KRG MINISTER OF NATURAL RESOURCES DISCUSSES

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001266

SIPDIS

SIPDIS

E.O. 12958: DECL: APRIL 10, 2027
TAGS: ENRG EPET IZ
SUBJECT: KRG MINISTER OF NATURAL RESOURCES DISCUSSES
HYDROCARBON LEGISLATION

Classified By: ECONOMIC MINISTER-COUNSELOR DANIEL WEYGANDT, REASONS 1.5
(B) (D)


1. (C) SUMMARY. In an April 9, 2007, meeting with econoffs
and the Energy Attach, the Kurdistan Regional Government
(KRG) Minister of Natural Resources, Ashti Hawrami identified
issues to be addressed by KRG and Government of Iraq (GoI)
negotiators working on the hydrocarbon Revenue Management
(RM),Iraqi National Oil Company (INOC),and Ministry of Oil
Reorganization (MinOil) laws. Hawrami also addressed issues
related to the Annexes to the Framework Hydrocarbon Law.
Hawrami's primary disagreements with the current GoI draft of
the RM are passing the regional share of oil revenue through
the Ministry of Finance-controlled central budget and whatis
done with surplus revenues at the end of the fiscal year.
Hawrami feels that the current draft MinOil law is too vague
in its description of which of the companies currently within
the Ministry of Oil become part of INOC and which will remain
within the Ministry of Oil (MinOil). He also feels that the
draft MinOil law needs to provide for the potential
privatization of those companies remaining within the MoO.
He also wants the law to contain stronger language separating
INOC from MoO's control. Regarding the draft INOC law,
Hawrami wants the draft law to include local representation
on the board of directors, and fewer, if any appointees by
the Minister of Oil. He feels that the law, as currently
drafted, provides for too many members of the board of
directors to be appointees of the Prime Minister. He is also
concerned that INOC will be given oil and gas fields
comprising over 80% of Iraq's proven reserves, without
appropriate incentives to maximize production of all those
fields. Hawrami also proposes that Annex 1 to the framework
Hydrocarbon Law contain a comprehensive list of the oil and
gas fields that INOC will develop and operate. Annex 2 would
contain a list of the more difficult to produce oil and gas
fields that INOC could produce with a private sector company
or achieve production by demonstrating the accomplishment of
milestones. If certain levels of production were not
accomplished according to set periods of time, INOC would
lose the opportunity to produce those fields. End Summary.


2. (C). On April 9, 2009, econoffs and the Energy Attach
met with KRG Minister of Natural Resources, Ashti Hawrami, to
review the status of Iraqi efforts to finalize the RM, INOC,
and MinOil laws, and to review any issues that the Minister
may be discussing with his counterparts in the GoI. Hawrami
noted that he finally had copies of the GoI's draft RM law.
He observed that while the GoI version had incorporated some
items from the KRG version, there were two significant
unresolved issues. First, the KRG would not agree to passing
its share of oil revenues through the central government
budget, with disbursement of the region's share controlled by
the Minister of Finance. Second, the GoI draft law requires
that surplus funds remaining in the central Oil Revenue Fund
be used to finance any existing deficits. (Note: Hawrami
commented that the GoI draft of the RM law requires that
surplus regional funds be returned to the central government,
but the text of the drafts we have seen are not consistent
with this comment. Hawrami said he wants these surplus funds
to remain with the regional governments for expenditure
according to the needs identified by the regional
governments.) He said he had no objection to an audit of the
expenditure of those funds by the central GoI. At various
times, Hawrami expressed both optimism and pessimism that an
agreement with the GoI could be reached on these points, but
he observed that since Minister of Finance Jabr, Minister of
Oil Shahristani, and Prime Minister Maliki were out of the
country until next week, serious substantive negotiations
would have to await their return. Hawrami stated that he is
not interested in a protracted round of negotiations of this
law similar to those that produced the framework Hydrocarbon
Law currently under review by the Shura Council. (Note:
During the conversation with Minister Hawrami, Deputy Prime
Minister Barham Salih entered the room and reinforced the
point that the distribution of surplus funds was a major
issue.)


