C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 003156

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/25/2026
TAGS: ENRG EPET IZ PREL
SUBJECT: IRAQ'S DEPUTY PRIME MINISTER AND MINISTER OF OIL
ON HYDROCARBON POLICY, FUEL SHORTAGES AND OIL SECTOR BUDGET
PROBLEMS

REF: STATE 127497

Classified By: Charge d'Affaire, a.i., Daniel Speckhard, Reasons 1.5 (b
) and (d).


1. (C) Summary: On August 24, the Charge held back-to-back
meetings with Deputy Prime Minister Barham Salih and Minister
of Oil Dr. Husayn Shahristani to discuss development of
Iran's hydrocarbon legislation and the country's fuel crisis.
In both meetings he presented USG recommendations for a
National Oil Framework (reftel). Barham Salih outlined his
preference for a national hydrocarbon structure that includes
overall policy direction and revenue collection by a
national-level entity, coupled with operational management by
regional companies. He disagreed with our formulation that
Iraq's petroleum sector should be managed by national-level
entity(s). Barham Salih, himself a Kurd, had just returned
from a meeting with Kurdish officials. His report of those
discussions indicated more opportunity for compromise between
Baghdad's and the KRG's than a comparison of the proposed
hydrocarbon legislation drafted by each side would indicate.
Shahristani expressed a preference for a strong central
responsibility for oil resources although recognized the need
for a role for the regions. However according to Shahristani,
the Ministry of Oil would be a regulator, not a manager. He
welcomed US assistance in reviewing the draft hydrocarbon law
that his ministry is preparing. End Summary.

-------------- --
Meeting With Deputy Prime Minister Barham Salih



2. (C) On August 24, the Charge met with Deputy Prime
Minister Barham Salih to present USG views on the development
of Iraq's hydrocarbon law. Utilizing the talking points
provided reftel, the Charge outlined our concept of a
National Oil and Gas Framework in which the petroleum sector
is managed by national-level entities with regional
participation. Barham Salih's initial reaction was to
strongly disagree with national-level management of the
industry. He was more accepting of our suggestions

concerning revenue sharing, national oil policy, and
transparency and anti-corruption, with oversight by a new
federal entity in Baghdad, such as the "Supreme Oil Policy
Council". Salih stated that the political reality at the
moment is that to "push too far is no good," and that it is
necessary, at this point, to "tame the excesses." He also
strongly expressed the opinion that Baghdad is the "ultimate
source of corruption" as an underlying reason to moderate
central control.


3. (C) Salih's personal view of an industry structure
includes 1) all revenue flows to the center; 2) oil policy
set at the national level; 3) structure and management should
produce maximum revenue; 4) three competing regional
companies would provide management; and 5) governance would
be the province of a Supreme Oil Policy Council. The Supreme
Oil Council would have representatives from all regions as
well as the center. It would "set terms - all aspects of oil
policy." Under this model, the regional oil companies would
run the fields and negotiate oil contracts, but the contracts
would have to be approved by a central body. Salih stated
emphatically that the Supreme Oil Policy Council should
NOT/NOT be the Ministry of Oil, which he characterized as
"not reformable."


4. (C) The Charge asked Salih whether the KRG would accept
Salih's proposal, especially since the KRG- proposed
hydrocarbon law strongly emphasized regional control. Salih,
himself a Kurd, had just returned from talks in Kurdistan
with KRG officials. He said the Kurdish leaders were in
agreement with most of the principles that he outlined above.
The primary area of disagreement was contracts, which the
KRG is insisting be negotiated solely by regional entities.
Salih said some compromise is necessary. He added that the
GOI should have representatives on the board of directors of
the KRG oil company.


5. (C) At the end of the August 24 meeting, Barham provided
the Charge with a non-paper on the petroleum law drawn up by
the Kurds. The points state three main principles: 1) the
Constitution must be the basis for the law; 2) the law should
be modern, clear and transparent; and 3) the law must create
a framework for investment that maximizes timely returns for
all the people of Iraq. The paper also included major issues
that the law must address, indicating the relevant article of
the Constitution as appropriate: 1)revenue sharing (%) for
KRG and each governate - Article 112; 2)revenue distribution
to be handled by an Independent Revenue Commission;
3)management of current fields - federal/regional/joint -

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Article 112; 4)management of new fields - Article 115;
5)organizations and structures; 6)role/authorities of the
petroleum/energy committee; 7)authorization, contracts and
management of operations, and 8)investment models to provide
maximum returns to Iraq. (Note: The talking points clearly
indicate that revenue sharing should be a percentage,
supporting the KRG position against pro rata sharing based on
population. They are against such a formula because they feel
the Sh,ia have larger families. End Note.)


