APPARENT BREAKTHROUGH ON HYDROCARBON LAW AT

S E C R E T SECTION 01 OF 02 BAGHDAD 004370

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/27/2016
TAGS: ECON EPET IZ KJUS KCOR PGOV EINV PBTS
SUBJECT: APPARENT BREAKTHROUGH ON HYDROCARBON LAW AT
NOVEMBER 23-26 ENERGY COMMITTEE RETREAT - AGREEMENT IN SIGHT

REF: A. BAGHDAD 04350


B. BAGHDAD 04342

C. BAGHDAD 04351

D. BAGHDAD 03257

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


1. (S) Summary. Apparent breakthroughs on the issues of
contracting, arbitration and arrangements for revenue sharing
have raised a real prospect that agreement on a hydrocarbon
law can be reached in time for a draft to be submitted to the
Council of Representatives (CoR) before it adjourns for two
months in early January. The outlines of the deal show that
significant movement was made by both the Kurdistan Regional
Government (KRG) and central government sides, with the
backdrop of high-level security discussions at the Policy
Council for National Security (PCNS) meetings making it
possible for negotiators to keep in touch with the political
level during key phases of the talks. Nevertheless, the
tentative agreement still needs to be blessed by senior
Kurdish leadership and political party leaders. Many
nettlesome drafting issues, especially regarding arrangements
for regional sub-accounts within a national trust account
under a revenue sharing plan remain to be worked out. The
bottom line, however, is that an approach has been found that
resolves several issues of principle and constitutional
rights that had been stumbling blocks as recently as a week
ago. With a final lobbying push and some goodwill on both
sides, a draft law could well be debated in the CoR before
the end of the year, marking a significant demonstration of
Iraqis' ability to resolve major differences for the common
good. End Summary.

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Main Points
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2. (S) Perhaps the main breakthrough made after the second
Energy Committee retreat in Baghdad on November 23-24 is that
the central government has accepted that contracts can be
negotiated and signed by regional entities (reftel A). In
exchange, a newly-created Federal Petroleum Committee (FPC)
would retain reviewing authority of such contracts,
preserving federal control of a nationally-shared resource
(reftel B). The Kurds have built in a non-political vehicle
for resolving any disputes between the central government and
the regions (details below). The other significant
breakthrough was that the central government has agreed to
the establishment of regional sub-accounts within a national
trust account which can be held offshore that would guarantee
provincial or regional access to their share of revenues. In
"exchange" the Kurds agreed to have such accounts nominally
under the Central Bank of Iraq's administration. There was
also agreement on the pillars of the hydrocarbon regime,
including a re-established Iraq National Oil Company, along
with regional operating companies and spin-off companies
transitioning from the existing Ministry of Oil (MinOil) to
operate the export port and manage the pipeline system.
Details on this restructuring remain to be clarified. To an
outside observer, the regime that would be established may
retain more elements of a centralized system than might be
economically optimal, but there is enough competition built
into the system that revenue maximization of the shared
national resource is still an achievable objective. The
proposed system should allow Iraq to develop its vast
resources effectively and open the door to needed foreign
investment within a year.

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Accomplishments and Work Remaining
--------------

3. (S) Following significant progress on November 25, Energy
Committee drafters (principally Government of Iraq energy
advisor Thamir Ghadbhan and KRG Minister of Natural Resources
Ashti Hawrami from Baghdad and Erbil respectively) met
November 26 to put into writing what had been agreed across
the table the previous day. One key outcome on the 25th had
been to agree that a board of experts be appointed by the FPC
to arbitrate any disagreements on deals negotiated and signed
at the regional level but reviewed at the federal level.
This arrangement replaces the transitional external
arbitration arrangement that had been proposed earlier in the
weekend, and is a significant step towards ensuring
transparency on oil and gas contracting in Iraq. The members
of the board are to be appointed unanimously on an
annually-renewable basis, and are to have internationally
recognized expertise in the field. The Kurds consider this
arrangement their best guarantee that their regional
constitutional rights will be respected, but have also built
in a provision for the FPC to take decisions on contracts by
a two-thirds majority. This provision will not provide the

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Kurds with a blocking share on their own, but they are
content with this combination arrangement.


4. (S) Another key element the Kurds have introduced is a
requirement for there to be tenders for international
development of existing major fields, such as Rumaila, within
two years of the law's adoption. That way, the Kurds
believe, there will be more public transparency on what
national hydrocarbon potential is, so that the central
government does not "sit" on resources, as the Kurds assert
the Iranian government does. A recurring theme in the talks
was Kurdish fear that the central government would follow a
course of inaction, and that their region would be tied to
policy-making which was driven by non-economic factors. The
Kurds intend to let out blocks of their territory for
exploration within the next two years as well, the goal being
again to get as good a picture of what total production
potential in the Kurdistan Region is, and to encourage
competition among smaller companies to develop these
resources. In addition, an annex of projects to be developed
on a priority basis is to be appended to the draft law to
reassure the Kurds that they will get their share of
infrastructure spending on refineries and pipelines.

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Revenue
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5. (S) Agreement was relatively easily reached on revenue
sharing, which entails costing out services the central
government provides to the regions ) which are in practice
often not delivered. In separate discussions with Kurdish
negotiators, they complained that the '06 budget provisions
had already resulted in reductions in their allocated 17
percent of national budget revenues, so they were keen to get
iron-clad guarantees that would give them the greatest
possible access to their sub-accounts in cash. This part of
the crafting of the draft law will likely prove to be the
most difficult, since the negotiators on both sides
acknowledge they are not financial experts. Embassy has
offered to provide additional advice in this area.

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Atmospherics
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6. (S) There were tense moments in the negotiations, mostly
centering on the Kurds' assertion that they could not be
expected to have any faith in the goodwill of the central
government. They were also skeptical that the government
would not fall into the hands of religious extremists or Arab
chauvinists who would work counter to Kurdish interests.
Such assertions were particularly problematic for Minister of
Oil Shahristani (reftel C),and it is worth noting that many
of the breakthrough decisions were reached on the final day
of the committee meeting, which he did not attend.
Nevertheless, with an embassy officer present, it was
striking that the talks were conducted in a spirit of finding
a compromise, despite misgivings which had been expressed to
us on the eve of the talks by both Ashti and Ghadbhan. Much
of the success of the talks can probably be credited to
Energy Committee Chair and Deputy Prime Minister (DPM) Barham
Salih, who hosted the sessions, and who alternately
represented central government interests and Kurdish concerns
masterfully (reftel D). When Ashti threatened to halt the
talks if issues of principle (contracting) were not resolved
first, Barham insisted on proceeding on areas of agreement,
like the scope for regional operating companies, as a way to
keep the momentum going. All in all, the talks reflected the
ability of the ministers and negotiators to find common
ground, which will, it is hoped, extend to the round of
getting the political seal of approval shortly. An
indication that it is not over till it's over, however, was
that on November 26, Barham noted that Sunni elements of the
government were objecting to parts of the deal.


7. (S) The rest of the coming week will be taken up with
further drafting, hampered somewhat by the fact that Ghadbhan
is also acting as an economic adviser to the Prime Minister
and thus has less time to focus on hydrocarbon drafting. The
trade off is that his access to the PM should help obtain
Maliki's endorsement of the compromises reached. The Kurdish
side does not wish any public announcements of a breakthrough
made until endorsement by both sides has been obtained. Our
goal over the next days is to speed up that process as much
as possible. In the meantime, Embassy is making its
technical/legal expertise available to the negotiators to
make as much progress as possible on the text.
KHALILZAD