3. (C). Hawrami expressed concern that the current GoI draft
of the MinOil law does not provide sufficient clarity
regarding INOC's relationship to the Ministry of Oil. (Note:
Deputy Prime Minister Barham Salih also expressed his opinion
that the law be clear that INOC is completely independent
from the Ministry of Oil.) He said that the law retains
within the Ministry of Oil too many of the 15 operating
"companies" currently controlled by the Ministry; only a few
major operating companies would become part of INOC. In his
opinion, the MinOil law should contain provisions that would
place those companies remaining in the Ministry in separate
departments and restructure them in a way that would
eventually provide them the opportunity to become private
entities. (Note; Hawrami suggested that privatization could
occur after a period of two years and the completion of a

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feasibility study.) Hawrami stated that he had been
discussing these issues with Advisor to the Prime Minister,
Thamir Ghadhban, and that Ghadhban was preparing another
draft of the MinOil and INOC laws for Hawrami's review.
Hawrami will share a copy of this draft with ecoffs when he
receives it.


4. (C). Hawrami was concerned that current draft of the INOC
law does not provide for local representation on INOC's board
of directors. The current draft provides for too many
Ministry of Oil appointees on the board. The current draft
law provides for three board members to be selected by the
Minister of Oil. Hawrami anticipates that the next draft
prepared by Thamir Ghadhban will propose two appointees.
While Hawrami does not want any appointees on the board, he
is likely to accept one. Hawrami is also concerned that the
GoI draft gives INOC control of approximately eighty percent
of Iraq's proven reserves, in effect continuing much of the
present state-controlled Ministry of Oil operating/producing
structure under a different label.


5. (C). Hawrami noted that Annex 1 to the framework
Hydrocarbon Law contained the list of existing producing oil
and gas fields that will be managed and operated by INOC. He
suggested that some of the less-developed fields be placed in
a separate Annex 2, and that the INOC law contain
requirements for INOC to develop the Annex 2 fields or lose
control of them. He suggested that one requirement might be
that INOC engage in joint ventures with other companies with
greater expertise or better technology.


6. (C). While Hawrami expressed optimism that a resolution
of the MinOil and INOC issues could be reached, he was
hesitant to suggest that those draft laws should proceed
through the legislative process unaccompanied by the RM law.
He views the RM law as clearly the most important part of the
legislative package, however, he did not believe it
worthwhile to remain in Baghdad to discuss the RM law with PM
Maliki, Minister of Finance Jabr, and Oil Minister
Shahristani absent.


7. (C). At the conclusion of the meeting, Hawrami was asked
if any fuel from Turkey had been delivered to the KRG via an
arrangement with the State Oil Marketing Organization (SOMO).
Hawrami claimed that, since the KRG must pay for its fuel
imports from its 17% share of the national budget, no fuel
could be imported from Turkey until the GoI provided the
budget funds. (Note; Turkey will not do business directly
with the KRG.) Hawrami told us that Shahristani had been
advising the Iranian government not to contract directly with
the KRG because efforts could distract the KRG from
finalizing the draft hydrocarbon legislation.


8. (C) Hawrami returned to Erbil on April 10. In a
follow-up conversation on April 11, he told econoff that he
was working on counterproposals to the GoI INOC, MinOil, and
Annex drafts. He would not predict a specific date for a KRG
negotiating team's return to Baghdad because future talks
must address the RM law and this depends on Maliki, Jabr, and
Shahristani's return. Hawrami believes that the RM law will
require KRG PM Nechirvan Barzani's personal intervention.
Econoff told Hawrami that the hydrocarbon legislation and the
KRG's schedule for continuing negotiations would be priority
issues for the Ambassador's discussions with KRG leaders in
Erbil later this week.
CROCKER