IRAQI OIL CO. TALKS CONSTITUTION, CORRUPTION, COMPROMISE

C O N F I D E N T I A L SECTION 01 OF 02 KIRKUK 000087 SIPDIS SIPDIS BAGHDAD FOR POL, ECON, NCT, FCS, USAID, IRMO FOR BATES AND CAPLES E.O. 12958: DECL: 4/12/2016 TAGS: PGOV EPET ENRG ECON KCOR PREL PINR IZ NO CA SUBJECT: IRAQI OIL CO. TALKS CONSTITUTION, CORRUPTION, COMPROMISE REF: KIRKUK 82 KIRKUK 00000087 001.2 OF 002 CLASSIFIED BY: Scott Dean, Acting Regional Coordinator, REO Kirkuk, DoS. REASON: 1.4 (b),(d) ¶1. (C) Summary: Iraqi businessman and CEO of KAR Group Baz Karim said that the Iraqi national government and the Kurdistan Regional Government were handling new oil contracts in accordance with the new constitution, even though it was not yet in effect. Karim also said the two sides had recently agreed to commence construction to exploit the Khurmala Dome, despite continuing controversy over who managed it. Karim said the sides had reached a compromise that allowed Khurmala to retain and refine its own gas to feed a new power plant currently under construction in the region. End Summary. ¶2. (C) KAR Group CEO Baz Karim met April 3 with USAID Representative Brad Camp and IPAO to discuss KAR projects in the Iraqi oil industry. Karim introduced KAR as a construction and civil engineering company working in Iraq on oil and on fiber optics. Ongoing projects included developing the Khurmala Dome and oil and gas fields in Hamrin and Subba & Luhais. Three outstanding bids remained for development: the Kormor oil and gas field and refineries in Koia and Al-Nahrian (REFTEL). Constitution "In Effect" for Oil Deals -------------- ¶3. (C) According to Karim, the national Ministry of Oil and the Kurdistan Regional Government (KRG) in Sulaymaniyah were handling new oil projects in the Kurdistan Region in accordance with the new constitution as if it were already in effect. Karim said that Baghdad now understood the reality that the average Iraqi believed the constitution would remain unchanged, and further, that the KRG was handling new projects as if it were in place. He said that although the Khurmala Project had been awarded before the constitution took effect the work would be done after it was in force. ¶4. (C) Karim said that all parties had to be realists and that there needed to be a system for sharing resources. He noted, however, that the Kurds were not ready to share resources. Karim said that there remained a gray area in the constitution over who was entitled to revenues when a site was discovered and only subsequently developed. For over 100 years the Northern Oil Company had identified and developed sites in the region, collectively producing 1.2 million bbl/d until 2003. Compromise Reached on Khurmala Dome -------------- ¶5. (SBU) According to Karim, construction to exploit the Khurmala Dome, located 80 km northwest of Kirkuk City, was 60% complete and should finish by the end of the year. Karim predicted the dome would produce 100,000 bbl/d of crude and 30 million standard cubic feet per day (MMSCFD) of associated gas within one year - a figure that would rise to 100 MMSCFD in three to five years. KAR was responsible for procurement and engineering for the site. ¶6. (C) KAR recently submitted a second bid on the dome, in partnership with a U.S. company, Anadarko, specifically to manage the construction of the site. Karim said KAR had already purchased $70 million in equipment, including the hydraulic compressor, turbo solar generator, pipes, etc. According to Karim, the proposal accords KAR 20 years' management of the project and an increased production share. Karim said the partnership fulfilled the KRG's desire to give a project to a U. ¶S. company, since other projects had already gone to the Norwegians and the Canadians. ¶7. (C) Karim said a decision on construction had been deadlocked because both the Ministry of Oil and the KRG wanted to tender and control the project. Karim said in the end Baghdad issued the call for tenders, ahead of a decision on which government had jurisdiction over the project. Baghdad wanted the job completed as soon as possible, even if who ran it had to be determined later. An Issue of Refinement - Another Compromise Reached -------------- -------------- ¶8. (C) Karim said that, in a new compromise, the Ministry of Oil had promised that all of Khurmala's associated gas would go to the new power plant currently under construction near Khurmala. Further, a gas conditioning plant would be built in the KRG and an additional 70 MMSCFD of gas would come from Kirkuk. Karim KIRKUK 00000087 002.2 OF 002 said that gas from the Khurmala Dome had been intended to meet all the needs of the Khurmala plant; however, the 30 MMSCFD of gas the dome initially produced would fall short of the 100-120 MMSCFD needed. ¶9. (C) Gas from both the dome and the crude was intended to go to Northern Gas in Kirkuk for refining. Conflict arose when the KRG was told the expected 100 MMSCFD of gas would not be realized for three to five years, when the ratio of crude to gas had shifted. According to Karim, over the years, the amount of gas will increase as the crude oil decreases. Corruption Less of an Issue for Oil Sector -------------- ¶10. (SBU) Karim said that corruption remained the biggest challenge for doing business in Iraq. However, he claimed that it affected the oil industry less than other sectors. As a high tech industry that was difficult to enter, there was less competition within Iraq and therefore, less opportunity for negotiation. Comments -------------- ¶11. (C) The high-stakes nature of the oil industry and the current abundance of corruption in the Kurdistan Region makes Karim's assessment that the oil industry is somewhat immune from corruption difficult to believe. The KRG's in both Erbil and Sulaymaniyah are acting and talking as if the constitution were already in place, and are interpreting all points to their favor. If energy sources become scarce, the Kurdish holdout for greater national investment in large-scale refineries in the KRG, with simultaneous autonomous development of their resources, stands a greater chance of success. End comment. ORESTE