DCM DISCUSSES HYDROCARBON LEGISLATION STATUS WITH

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001122

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/25/2017
TAGS: ECON ENRG EPET KCOR EIND IZ
SUBJECT: DCM DISCUSSES HYDROCARBON LEGISLATION STATUS WITH
OIL MINISTER

Classified By: Deputy Chief of Mission Daniel V. Speckhard for reasons
1.5 (b) and (d).


1. (C REL GBR) Summary. On March 25, the Deputy Chief of
Mission met with Minister of Oil Husayn al-Shahristani to
discuss the status of the package of hydrocarbon legislation.
Shahristani said that drafts of all companion laws were ready
-- revenue management, reconstitution of the Iraq National
Oil Company (INOC),reorganization of the Ministry of Oil
(MinOil) -- as well as drafts of the annexes to the framework
hydrocarbon law approved by Council of Ministers (CoM) on
February 26. He said that the framework hydrocarbon law had
been submitted to the Shura (Legal) Council to put it in
"final format," but the process was taking longer than
expected. The Minister noted that several CoM Energy
Committee meetings had been held while the Committee Chair
Deputy Prime Minister (DPM) Barham Salih was absent, and the
participants had discussed the MinOil reorganization and INOC
laws. He said that the INOC law proposed a new form of
company not covered by Iraqi commercial law and that a
sub-Committee had been formed to advise the broader Energy
Committee on the company's formation. Shahristani
acknowledged that the Kurdistan Regional Government (KRG)
wants the revenue management law to require that provincial
and regional shares of revenue be deposited in independent
accounts in the central Treasury rather than a single account
that would then distribute the funds through the federal
budget. The Minister said that this was "completely
unacceptable." He attributed much negative criticism of the
hydrocarbon law to expatriate oil officials in Amman who
generally opposed the new political system in Iraq.
Shahristani agreed that the best way forward would be for KRG
and GOI negotiators to meet to finalize the draft
legislation. End Summary.

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Status of Legislation
--------------

2. (C REL GBR) Minister Shahristani said that the framework
hydrocarbon law had been submitted to the Shura Council to
put it in "final format," and the process was taking longer
than expected. (Note: The Shura Council or Legal Committee is
responsible for assuring that proposed legislation is
consistent with existing legislation. End Note.) He also said
that the annexes to the framework law that would list
currently producing and undeveloped discovered fields
assigned to the Iraq National Oil Company, undeveloped
discovered fields outside INOC operations, and exploration
areas had been submitted to the Energy Committee two months
ago and that he had not received any comment. He said that he
believed this silence meant there was no opposition to the
lists. (Comment: KRG negotiators have told us that these
annexes had not been shared with them, though there have been
versions available on the Internet that the Kurds have
publicly stated have not been agreed. End Comment.)


3. (C REL GBR) According to Shahristani, the Energy Committee
had several meetings while Chairman DPM Barham Salih was
absent. PM Maliki chaired these meetings. The Minister said
that the Committee had discussed the MinOil reorganization
law three weeks ago, and again at a meeting the day before.
He told us that no KRG officials had been present at the
meetings, but that the Committee would meet again on March
26, and that DPM Salih would review the law. The Minister
expected that there would be no problems with gaining support
for the law.


4. (C REL GBR) Shahristani said that the INOC law was more
complicated because it establishes a form of company not
covered by Iraqi commercial law. He told us that the Energy
Committee had decided to form a sub-Committee consisting of
representatives from the Ministry of Finance, Ministry of
Planning, and Ministry of Justice to advise the Energy
Committee on the company's formation. He said the
sub-committee would report to DPM Salih.


5. (C REL GBR) The Ministry of Finance has the lead on the
revenue management law, and as Finance Minister Bayan Jabr
told the DCM on March 15, Shahristani confirmed that the KRG
opposed having revenue deposited in a single account
distributed through the budget preferring to have multiple
accounts for provincial/regional revenue shares. This would
give the local governments greater access to funds and
protect them from volatility in Baghdad. Shahristani said
that the KRG proposal was "unacceptable." He said that the
Kurds had instead been urged to present the assurances they
would require to feel their shares were protected. Since this
matter had come up months ago, Shahristani was optimistic
that it could be resolved quickly. (Comment: Another area of
dispute mentioned by Jabr on March 15 was the issue of

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reparations for "damaged areas." Jabr said that his draft
included reparations, but that, while there are Shia and
Kurdish factions that support this provision, he expected it
would encounter resistance when the Energy Committee reviewed
the draft law. He said that the criteria for determining
"deprivation" were too ambiguous. Jabr also said that the KRG
had not remitted customs duties to the federal government
since last year, claiming the KRG owed approximately $400
million. He believed that this matter would need to be
resolved when the GOI considered the mechanism for collecting
and distributing revenue, since non-oil revenue would be
included in the distribution formula as well. Minister
Shahristani told us that he believed this issue was an
entirely separate matter. End Comment.)

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Proposed Contracts
--------------

6. (C REL GBR) Shahristani called remarks made by KRG
Minister of Natural Resources Ashti Hawrami on numerous
contracts the KRG intended to execute with or without a
national hydrocarbon law "unhelpful." He did say that MinOil
would likely hold bid rounds for service contracts on
producing fields in the second half of the year, and that he
had already received many "interesting proposals."

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Media Reaction to the Framework Law and a Way Forward
-------------- --------------

7. (C REL GBR) Minister Shahristani told us that he believed
that the negative press response to the framework hydrocarbon
law was emanating from Amman from ex-MinOil officials, and
that most of their criticisms were of provisions that were
not even in the law. He said that these individuals were
fundamentally opposed to the new political system in Iraq,
calling them Baathists and Arab Nationalists. He did not
believe their criticisms merited a response. He said that
other opposition in the media was being mounted by Iraqi
political groups who want to delay passage of the hydrocarbon
legislation package until the constitutional review process
is complete since they want to reduce regional powers
currently recognized in the framework law. The last group he
identified as being critical of the law was those opposed to
the idea of Production Sharing Agreements (PSAs). He said
that even though the framework law did not mention PSAs,
these group were suspicious that PSAs would be executed, and
they associated this contract type with overly generous terms
for foreign oil companies.


8. (C REL GBR) Shahristani told us that the Ministry was
undertaking efforts to dispel some of this misinformation by
holding seminars about the hydrocarbon legislation. He said
the next one would be held in Dubai on April 6 for Iraqi
Parliamentarians, and that industry experts would explain how
the hydrocarbon law fits into the Constitutional framework.
The DCM told Shahristani that Ambassador Khalilzad had spoken
with KRG Prime Minister Nechirvan Barzani, who agreed to send
a drafting team to Baghdad in the coming days, and
Shahristani agreed that having KRG and GOI negotiators work
together to finalize the drafts would be the most expedient
way forward.
CROCKER