DCM MEETS WITH GOI LEADERS IN ADVANCE OF

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001665 SIPDIS SIPDIS E.O. 12958: DECL: 05/21/2017 TAGS: ECON ENRG EPET KCOR EIND IZ SUBJECT: DCM MEETS WITH GOI LEADERS IN ADVANCE OF HYDROCARBON NEGOTIATIONS Classified By: Ambassador Daniel Speckhard for reasons 1.5 (b) and (d). ¶1. (C REL GBR) Summary. On May 20, the Deputy Chief of Mission (DCM) and Economic Minister Counselor discussed the hydrocarbon revenue management law and upcoming hydrocarbon legislation negotiations with Vice President Adel Abdul Mehdi, Chief of Staff to the Prime Minister Tarik Abdullah, Minister of Finance Bayan Jabr, Finance Advisor to VP Mehdi/Minister of Finance Aziz Jafar, and Minister Shahristani. All of the Government of Iraq (GOI) officials appreciated the US effort to provide a neutral model revenue management law from which the parties could negotiate, rather than attempt to work with the competing drafts produced by the Ministry of Finance (MoF) and the Kurdistan Regional Government (KRG). The DCM reviewed the key elements of the model draft, emphasizing that it was an effort to bridge the different views among Iraqi actors, while ensuring international standards for accountability and transparency and providing checks and balances aimed at addressing the concerns of both the KRG and central government. ¶2. (C REL GBR) Summary cont'd. The day of meetings culminated in a dinner hosted by the Ambassador for the delegation from the KRG that had arrived in Baghdad on May 19, which included Prime Minister Nechirvan Barzani, KRG Minister of Natural Resources Ashti Hawrami, KRG Minister of Foreign Affairs Falah Bakir, and former GOI DPM (and Kurd) Rowsch Shaways. Nechirvan agreed that it was critical that a hydrocarbon legislation "deal" is made while he is in Baghdad, but reiterated that he could not make compromises at the expense of Kurdish interests. On May 21, the DCM updated recently returned Deputy Prime Minister (DPM) Barham Salih on the current hydrocarbon legislation state-of-play, and the DPM told us that he had met with the PM for an hour the previous evening, and was convinced that the PM was intent on getting a deal. The DPM planned on convening a Council of Ministers (CoM) Energy Committee meeting as early as later that day. End summary. -------------- -- Key Elements of US Model Revenue Management Law -------------- -- ¶3. (C REL GBR) The key elements of the model revenue management draft that the DCM presented to GOI and KRG officials are: -- Establishes a single Petroleum Revenue Fund in the name of the Central Bank of Iraq (CBI). -- Contains numerous checks and balances to distribute authority and responsibility among different governmental entities, including formation of a: -- Petroleum Revenue Commission of Iraq: an independent, representative body (representatives of the federal government, and regional governments/qualified governorates, independent auditing and financial advisors) that acts as the trustee for the Fund and provides oversight of the entire process. -- Signatory Group: authorized to instruct disbursement of shares from the Fund. Instructions are to be executed jointly by all of the following officials: the Prime Minister, DPM for Economic Affairs, MoF, and Minister of Planning (MoP). -- Follows international standards for accountability and transparency, requiring reporting and regular audits by independent, internationally qualified auditors. -- States that the MoF, with oversight of the Commission, shall determine the estimated petroleum revenue for the fiscal year, and, with approval by the CoM, will determine amounts needed to meet international obligations, support federal institutions and functions, and address federal defense and security. These amounts will be subtracted from the overall revenue in the Fund. -- Authorizes the CBI to certify the net distributable revenue available after initial computations (above) by the MoF. Shares of this distributable revenue to regions/governorates will be based on population. -- Requires direct monthly electronic payments of one-twelfth of annual shares deposited into the designated budget account of respective government entities. All entities receive payment simultaneously, and none receive payment if all others did not receive payment. -- Establishes that surplus revenue is accumulated and held in the Fund to be made available as distributable revenue for all entities in subsequent fiscal years. Shortfalls in revenue will result in the shares for all entities being BAGHDAD 00001665 002 OF 003 reduced proportionally. -------------- Reactions to Presentation of USG Model -------------- ¶4. (C REL GBR) The DCM made it clear that we did not expect that either GOI or KRG officials would be entirely pleased with the USG revenue management draft since the model, contrary to KRG designs, provides for a single revenue account and a significant role for the MoF, and also includes a Signatory Group and a role in revenue distribution for the CBI that GOI officials find unnecessary and cumbersome. Mehdi, Jabr and Aziz are particularly opposed to the four-person