Identifier
Created
Classification
Origin
06BAGHDAD2115
2006-06-21 04:54:00
CONFIDENTIAL
Embassy Baghdad
Cable title:  

SHAHRISTANI PUSHING FOR REFORM IN THE MINISTRY OF

Tags:  ECON TCOR ENRG EPET PGOV PREL PINR IZ 
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C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002115 

SIPDIS

C O R R E C T E D C O P Y - ADDED TAG TCOR

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E.O. 12958: DECL: 06/20/2016
TAGS: ECON TCOR ENRG EPET PGOV PREL PINR IZ
SUBJECT: SHAHRISTANI PUSHING FOR REFORM IN THE MINISTRY OF
OIL

REF: BAGHDAD 1552

BAGHDAD 00002115 001.2 OF 003


Classified By: Economic Minister Counselor Tom Delare, for reasons 1.4
(b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002115

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C O R R E C T E D C O P Y - ADDED TAG TCOR

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E.O. 12958: DECL: 06/20/2016
TAGS: ECON TCOR ENRG EPET PGOV PREL PINR IZ
SUBJECT: SHAHRISTANI PUSHING FOR REFORM IN THE MINISTRY OF
OIL

REF: BAGHDAD 1552

BAGHDAD 00002115 001.2 OF 003


Classified By: Economic Minister Counselor Tom Delare, for reasons 1.4
(b) and (d).


1. (C) Summary: In a positive meeting June 16 with Econ staff
members, Minister of Oil Husayn al-Shahristani focused on
four areas of reform for his Ministry: hydrocarbon
legislation, liberalization of fuel imports, improved
contracting procedures, and rooting out corruption. His
goals, especially for oil production and increased domestic
supply of refined products, are very ambitious, and he is
eager to engage with the USG on security and anti-corruption
issues. End Summary

--------------
HYDROCARBON LAW
--------------


2. (C) Shahristani realizes that Iraq will not get serious
foreign investment until hydrocarbon legislation is passed
that serves to protect private investment. He feels that the
legislation should ensure that revenues go to the National
Treasury to support the national budget as approved by
Parliament. While exploration and production will remain
under state control, the downstream--refining, import and
sale of products, and distribution--should be privatized.


3. (C) When asked about how the Ministry of Oil (MoO) will
handle the proliferation of draft legislation that is being
provided by private oil companies, international
organizations, and previous government officials, Shahristani
replied that he actually welcomes additional versions of
hydrocarbon laws. He referred to a team within the Ministry
established to review all of the proposals to determine
approaches that best fit Iraq. (Note: A USG-contracted legal
advisor has already been working with this committee, marking
an improvement over the previous administration which
regarded U.S. input as intrusive. End Note.). He acknowledged
that dialogue with different regions-especially
Kurdistan-will be necessary for successful legislation. He
has also advised Parliament that all new contracts be issued
through public tender, with both tenders and executed
contracts being made available to the public via the Internet.


--------------
IMPORT LIBERALIZATION
--------------


4. (C) Minister Shahristani announced that he was, that
afternoon, presenting draft fuel import liberalization
legislation for discussion and ultimate approval by the
Council of Ministers and Parliament. He seemed confident that
the legislation would be accepted without a problem because
he had already discussed it within the Cabinet-concluding,
therefore, that introducing market liberalization by Council
decree would be unnecessary. He stated that the law should be
passed within a few months, though he didn't expect that a
significant amount of imported product will be available to
the domestic market through private importers until the end
of the year. Shahristani elaborated that import licenses
would be granted by the Ministry through the State Oil
Marketing Organization (SOMO),currently the only entity
permitted to import petroleum products. Potential importers
would need to prove they possess adequate capital and means
of transportation, as well as the ability to meet
environmental and safety requirements. There would be no
pricing regulations, so importers would compete in an open
market.

--------------
REFINING CAPACITY
--------------


5. (C) The Minister expressed his goal of increasing
production of refined product to a total of 1.05 million
barrels per day (bpd) to meet domestic needs-a figure that
includes expected demand growth. He described a medium-term
refinery construction plan that should help the Government of
Iraq (GOI) meet that goal within three to four years. This
refinery plan will ensure that each of the five main regions
in Iraq will have a refinery to provide for local needs-a
strategy that we believe is not as economically sound as it
is politically savvy. Existing refineries, such as that at
Daura, will receive new units as older ones are
decommissioned. Ten small plants will also be decommissioned
as new facilities in areas such as the Central Euphrates and
Nasiriyah are built. Shahristani explained that these capital
investments are covered in the MoO's current budget. Of note

BAGHDAD 00002115 002.2 OF 003


is the new Kouya refinery to be built near Sulaymaniyah to
take oil from new fields being developed in Kurdish
territories. (Comment: The Minister has engaged in
discussions with the Kurds on the Kouya project,
demonstrating cooperation between the central and regional
governments in development of hydrocarbon resources. End
Comment)

--------------
PRODUCTION AND FUEL PRICES
--------------


6. (C) Shahristani pointed to a 20 thousand bpd increase in
oil production since he became Minister, stating that exports
the day before (June 15) had been 1.5 million bpd. He
commented that all of that increase was due to pumping
through the export pipeline to Ceyhan, and recognized the
need to protect the pipeline. He has already engaged with the
Ministry of Defense and Multi-National Forces-Iraq (MNF-I) to
improve infrastructure security from Bayji to Kirkuk.


