KURDISTAN REGIONAL GOVERNMENT LEADERS ON

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 004342

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/20/2016
TAGS: ECON EPET IZ KJUS KCOR PGOV EINV PBTS
SUBJECT: KURDISTAN REGIONAL GOVERNMENT LEADERS ON
HYDROCARBON LAW COMPROMISE

REF: A. BAGHDAD 04066

B. BAGHDAD 03069

C. BAGHDAD 03341

D. BAGHDAD 03257

Classified By: Ambassador Zalmay Khalilzad for Reasons 1.4 (b) and (d).


1. (C REL GBR) Summary. In a November 19 meeting with
Economic Minister Counselor, Kurdistan Regional Government
(KRG) Prime Minister Nechirvan Barzani and KRG Minister of
Natural Resources Ashti Hawrami presented their compromise
proposal on contracting which denies signatory authority to
the federal government on new hydrocarbon development, but
includes a degree of federal government approval rights.
Minister Ashti proposed that disputes between regions and the
federal government over approval of particular contract
provisions be settled through arbitration, though during a
four-day dialogue in Sulaymaniyah with Government of Iraq
(GOI) energy advisor, Thamir Ghadbhan, the two disagreed on
the nature of the arbitrator. Ashti suggested an
international body such as the World Bank or International
Monetary Fund, and Ghadbhan wants an Iraqi entity to perform
that role.


2. (C REL GBR) Barzani and Ashti also spoke of increasing
Kurdish domestic pressure for the KRG to deliver on promises
of economic growth and prosperity, and made it clear that
they do not and will not trust Baghdad with the development
of the hydrocarbon resources so critical to achieving this
growth. Ashti reiterated that there is agreement in
principle between the KRG and GOI on revenue sharing and
acknowledged that a portion of hydrocarbon revenue should be
allocated to the federal government. He also said, however,
that the KRG aimed to reduce the Kurdistan Region's (KR)
dependence on the federal government to the point where in
three years the KRG will use hydrocarbon revenue to provide
its own essential services, promised but not delivered by the
federal government. The KRG will therefore no longer need to
cede a part of its share of national hydrocarbon revenues for
such services. The ministers also elaborated a proposed
framework for gradually transferring authorities from a
reconstituted Iraq National Oil Company (INOC) to nascent
producing regions based on the authorities the KRG has
defined for itself. End Summary.

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Persistent Contracting Issues and the Federal Petroleum
Committee
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3. (C REL GBR) Econ MinCouns travelled to Erbil for November
19 meetings with Prime Minister Barzani and Minister of
Natural Resources Ashti. Based on Post,s discussions with
former Minister of Oil and current GOI energy advisor Thamir
Ghadbhan, and KRG Minister of Natural Resources Ashti
Hawrami, the federal and regional governments seem to agree
on the establishment of what Ashti called a "Federal
Petroleum Committee" (FPC). Ashti described this body as
reporting directly to the Iraqi Council of Representatives,
with the Minister of Oil and representatives from the
regional operating companies on its Board of Directors. Both
parties agree that this new entity would be responsible for
setting national hydrocarbon development policy, but disagree
on the influence the FPC will have over hydrocarbon
contracts.


4. (C REL GBR) The KRG sees the FPC as having approval
authority over contracts for existing fields, but not for new
fields. Ashti made the point that the FPC can wield
contracting authority in nascent producing regions until
these regions have adequately developed regional institutions
to perform these functions, but the KRG insists on retaining
contracting authority on new fields as, he argued, was
enshrined in the Iraqi Constitution. These regions would
also partner with the INOC during a transition period until
their regional operating companies had the capacity to
undertake development of existing fields independently.
Ashti proposed that a separate arm of the INOC perform this
function, and that transfer of responsibilities to the
regions be determined by a two-thirds majority in the FPC.


5. (C REL GBR) Ashti explained that the role the KRG
envisioned for the FPC with regard to new fields respected
certain federal authorities. For example, regional
contracting committees that review agreements negotiated by
regional operating companies would include a representative
from the FPC. Contracts would be submitted to the FPC to
ensure that they adhere to national energy policy and meet
standards set by model contracts for issues such as
transparency (Note: The FPC would develop these model
contracts. End Note.). It should be noted that even the

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regional contracting committee as formulated by the KRG would
not have approval authority, but would merely provide a
report to the Minister of Natural Resources, who has the
power to sign contracts which are then passed on to the
Kurdish Council of Ministers for approval. Minister Ashti
made it clear that the FPC would not have authority to
approve contracts, but could comment and send them back to
regional authorities to remedy. He said that if an
inter-governmental dispute were to arise, the dispute could
be submitted to binding arbitration.


6. (C REL GBR) The KRG favors international arbitration in
the form of an international organization such as the World
Bank or International Monetary Fund. Ghadbhan feels that
this approach would undermine national institutions and has
suggested an Iraqi arbitration body be established. Ashti
said that the KRG did not believe an Iraqi body would be free
of political influence. Both Ashti and Barzani repeatedly
told us of their distrust of Baghdad, saying that no projects
would be undertaken in the KR if the federal government had
complete contracting authority. In order to preempt
obstructionism, the KRG has proposed that there be parameters
limiting the use of arbitration. Ashti volunteered the
example that three consecutive arbitrations could trigger
reversion of rights to the KRG to approve contracts
unilaterally.


