The deal comes as Iraq's budget is increasingly pinched by a decline in global oil prices and officials seek to boost oil production and develop new industries to pay for reconstruction. But many major oil companies have remained in the wings until Iraqi lawmakers deal with a long-delayed proposal governing oil investments.
State-run Iraqi Drilling Co. will hold 51 percent of the new pact with Mesopotamia Petroleum Co., said Amman Zouain, head of the IDC drilling operations.
The new company, which will be called Iraqi Oil Service Co., will have an initial capital investment of $90 million which could be increased in the future. It is planned to drill up to 60 wells a year with a potential of 120,000 barrels a year, Zouain added.
The work will be based first in the southern oil fields around Basra and Maysan provinces, Zouain said.
"We will hold our first meeting with the visiting delegation (Friday) to start work immediately," Zouain told The Associated Press in a phone interview.
Thursday's agreement followed two other agreements signed last year with international energy companies.
In August, Iraq reached an accord with the state-run China National Petroleum Corp. to develop the al-Ahdab oil field. It was the first deal from the Saddam Hussein era to be revived.
A month later, Iraq signed a preliminary agreement with Royal Dutch Shell PLC that paves the way to establish a joint venture to gather, process and market associated natural gas in the oil-rich province of Basra.
Iraq's economy has been hit hard by the plummeting price of oil, which has dropped to less than a third of its high of nearly $150 a barrel last year.
The Iraqi government was forced to slash its 2009 budget twice - from $79 billion to $64 billion now. The parliament has yet to approve the budget and further cuts are possible.
Iraq hopes to add up to 4.5 million barrels a day to its current daily production of 2.4 million barrels over the next four to six years. But Prime Minister Nouri al-Maliki has warned that Iraq will remain too vulnerable to global economic swings if it relies solely on oil as its main revenue.
Iraq, which sits on the world's third-largest oil reserves of at least 115 billion barrels, has offered 19 oil and gas fields to international companies for development in two major bidding rounds.