Signatory Group, pointing out possible complications that could arise if signatories are traveling. Mehdi has proposed a similar arrangement involving only the MoF and MoP and an Auditing Group that could block payments if the process has not been properly executed. DPM Salih emphasized to us the importance of including Mehdi in the discussions, saying that he was needed to deliver Jabr and Aziz given their political ties to the Supreme Islamic Council in Iraq (ISCI, formerly SCIRI). ¶5. (C REL GBR) Dr. Tarik articulated a common belief among GOI officials that the KRG is misrepresenting their difficulties getting their budget from the MoF, saying delays in disbursement of funds are not politically motivated but caused by administrative "defects on both sides." The DCM acknowledged that there are different perceptions of the problem. It was important, however, that rather than focus on perceptions, negotiators should focus on a mutually acceptable solution. Given the proportion of revenue arising from oil sales, the DCM pointed out that there is no better place in Iraq's nascent government for a reliable system of checks and balances. ¶6. (C REL GBR) Minister Jabr and Aziz pointed out that the KRG has not paid taxes or remitted customs duties in four years, and complained about the lack of transparency once funds are transferred to the KRG budget account. Jabr also told us that the draft that he originally put forward was no longer "his" draft, but that it had been discussed and modified by the Energy Committee. When asked if the KRG had seen this draft, Minister Shahristani said that the draft was available to DPM Salih (who absented himself when the revenue management draft was discussed in the Energy Committee),but that the KRG did not provide any formal comments on it, but instead presented its own draft. ¶7. (C REL GBR) Shahristani told us that he would be supportive of delivering the framework hydrocarbon law and revenue management law to the CoR prior to the Iraq National Oil Company (INOC) reconstitution and Ministry of Oil (MinOil) reorganization laws, and de-linking the field allocation annexes from the framework law as proposed by KRG officials in Erbil on May 15. He agreed with the DCM that it is clear how different field allocations could be derived based on the criteria used for classifications, but took exception to the KRG's keen interest in reallocating fields in the South. Especially given their fervent protectionism of regional rights, Shahristani believes that they can seek further control over fields in the KR, but fields in the rest of the country "are none of their business." -------------- Call for Flexibility -------------- ¶8. (C REL GBR) At the May 20 dinner, the Ambassador underlined how vital it was for Iraq and Washington that the Iraqi parties conclude the hydrocarbon negotiations. He noted the special relationship between the US and KRG, and said that Americans would be observing the hydrocarbon legislation negotiations closely with this in mind. Nechirvan stated that the KRG is supportive of US policies, but that "the interests of our people come first." He assured the Ambassador that the KRG delegation was committed to reaching agreement, and that the KRG voted to be part of the new Iraq under the Constitution. The Ambassador recognized the understandable distrust of Baghdad that the KRG harbors given the scars left by the Saddam regime, but said that adequate protections within the legal framework and structures established by the hydrocarbon legislation are possible. The Ambassador told Nechirvan that agreement, not acceptance of the USG formulation was the goal, and that the KRG negotiators should also focus on desired outcomes rather than rigidly defend their formulation. We emphasized that our model revenue management law is very similar to the KRG draft, aside from the assignment of some authorities. -------------- BAGHDAD 00001665 003 OF 003 Next Steps -------------- ¶9. (C REL GBR) Nechirvan is meeting with PM Maliki, Minister Jabr, and Minister Shahristani on May 21, and DPM Salih expects to call a meeting of the CoM Energy Committee meeting as early as the evening of May 21. The PM believes that the negotiators should undertake preliminary discussions prior to direct intervention by himself or the US. DPM Salih believes US participation will be required early in the process. DPM Salih supports the idea of using the US model revenue management law as the basis for negotiations. He is concerned about other elements of the hydrocarbon package including field allocations and contracting guidelines. Nechirvan said that the delegation was prepared to "stay a while." ¶10. (C REL GBR) Comment. It is clear that the upcoming hydrocarbon legislation negotiations will pose challenges for all involved, and while all parties have agreed to approach the discussions prepared to compromise, the coming days will show us whether the key players are really seeking a hydrocarbon deal. Embassy will continue to engage with GOI and KRG officials, and is prepared to participate in the negotiations as needed to keep the process from stalling. CROCKER