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. -------------- 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 BAGHDAD 00001122 002 OF 002 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.) -------------- 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." -------------- -------------- 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