FORMER SOMO DIRECTOR GENERAL ON THE IRAQI OIL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001197 SIPDIS SIPDIS E.O. 12958: DECL: 04/10/2016 TAGS: ECON EPET ENRG EFIN KCOR PGOV PREL IZ SUBJECT: FORMER SOMO DIRECTOR GENERAL ON THE IRAQI OIL SECTOR REF: A. BAGHDAD 0405 ¶B. STATE 050693 Classified By: Acting ECON Chief Harry O'Hara, for reasons 1.4 (b) and (d). ¶1. (C) Summary: Former Director General of the State Oil Marketing Organization (SOMO) Dr. Musab al-Dujayli said that the Fadhila party was focusing its efforts to siphon money from the Ministry of Oil (MoO) to enrich the party on crude oil export contracts, due to expire in June 2006. Dujayli claims that foreign companies' wishing to continue purchasing Iraqi crude will be required to pay "tribute" to Fadhila spiritual head Ayatollah al-Yacoubi. Dujayli also warned that allowing Iraq's oil sector to devolve into regional companies would fuel secessionist tendencies among oil-rich regions. He advocated a single national company in which every Iraqi owned a share, but disparaged the idea of recreating the Iraq National Oil Company (INOC),calling it a "Saddam-era entity" and bad for Iraq's future. End Summary. -------------- "Tribute Collection" Efforts Continue -------------- ¶2. (C) Former Director General of the State Oil Marketing Company Dr. Musab al-Dujayli reiterated to us April 7 concerns first voiced in Ref A that Fadhila party members currently in control at the Ministry of Oil (MoO) continue to seek to divert funds from Iraq's oil wealth to the party's coffers. Iraq's pressing fuel needs had raised the profile of fuel import contracts to the point that the central government took a direct hand in negotiations with Turkish suppliers, limiting Fadhila's opportunities to demand kickbacks in return for deals. Dujayli maintained, however, that party faithful at MoO are now focusing on crude oil contracts, most of which will come up for renewal in June 2006 (Note: SOMO generally contracts crude oil sales for six months. End Note.). According to Dujayli, the party plans to leave half of the approximately 30 purchase contracts as is; it intends to award the rest only to those who pay "tribute" to the Ayatollah al-Yacoubi (spiritual head of Fadhila) in Najaf. Dujayli exhorted the U.S. to "stand firm" against Fadhila's machinations, calling them the "legalization of corruption according to Shari'a" that would put off international oil companies (IOCs) hoping to do business with Iraq. The U.S. must act to prevent Fadhila from "looting the south," he said. ¶3. (C) Dujayli said that there are two kinds of people now at MoO: those - including the clergy - with a "Saddam mindset" (anti-foreign investment and pro-government control) and those few technically minded people who hoped to change things for the better. It is imperative to keep the ministry apolitical, Dujayli continued, as giving control to another party would only wet that party's appetite for corruption. -------------- "If I Were in Charge..." -------------- ¶4. (C) Dujayli then proceeded to outline a rough strategy for Iraq's oil sector, one that he said was supported by Deputy Prime Minister Chalabi. First and foremost, Dujayli said that Iraq must "scrap the old idea of the Iraq National Oil Company (INOC)." Calling INOC "a Ba'athist idea," Dujayli predicted that any attempts to resurrect it would lead to MoO being run "just like it was under Saddam." Instead he advocated privatizing downstream operations and encouraging foreign investment upstream. Iraq could form its own or joint refining and distribution companies, Dujayli said, while inviting international oil companies (IOCs) to focus their efforts - and money - upstream. If Iraq carries on much longer in the same manner it is now, Dujayli warned, the country will "not go one step further." ¶5. (C) Warming to his subject, Dujayli opined that the formation of regionally-based oil companies now in Iraq was dangerous. Maintaining his opposition to reconstituting INOC, Dujayli proposed instead to create a new national company, one share of which would be distributed to each Iraqi citizen. Shares would not be transferable nor could they be passed on as inheritance. Revenue would be invested on the people's behalf by a board of directors appointed and overseen by members of the Council of Representatives (COR) rather than the executive branch. The government, in Dujayli's plan, would live off taxation only, as revenue would be reinvested to avoid opportunities for corruption, including that which could possibly fund terrorism. Dujayli BAGHDAD 00001197 002 OF 002 said that "a government with the money in hand was a government that did not need the support of its people." ¶6. (C) Comment: Dujayli is clearly unhappy about his recent sacking from his position as DG SOMO. Nonetheless, he is extremely knowledgeable about MoO misbehavior and maintains a keen interest in how the oil sector develops in future. We were struck by his advocacy of a share-based oil company, an idea we have heard before from DPM Chalabi and Deputy Minister of Finance Kamal. We also share his concern that a strictly geographic division of Iraq's oil sector could fuel - and finance - increased regionalization. End Comment. KHALILZAD