7. (C REL GBR) Despite agreement between Ghadbhan and Ashti
that existing fields be jointly managed by the INOC and
regional operating companies, Ashti told us that if the FPC
does not include development of discovered fields in the KR
within two years, the KRG could independently proceed with
development planning and management of these fields. Ashti
defended this position by saying that it took the Ministry of
Oil three years to enter into a service agreement, though he
did not reference a specific project. Ashti and Barzani were
adamant that the KRG not hitch their destiny to Iraqi
political stability. Another role of the FPC that Ashti
pointed out supports federal authority is its proposed
apportioning of Iraq's OPEC quota to producing regions and
governorates. He said that such a system would be
self-regulating with regard to resource development when
combined with revenue sharing, "Why would we deplete our
resources at the expense of future generations if our share
does not increase?"

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Revenue Collection and Sharing
--------------

8. (C REL GBR) When discussing revenue sharing, the KRG
officials reaffirmed their commitment to sharing all
revenues, but acknowledged that the mechanism to do so was
still a matter of disagreement. The KRG position continues
to require that an "offshore" trust account be established
with sub-accounts for each region and province to be used at
their discretion. Ghadbhan had told us at a November 18
meeting that the Ministry favored a process through which
shares of oil revenues were added to ordinary provincial
budgets after the federal budget was provided for, whereas
the KRG wants their share before any revenue is consolidated
into the national treasury.


9. (C REL GBR) Ashti presented us with a diagram through
which percentage shares of oil revenue--defined as including
crude and product sales, signature bonuses, and
royalties--would be initially agreed upon and enshrined in
law, but revised based on upcoming census figures. In
addition to determining percentage shares, Ashti's diagram
indicates that a financial value for services provided by the
federal government to the provinces would also need to be
determined, with the agreed upon value to be subtracted from
regional/provincial revenue shares and the cash balance
channeled into the provincial/regional sub-accounts.
Minister Ashti and Prime Minister Barzani for the first time
articulated a strategy for weaning the KR off of federal
services. Ashti's diagram illustrates this three-year
reduction in the portion of regional revenue share allocated
to the federal government in exchange for services.

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KRG vs. GOI Approach
--------------

10. (C REL GBR) Ashti portrayed the KRG as "good listeners"
who invited input on their draft laws and made them publicly
available on the Internet (reftel A). He contrasted this
approach with the federal government's isolation of the
KRG--not only by failing to share GOI draft laws, but through
public statements by Minister of Oil Husayn al-Shahristani
regarding infrastructure development in the KR not determined
in consultation with the KRG, such as a proposed pipeline

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from Kirkuk through KR territory and the building of the
Kouya Refinery. Ashti also questioned Minister Shahristani's
priorities, citing Shahristani's pursuit of international
unitization agreements with Iran--typically a complex
process--rather than focusing on a national hydrocarbon law
of critical importance to Iraq's political as well as
economic future.


11. (C REL GBR) During a discussion of needed foreign
investment, Ashti said that the KR offers potential investors
a "basket of opportunities." If Kirkuk becomes part of the
KRG, the international oil companies (IOCs) will have a role,
but given limited exploration opportunities within the
current borders of the KR, Ashti welcomed smaller companies
that are willing to take more risk.


12. (C REL GBR) Ashti and KRG Spokesman Khaled Salih told us
that regional contracting authority is critical to helping
the KR establish political and commercial ties to Turkey and
improve relations. More broadly, they see commercial
cooperation as a vehicle of secularization to combat
increased Islamicization of the region.

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Prospects for Consensus
--------------

13. (C REL GBR) Minister Ashti and Prime Minister Barzani
agreed that national hydrocarbon legislation is urgently
needed. Econ MinCouns stated that presenting draft
legislation to the Iraqi Council of Representatives before
its January recess is a priority for the US, and that
flexibility and creative thinking on both sides is vital to
reaching consensus. Ashti admitted that the primary
intention of the KRG regional hydrocarbon law was to elicit
action from the Ministry of Oil (MinOil),and said that the
promulgation of competing drafts between MinOil and the KRG
was more about establishing boundaries than working towards a
good law (reftels B and C). He also said that neither the
KRG nor MinOil drafts should be used as a starting point for
drafting a joint law. During our November 18 meeting,
Ghadbhan emphasized that the law must be drafted in Arabic by
Iraqis and then translated into English only for
international comment. He also said that mediation by the US
would be important only if the parties were unable to break a
deadlock themselves.


14. (C REL GBR) Ashti agreed that progress at the second
Energy Committee "retreat" scheduled by Committee Chair and
Deputy Prime Minister Barham Salih to begin on Thursday,
November 23 in Baghdad is crucial (reftel D). When asked how
progress towards consensus might be facilitated, he said: 1)
remove Shahristani as Minister of Oil due to his evident lack
of commitment to resolving critical policy issues; and 2)
broaden the composition of the Energy Committee to include
representatives from each province. Acknowledging that
changing the composition of the Energy Committee is unlikely,
he recommended selecting provincial representatives to act as
advisors during the negotiating process to counteract the
"Green Zone mentality" in which the Committee members repeat
positions without thought to their constituents or to a
desired end-state. He emphasized that a new Minister of Oil
would need to understand that the nature of the Ministry
would change--being less about power and more about service.
He also reiterated that the KRG has already offered
sufficient compromises--agreeing to put themselves at the
"mercy" of the FPC for production allocations and long-term
strategy--and that the total surrender of regional
contracting authority was not negotiable.
KHALILZAD