War in 1991. The KRG has angered Baghdad by moving ahead with plans to develop its energy sector while political wrangling has delayed a federal oil and gas law from going before parliament.

The deal with Dana and Crescent is a service contract, rather than a production sharing agreement (PSA). The Kurdistan government's PSAs have attracted criticism from some politicians in Baghdad, including the oil minister. The KRG says its deals are in line with the constitution.

Crescent says it has no doubts over the legality of its deal and that other regions of Iraq have shown interest in contracting the companies for similar projects.

'We are absolutely certain of the moral, legal and economic correctness of our contract with the KRG and the work we are doing,'  Majid Jafar, Crescent executive director, told Reuters.

'This benefits the Kurdistan Region and all of Iraq. We have already been asked by local officials to replicate similar projects in other regions of Iraq.'

The plants will save Iraq over $2 billion annually in fuel costs - cash the government currently spends on oil products for small power generators. The project was the largest private-sector investment in Iraq since the US-led invasion of 2003, the companies said.

Aside from redeveloping Khor Mor, appraising Chemchemal and building gas processing facilities, the companies constructed a 180 km pipeline that required clearance of some minefields. Crescent and Dana each have a 50 percent stake in the
project. Crescent is based in Sharjah.

The duo had last year signed up to evaluate the region's gas reserves and to build a large gas-fed industrial complex called Kurdistan Gas City.-Reuters