Iraqi Kurdistan-focused energy shares fall after IS advance

* Islamic State seizes oilfields

* Kurds vow fightback after surprise rout

* Major Kurdish oilfields far from IS advance

By David Sheppard

LONDON, Aug 4 (Reuters) - Energy shares focused on Iraqi Kurdistan fell sharply on Monday after the Islamic State's seizure of oilfields and towns in northern Iraq raised fears over the autonomous region's ability to defend its territory against Sunni militants.

Shares (Frankfurt: DI6.F - news) in Norway-listed DNO International and London-listed Genel Energy Plc (Other OTC: GEGYF - news) fell 9 percent and 6 percent respectively in early trading, while Gulf Keystone Petroleum International fell 3 percent.

The Islamic State's seizure of the Ain Zalah oilfield and three Kurdish-controlled towns on Sunday was the first major defeat for the Kurds' peshmerga forces since the Sunni-led insurgency first captured swathes of northern Iraq in June.

While the Ain Zalah field is far from Iraqi Kurdistan's largest oilfields, the routing of peshmerga forces - who have a reputation for being formidable fighters - reverberated with investors.

"While my assessment of the threat to Kurdish oil production isn't greatly altered," said Richard Mallinson at Energy Aspects in London, "this is a reminder that the Kurdish region shares a long and dangerous border with the militants now."

The Ain Zalah oilfield, which was run by Baghdad's state-backed North Oil Company, was producing 20,000 barrels per day before Sunday, industry sources said, about two-thirds of its capacity. The Islamic State also seized the Batma field that was under development.

In total they now control five Iraqi fields that have helped fund their stated goal of establishing a caliphate across western Iraq and Syria.

European-listed energy producers and U.S. majors such as Exxon Mobil Corp dominate oil development in Iraqi Kurdistan, which has been a self-ruling region of relative stability since the 2003 U.S.-led invasion of Iraq.

While Baghdad has opposed Kurdish control of energy resources and has disputed its right to sell crude, companies have pushed ahead in tapping what is believed to be one of the last major onshore conventional oil patches.

On Monday senior officials in the KRG announced a major counter-offensive against the fighters of the Islamic State, saying its forces had been overstretched in defending the region but were ready to hit back.

Sunday's advance by the Islamic State group saw them take control of Iraq's biggest dam and three towns not far from the Syrian border to the west of Mosul.

The vast majority of Iraqi Kurdistan's major oilfields are far to the east of Mosul and are expected to be more heavily defended than outlying villages, analysts said.

At 1330 GMT, shares in Genel, Gulf Keystone and DNO (Other OTC: DTNOF - news) were all down by between 3 and 5 percent, compared with a 0.6 percent rise in the broad European oil and gas sector.

TERRITORY AND OILFIELDS

The Kurdistan Regional Government has expanded the territory it controls by more than a third since the Sunni militants of the Islamic State - then known as the Islamic State in Syria and the Levant - routed Iraqi troops in Mosul on June 10.

Relations between Iraqi Kurdistan and Baghdad have deteriorated during the recent crisis, with disputes over oil sales stoking anger on both sides.

The Kurds, who aim to increase oil exports to 1 million barrels per day by the end of next year, from less than 125,000 bpd currently, saw a U.S. court order the seizure of one of its tankers last week following a request from Baghdad.

But in a possible signal of greater cooperation between the Kurds and Baghdad after the weekend advance of the Islamic State, Iraq's Prime Minister Nuri al-Maliki on Monday ordered the air force to support Kurdish forces, state television reported.

Oil flowing on Iraqi Kurdistan's own oil pipeline to Turkey's port of Ceyhan also resumed on Sunday to 75,000 bpd, Turkish energy officials said. It was halted late last month because the storage tanks were full.

The officials also said a sixth tanker carrying 260,000 barrels of Iraqi Kurdish oil had left the Mediterranean port of Ceyhan after the completion of loading on Sunday. (Editing by Keiron Henderson)