REPORT ON ENERGY COMMITTEE MEETING ON HYDROCARBON

S E C R E T SECTION 01 OF 02 BAGHDAD 004350 SIPDIS SIPDIS REL GBR E.O. 12958: DECL: 11/24/2026 TAGS: ECON ENRG EPET IZ SUBJECT: REPORT ON ENERGY COMMITTEE MEETING ON HYDROCARBON LAW Classified By: AMBASSADOR ZALMAY KHALILZAD E.O. 12598, REASONS 1.4 (B) AND (D) ¶1. (S) Summary: At the invitation of Oil Minister Shahristani and DPM Barham Salih, Econ MinCouns attended two sessions of the Energy Committee meeting on November 23 and 24. On the key issue of contracting, considerable progress was made. The committee will refer the issue to the "political level" where the outcome remains uncertain. Talks on November 25 produced additional positive momentum. DPM Salih put forward the idea of a transitional arbitration mechanism to resolve potential disagreement between the KRG and Baghdad. On the other key area, the revenue sharing mechanism, progress was made with DPM Barham Salih saying the issue was 99% resolved. In general, both the Kurdish representative and Shahristani showed considerable flexibility and a positive approach, but the degree of distrust by the Kurds of anything giving authority to the central government continues to complicate agreement. End Summary. ¶2. (S) At a dinner hosted by the Ambassador on November 22 (septel),Oil Minister Shahristani suggested that Econ MinCouns attend the Energy Committee discussion on the hydrocarbon law, an invitation which was subsequently confirmed by DPM Salih. The committee spent the bulk of the evening of November 23 going through a paper drafted by the PM's oil adviser Thamir Ghadbhan largely covering the scope of operating companies to be spun off from the Ministry of Oil, as well as the more central issue of the relationship between the authorities of the ministry and those of a planned Federal Petroleum Committee (FPC). Following the discussion, Kurdish negotiator Ashti expressed considerable frustration to MinCouns over Barham Salih's preference for deferring issues of disagreement - especially contracting authority - in favor of seeking agreement on the bulk of elements in Ghadbhan's paper. ¶3. (S) The curfew imposed on November 24 reduced participation in the subsequent session to Barham Salih, Ashti, Shahristani, Ghadbhan, and Central Bank Chairman Shibibi, a development that promoted a much more candid exchange on the basic issue of a lack of trust on the part of the KRG vis--vis the Ministry of Oil and the central government in general. Ashti presented his compromise proposal on contracting which gave the FPC representation in the regional (KRG) negotiating team which was to conclude and sign contracts with foreign partners. Agreement was reached on the terms of such negotiations, namely that the guiding principles were to be shared revenue and revenue maximization. Ashti also put forward the proposal that contracts negotiated by the regions had to conform to a list of centrally determined conditions such as transparency, and had to be based on centrally established model contracts, and that the FPC representative could report to the FPC with any criticisms of a draft contract. On this basis, under Ashti's proposal, the FPC could reject a contract. Ashti further undertook to get KRG concurrence that such disputes could be ruled on by the Iraqi Supreme Court, as the constitution suggests - a condition the Kurds had previously not been willing to accept, arguing that the other constitutional rights governing control of oil by the regions outweighs the jurisdiction of Iraqi courts in disputes between the region and the central government. But, Ashti insisted that the KRG still required some form of arbitration since it was premature to have confidence in the reliability and impartiality of Iraqi courts. This position was rejected out of hand by Shahristani. Following extensive discussion, Barham Salih put forward the idea that there could be a form of transitional external arbitration for a period of two to three years as a compromise. Shahristani did not agree to this proposal but did not object to Barham's plan to present it to the Council of Ministers as a possible way out of the impasse. ¶4. (S) On revenue sharing, there was general agreement on a system of regional accounts for regions' shares of national revenues, but there was no agreement on the Kurdish demand that these accounts could be drawn on at any time by regions for cash withdrawals in the full amount of their share of total revenues. The issue will be considered further, with the absence of Finance Minister Jabr for this session making further discussion unproductive. ¶5. (S) The November 25 session produced additional progress on contracting and revenue sharing mechanism. It was agreed that contracts were to be signed by the regional (Kurdish) entity and referred to the FPC, where any differences were to be resolved first by negotiation to make necessary changes to any regionally signed contract. If such efforts did not BAGHDAD 00004350 002 OF 002 produce agreement, the FPC could reject a contract, but only by a 2/3 majority vote. In addition, there was agreement to create a board of experts of 3-6 members, chosen by the FPC by unanimous vote, who could serve as arbitrators in case of disputes. On revenue sharing further progress was made, including provision for depositing revenue offshore. Negotiators for the Kurdish side have solicited USG assistance with drafting provisions for sub-accounts for the regions (of the offshore account) to make language "as iron-clad as possible." KHALILZAD