Identifier
Created
Classification
Origin
07BAGHDAD1659
2007-05-21 13:55:00
CONFIDENTIAL
Embassy Baghdad
Cable title:  

DCM VISITS KRG LEADERS, ADVANCING HYDROCARBON

Tags:  ECON ENRG EPET KCOR EIND IZ 
pdf how-to read a cable
VZCZCXRO1468
OO RUEHBC RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1659/01 1411355
ZNY CCCCC ZZH
O 211355Z MAY 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1265
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/USDOE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001659 

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/20/2017
TAGS: ECON ENRG EPET KCOR EIND IZ
SUBJECT: DCM VISITS KRG LEADERS, ADVANCING HYDROCARBON
COMPROMISE AND RESUMPTION OF NEGOTIATIONS

Classified By: Ambassador Daniel Speckhard for reasons 1.5 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001659

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/20/2017
TAGS: ECON ENRG EPET KCOR EIND IZ
SUBJECT: DCM VISITS KRG LEADERS, ADVANCING HYDROCARBON
COMPROMISE AND RESUMPTION OF NEGOTIATIONS

Classified By: Ambassador Daniel Speckhard for reasons 1.5 (b) and (d).


1. (C REL GBR) Summary. On May 14-15, the Deputy Chief of
Mission and Economic Minister Counselor met with Kurdistan
Regional Government (KRG) Prime Minister Nechirvan Barzani,
KRG Minister of Natural Resources Ashti Hawrami, and the KRG
Ministers of Interior and External Affairs to express US
condolences regarding victims of recent attacks in the
Kurdistan Region (KR),and discuss security and stalled
hydrocarbon legislation. The DCM conveyed the increased sense
of urgency in Washington to finalize a hydrocarbon deal, and
the need for compromises that could move the legislation
forward. Nechirvan asked for US support in training and
equipping KR security forces. Recognizing the importance of
the US relationship, Nechirvan understood the need to
finalize draft national hydrocarbon legislation. He has
agreed to come to Baghdad on Saturday, May 19 for initial
bilateral meetings with political bloc leaders, followed by
broader negotiations with GOI officials.


2. (C REL GBR) Summary continued. Nechirvan was firm that the
KRG would not relinquish regional rights enshrined in the
Iraqi Constitution, but told us he recognized the need to
come to a conclusion in the negotiations. He also emphasized
that no development in the Disputed Territories should be
pursued until after the Article 140 referendum required by
the Constitution, though he acknowledged that the KRG
recently signed a contract for gas development in the
Disputed Territories. The DCM elicited the views of the KRG
officials and proposed possible compromise solutions on the
revenue management law that we will work into a neutral draft
to serve as a starting point for negotiations. By the end of
the discussions, the Kurds told us that despite their initial
insistence that field allocation annexes be appended to the
framework hydrocarbon law approved by the Council of
Ministers (CoM) on February 26, they would be supportive of a

strategy to disengage the annexes from the framework
hydrocarbon law in favor of appending them to the law
reconstituting the Iraq National Oil Company (INOC). This
approach would allow the framework law and revenue management
law to advance to the Council of Representatives (CoR) prior
to the INOC and Ministry of Oil (MinOil) reorganization laws.
This could accelerate the delivery of two key pieces of the
legislative package to the CoR, building momentum for
immediate discussions of field allocations and principles for
the INOC and MinOil laws.

-------------- --------------
Interdependence of Security and Hydrocarbon Legislation
-------------- --------------

3. (C REL GBR) The DCM expressed US condolences regarding
victims of recent attacks in the KR, pointing out that the
tragedy demonstrated that the KR is not an island in Iraq.
KRG PM Barzani agreed that the KR is not impervious to the
violence plaguing the rest of the country, and urgently
stated that the KRG needs support from the US in training and
equipping KR security forces. The DCM reaffirmed the
commitment of the US to the KRG, and suggested that the KRG
PM discuss security issues with CG Petraeus when the KRG PM
comes to Baghdad at the end of the week.


4. (C REL GBR) The DCM pointed out that there is an increased
sense of urgency in Washington to finalize a hydrocarbon
deal, and that the legislation has become a benchmark that
will influence USG Iraq policy. Nechirvan stated that a quick
withdrawal of US troops would be detrimental to Iraq and the
KR, and acknowledged that moving forward with hydrocarbon
legislation at this time is important.

--------------
New Compromises
--------------

5. (C REL GBR) Nechirvan told us that the KRG has already
made concessions on the framework hydrocarbon law, and while
he does not regret them, the KRG is not willing to compromise
on revenue management law in ways that allow all revenue to
be controlled by Baghdad. He said that the KRG is a
successful government that needs financial independence--it
would not be held hostage by the dysfunction of Baghdad.
Nechirvan and Ashti also told us that the current field
allocation annexes were "unacceptable," characterizing them
as a back-door way to recentralize Iraq's oil sector by
giving 93 percent of Iraq's resources to INOC. (Note: Review
of the annexes shows that the 93 percent refers to the
proportion of producing fields earmarked for INOC, not the
proportion of all fields. The Kurds seem to be using the
figure as a convenient way to reinforce the assertion that
INOC is getting too much. End Note.) Ashti insisted that INOC
would be incapable of handling most of these fields, and
Nechirvan told us that their opposition is driven by

BAGHDAD 00001659 002 OF 003


economics not politics. The Kurds assert that MinOil and some
GOI officials believe that current oil production levels are
adequate, but they disagree, citing additional revenue
requirements to support reconstruction.