7. (C) Despite lower than projected production during the
early part of 2006, Shahristani is confident that current
production levels will ensure that Iraq meets-even slightly
exceeds-IMF Standy-by Agreement (SBA) expectations. He also
confirmed that the GOI would implement SBA-required fuel
price hikes for both March and June by June 30. He even said
the planned price hikes would be higher than stipulated by
the IMF. (Note: Price increases were actually implemented on
June 19 for diesel, kerosene and LPG, with new fuel prices
reported at: LPG: ID 1000 per 12 Kg cylinder; Diesel: ID 125
per liter; Kerosene: ID 75 per liter; Gasoline: ID 175 per
liter for 80 octane, ID 250 per liter for 86-87 octane, and
ID 350 per liter for 91 octane; and Residual Heavy Fuel Oil:
ID 200,000 per metric ton. At a subsequent meeting on June
20, the Minister stated gasoline prices had not yet
increased, but would sometime before the end of the month.
New subsidy reform public service announcements were not
ready to air prior to these increases. End Note)


8. (C) The Minister articulated a goal of increasing oil
production to 4.3 million bpd by the end of his term in 2010,
insisting that the figure was possible through exploitation
of existing fields and facilities and with minimal help from
outside partners. He expects production of 6.7 million bpd by
2012, for which, he admits, new fields will need to be
developed. In order to explore and produce these fields,
Shahristani acknowledged that hydrocarbon legislation and
participation of international oil companies will be
necessary. (Comment: Shahristani's goals are extremely
optimistic, as many observers believe that considerable new
development, infrastructure, and equipment will be necessary
to meet even the stated 2010 target. With new fields taking
4-5 years to develop, barring new fields coming online, IRMO
estimates that 750 thousand additional bpd is a more
realistic figure for increased production for a total of 3.15
mbpd vice 4.3 mbpd by 2010. End Comment).

-------------- --------------
SHAHRISTANI PUSHING FOR IMPROVED CONTRACTING PROCEDURES
-------------- --------------


9. (C) The Minister admitted "everyone knows there has been a
lot of corruption in the Ministry of Oil." Recently, the
Minister cancelled about 20 fuel purchase contracts due to
suspected corruption, including contracts for importing fuel
from Kuwait because he was suspicious they "weren,t clean."
Shahristani said he plans to push at the Cabinet level for
sending corruption cases to court. He also said he will
remove people involved in corrupt contracting.


10. (C) Shahristani expressed his displeasure with American
contractors KBR and Parsons, and their inability to complete
the projects for which they have been retained. He gave one
example of a Parsons contract to meter loading at the ABOT
export terminal, which has been languishing for two years.
He said KBR and Parsons keep making excuses for why work is
not finished, and despite their appreciation for USG funding
of these projects, the Iraqis would have preferred finding
alternate means of financing had they known how little
oversight would be exercised over these projects.
Shahristani made this same point to the Ambassador in his
initial meeting as Minister with Emboffs on May 28 (reftel
Baghdad 1552). When asked how the USG could mitigate the
situation, he said we should hold our contractors accountable
for performance delays since we are paying them. To
emphasize his point, the Minister said he has fired employees
in his Ministry due to corruption or inability to meet
performance schedules.

BAGHDAD 00002115 003.2 OF 003



--------------
ROOTING OUT CORRUPTION IN THE MoO
--------------


11. (C) Sharihstani recounted to us his June 15 introductory
conversation with Secretary of Energy Samuel Bodman, in which
he told the Secretary that he needs help rooting out
corruption in his Ministry. Shahristani said he plans to
meet with his senior MoO staff to compile a list of
priorities for discussion when the Secretary visits Iraq. We
will follow up with the Minister to gather these points
before Secretary Bodman's visit.


12. (C) Econ Counselor informed Shahristani that the Embassy
has an interagency Anti-Corruption Working Group (ACWG) that
can help the Minister identify corruption at the MoO. He
offered for the group to work with his Inspector General
(IG),Dr. Ali Alaq, on identifying specific cases of
corruption in the Ministry. Shahristani said he has a close
working relationship with his IG, who briefs him every
morning. The Minister stated that he told his IG's staff
that they are independent, and free to interview any
employees and request any material they deem necessary to
investigate cases. He has also empowered them to perform spot
inspections in the field (distribution depots, retail
outlets, etc). He also told them that if anyone refuses the
IGs access, the IGs should report back to the Minister.
Additionally, the IG prepares a daily report on how much oil
has been loaded that day in addition to the two operational
reports from SOMO and the South Oil Company.

--------------
COMMENT
--------------


13. Shahristani seemed confident in his new role, detailing
actions he is pursuing in priority areas such as fuel import
liberalization and fuel price increases, as well as improving
oil production and refining. He also seemed serious about
addressing corruption within the Ministry of Oil, though he
appeared more focused on specific intelligence on corrupt
Ministry personnel rather than the impact of sectoral reforms
that would undermine financial incentives leading to
corruption. Though he is supportive of fuel price and import
reform, his appreciation for the importance of such measures
seems more financially motivated (to meet IMF requirements or
increase revenues). Shahristani was not nearly as specific
in a way forward on passing hydrocarbon legislation as he was
with achieving production and refining improvements. He
glossed over of how the Ministry's internal committee will
reconcile the multitude of model and draft laws is cause for
some concern. The Minister was overly optimistic in his
projections for increased oil production by the end of his
term in office, casting some doubt on other declarations,
such as his expectations for increased transparency within
his Ministry. More generally, the tone of the meeting was
encouraging considering initial misgivings about
Shahristani's level of receptivity to U.S. involvement. He
was timely, professional, and responsive--conducting the
meeting like a Chief Executive Officer aware of the
challenges facing his organization, but prepared with a
strategy for addressing these challenges. He downplayed
dependence on U.S. resources, asserting the ability of the
Ministry to undertake proposed initiatives--except in the
area of security.
SPECKHARD