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

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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