6. (C REL GBR) Ashti told us that the Constitution does not
require that the KRG share revenue from new regional
development, but they have agreed to share. He said, however,
that the current allocations to INOC suggest that Iraq is not
open for business, and the Kurds will therefore lose by
aggressively developing their resources and sharing the
revenue while production elsewhere remains at the status quo.
The DCM responded that the US has set aside many of its views
on the shape of an ideal hydrocarbon regime in favor of a
regime that GOI and KRG officials can agree upon, and that
the flexibility of KRG negotiators earlier in the process was
appreciated. He pointed out, however, that the two sides seem
to have been growing further apart rather than closer
together over the last month and said that defiant
talk--especially when the KRG still clearly has an economic
interest in cooperating on the hydrocarbon issue--is not only
unconstructive to the process, but has led to frustration
among US officials. The DCM proposed that instead of seeking
to cut federal authorities out of the revenue management
process in a way that unhelpfully seems to divorce the KRG
from Iraq, a compromise solution through checks and balances
should be pursued.


7. (C REL GBR) Nechirvan repeated that the KRG would not set
aside its Constitutional rights, but agreed that adequate
assurances that the KR would efficiently and fairly get its
share would be acceptable. Minister Ashti suggested reverting
to a previous KRG suggestion that a panel of three
signatories be established to unanimously authorize the
disbursement of funds according to the premise of linked
payments so that "no one gets paid unless everyone gets
paid."


8. (C REL GBR) EconMinCouns commented that the most recent
KRG draft revenue management law was very thorough and
professionally drafted, and the DCM asked if it would be
better for negotiations if the US were to table a modified
version of that draft that reflected the compromises
discussed. (Note: The most recent version of the KRG draft is
actually a modified version of a model revenue management law
drafted by USG legal advisors and back-channeled to Deputy
Prime Minister Barham Salih. Rather than pass the USG model
to GOI drafters, Salih seems to have passed the model to KRG
drafters who preserved most of the text, but replaced federal
authorities with other entities. It is unclear if KRG
officials are aware that US legal advisors were the original
authors. End note.) The KRG PM welcomed the suggestion that
the US table a draft as a starting point for discussion in
Baghdad.

--------------
Challenges for Negotiations
--------------

9. (C REL GBR) As when the signatory body was first proposed
in the Erbil meetings convened by former Ambassador Khalilzad
in early February, Nechirvan continued to insist that all
sects of Iraqi society must be represented, stating that the
KRG must have a representative (vice a Kurdish GOI official).
Nechirvan also asked the DCM why the US is opposed to the
idea of sub-accounts for regions and governorates, with the
KRG legal advisor interjecting that a sub-account was the
KRG's constitutional right. The DCM said that constitutional
arguments will take negotiations down the wrong road, and
that there is no reason why a sound distribution mechanism
should require more than one account.


10. (C REL GBR) On the topic of field allocation annexes, the
DCM said that we are in general agreement that too many
fields are going to INOC, but that the KRG must be flexible
on their demand that no more than 50 percent go to INOC,
suggesting that 75 percent might be more reasonable
recognizing that mechanisms could be included that allowed
flexibility over time to further reduce INOC coverage. Ashti
said that INOC should get only the fields that it could
handle in the near-term, with MinOil holding on to the rest
to put them out for tender--perhaps giving preference to INOC
or holding out on tendering for bigger fields to see if INOC
is ready in a few years. He added that there should be
accountability for the development of every field--if
development plans established in the contracting phase were
not adhered to, then the Federal Council on Oil and Gas could
take the field away from the developer and re-tender it.


11. (C REL GBR) The DCM told Nechirvan that the KRG's
economic arguments were good ones, but said that KRG

BAGHDAD 00001659 003 OF 003


negotiators would need to be politically flexible. He also
advised that they should identify where they could be
flexible on reallocation of fields before the delegation
arrives in Baghdad. Nechirvan and Ashti then agreed that it
would be acceptable to de-link the annexes from the framework
law entirely, adjusting the law to remove references to the
annexes, and instead append them to the INOC law--as long as
work was commenced on the INOC and MinOil reorganization laws
as soon as the draft revenue management law was finalized.
The DCM said that it would be important to establish the
principles for the INOC and MinOil laws while the delegation
was in Baghdad next week.


12. (C REL GBR) Nechirvan stated that the KRG remained firm
that there should be no development in the Disputed
Territories prior to the Article 140 referendum admitting,
however, that the KRG had already breached that agreement
(contained in the side letter accompanying the CoM-approved
draft framework law) when it recently signed a gas
development deal with UAE's Dana Gas. The PM citing the
overiding need for electricity as the reason for this breach.


13. (C REL GBR) Comment. Prior to the arrival of the KRG
delegation, Embassy has developed an engagement plan to
prepare key political bloc leaders for the presentation of
the USG draft revenue management law, proposed compromises,
and the need for their support. The objective is to wrap up
negotiations on revenue management law and minor
modifications of the framework law in time for the scheduled
CoM meeting on Thursday, May 24, and urge the technical
experts to begin work on the INOC and MinOil laws in the
interim with the Energy Committee to engage as soon as the
revenue-sharing law was completed.
CROCKER