6. (C) Lastly, the Charge and Salih briefly discussed MoO's
difficulties in receiving its capital improvement and
operating budgets. The Senior Consultant from the Iraq
Reconstruction Management Office (IRMO), who accompanied the
Charge to the meeting, stated that MoO had spent less than
$1.0Bn of its allocated $3.5Bn capital expenditures budget
during FY2006. The problem appeared to be the inability of
MoO to receive an overall, annual approved budget. Ministry
officials therefore had to go through separate approval
procedures for any project/item over $10M. The IRMO
consultant stated that the same held true for MoO's repair
and maintenance budget. The Ministry is unable, due to
procurement constraints, to efficiently purchase and
stockpile spare parts in a manner that would facilitate
timely repair of inoperative equipment. He warned that if
this is allowed to continue, the degradation of the oil
industry's infrastructure will significantly hamper the GOI's
plans to maximize oil revenue. The consultant contrasted the
present situation to the end of the Iran-Iraq war, when MoO
was given a budget and streamlined contracting authority to
repair the damage that occurred during the war. Salih
professed to be surprised at this concern, stating that the
High Contracts Commission (HCC) had approved all but two of
MoO's major budget requests. He said the problem was
therefore with the MoO, but he offered no opinion as to how
to correct the situation.
-------------- --
Meeting with Minister of Oil Husayn Shahristani
-------------- --


7. (C) Immediately following the Salih meeting, the Charge
met with Minister of Oil Husayn Shahristani. Shahristani
began by briefly outlining the status of MoO's draft
hydrocarbon law. He said the draft (which post had received
a copy of two days prior to this meeting) was lengthy and
constantly under revision, but it was a starting point. He
estimated that it will take weeks to finalize, after which it
will go to the Cabinet and Parliament. He said that the
proposed law had been drafted by four former Iraqi hi-level
technocrats.


8. (C) The Charge inquired if Shahristani thought the draft
would be acceptable to the KRG. Shahristani, smiling, said
the KRG draft law conveys the impression that the GOI-KRG
negotiations are between two countries instead of between a
country and a region.


9. (C) Shahristani stated that the Kurds are comfortable with
the following: 1) oil belongs to all the Iraqi people; 2)
revenues flow to the center; 3) the budget is basically
national; 4) Iraq should have one national oil policy,
including national determination of which fields will be
developed; 5) establishing national models/types of
contracts; and 6) national determination of which fields will
be developed first (as long as it is balanced) and what type
of contract/tender will be used. Shahristani confirmed
Salih's statement that the only point of disagreement was
that the Kurds want complete control over negotiating oil
agreements. Shahristani felt that contracts should be
handled at the national level. He summarized the situation
by stating that the Kurdish position "provides a basis for
agreement on a hydrocarbon law." Shahristani said that he is
nervous, however, about the Kurds signing oil contracts
without a hydrocarbon law in place. Note: Subsequent
meetings with Kurdish representatives suggest there may be
additional significant disagreements between the KRG and the
Central Government as discussed in septel. End Note.


10. (C) The Charge then briefed the Minister on his
presentation to DPM Salih. Shahristani agreed with Salih
that the MoO should be a regulator, not a manager.
Management should be left to an Iraqi National Oil Company, a
holding company for the regional oil companies. The regional
companies would be allowed to compete with each other and
negotiate joint ventures with the international oil companies
(IOCs).


11. (C) Turning to draft MoO hydrocarbon law, the Charge and
the AID consultant on petroleum law, who also accompanied the
Charge to the meeting, told Shahristani that the draft needed

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more definition between regulatory and operating rules.
Shahristani said he wants our comments on MoO's draft law and
he confirmed that post had the latest draft.


12. (C) The Charge next raised the same budget issues with
Shahristani that he had raised earlier with Salih.
Shahristani stated that even if the HCC approved projects
quickly, Salih himself often sat on the approval document for
two weeks before signing it. In a subsequent meeting, Barham
denied this charge. Shahristani basically agreed that
government-wide bureaucratic procedures for processing budget
allocations were a serious problem. He attributed this to a
culture that had lived for too long under an authoritarian
regime, in which people were, and still are, afraid to make
independent decisions. This problem recently had been
exacerbated by the government's anti-corruption drive, which
made officials, especially those serving on bid committees,
afraid to authorize monetary expenditures lest they be
accused of corruption. Shahristani also complained that the
Ministry of Finance was attempting to insert itself too
deeply into the project approval process.


13. (C) Shahristani said that, with regard to the MoO's
surplus of over $2.0Bn, that would be dealt with within a few
months when the ministry solicits bids to build two new
refineries. (Comment: Post is aware of only one refinery
project that the Iraqi's are currently putting out for bid.
To date, they have received only one bidder. We do not
believe that Shahristani and MoO can finalize any refinery
project "within a few months." End Comment)


14. (C) The Charge asked Shahristani what progress the GOI
was making in alleviating the fuel shortage by importing
petroleum products. The Minister said that they were still
in disagreement with Turkey, which insisted that Iraq pay all
claimed arrears for petroleum products before the GOT will
let its companies sell more product to Iraq. Since some of
the charges are under dispute, Iraq did not believe that it
could simply pay the total asked for. Shahristani added that
they did not understand why the Turkish Ministry of Foreign
Trade had inserted itself into this affair, including
mandating that the GOI purchase from 33 Turkish companies.
Some of which he claimed were not even in the fuel business,
but were in the textile or food business. He said that many
of the companies have ties to Turkish politicians.


15. (C) Lastly, the Charge asked Shahristani about his recent
trip to Iran and the MOU that he had signed in Tehran.
Shahristani said that the principal purpose for the MOU was
to agree to a process for unitization of the oil fields that
span the Iraq-Iran border, which Iran is already exploiting.
(Unitization determines the arrangement between operators
when one or both is exploiting a shared oil field.)
Shahristani said that they hoped also to conclude unitization
agreements with Kuwait and Syria. Iran also agreed to export
small quantities of LPG and kerosene to Iraq. The Iranians,
in exchange, want Iraqi crude from Kirkuk and Basrah.
SPECKHARD