EMBASSY ECONOMIC MINISTER DISCUSSES HYDROCARBON

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 002372

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/15/2027
TAGS: ECON ENRG EPET IR IZ KU
SUBJECT: EMBASSY ECONOMIC MINISTER DISCUSSES HYDROCARBON
LEGISLATION, IRAN AND KUWAIT WITH MINISTER OF OIL HUSAYN
SHAHRISTANI

Classified By: ECONOMIC MINISTER CHARLES RIES, E.O. 12958, REASONS 1.4
(b) (d)


1. (C) Summary: On July 15, Minister of Oil Husayn
Shahristani met with MIN Charles Ries, ECONCOUNS Dan Weygandt
and econoff to discuss hydrocarbon legislation, Daura
refinery, fuel supplies from Kuwait and crude exports via
fuel swaps with Iran. Sharistani said that there are two
major issues to be resolved on the Hydrocarbon Law, i.e., the
desire of the KRG to use a reference to the constitution
instead of using specific language, and a dispute over
regional versus federal control of arbitration. He added
that the KRG was also seeking to add an additional right of
review by regional authorities of decisions taken by the
Federal Council on Oil and Gas (FCOG). Disagreement
continues on the Revenue Management Law over what percentage
of oil revenue should be reserved for investment in
"strategic projects" - Shahristani thinks they can agree on
10% - and how quickly the KRG will have to remit to the GOI
$160 million in customs duties that it has collected.
Shahristani said that the Daura refinery was again in
operation, but he worried that more interdictions of its
crude oil supply pipeline will occur, citing the fact that
the pipeline repair crew was under mortar fire as it was
repairing the pipe. Shahristani stated that the Cabinet had
decided to pay the arrearages owed to Kuwaiti fuel transport
companies, arising from border closures last winter, so that
the Minister of Electricity could purchase $150 million of
diesel fuel for Baghdad power stations. Lastly, Shahristani
said that Iraq is considering a 150,000 barrels/day crude oil
pipeline to Iran's Abadan refinery as an additional export
outlet to the offshore terminal at Basrah (ABOT). End Summary.

--------------
Hydrocarbon Law
--------------


2. (C) On July 15, Ambassador Charles Ries, Minister for
Economic Affairs and Coordinator of Economic Transition in
Iraq, held his first meeting with Minister of Oil Husayn
Shahristani to discuss several issues, including the
Hydrocarbon Law. Shahristani stated that the GOI and the KRG
had been trading comments on the latest text for the last
several days. Three minor points had been resolved, with two
issues remaining. The KRG proposed amending one section of
the HC Law by replacing the original text with a simple
reference to the constitution. The GOI objected on
procedural grounds, stating that they could not make major
substantive alterations to the text agreed upon by the
Council of Ministers on February 26, since it would put in
question that Council of Ministers approval. Moreover,
Shahristani asserted, the law should provide explicit
language to implement the constitutional provision on control
of resources, not simply refer to it. Shahristani added
that, in his opinion, the KRG had a fundamental
misunderstanding of how its constitutional rights to
participate in oil development and policy formulation would
be guaranteed. Shahristani said the KRG's membership on the
Federal Council on Oil and Gas (FCOG) was the mechanism. The
KRG's contention that the FCOG would have to consult with the
regional government after it had made a decision was wrong.
He said, "You can't expect that body to go back to the KRG
for consultation when the KRG has a voice on the Council."
Shahristani said that this would effectively give the KRG
veto power over FCOG decisions.


3. (C) Second, according to Shahristani, the KRG, wanted to
change the arbitration clause of the law to require mediation
by a regional minister instead of the Minister of Oil if a
commercial, petroleum-related dispute occurs in a region.
Shahristani said the GOI will not accept this because it
varies from the COM-approved draft.


4. (C) Shahristani and the GOI chief negotiator, Thamir
Ghadhban, planned to call KRG Minister of Natural resources
Ashti Hawrami to discuss GOI opposition to the Kurds'
position on the two remaining issues. If the telephone
conversation was not sufficient to reach agreement, they
would draft a letter to the KRG formally notifying it that
they were sticking to the original draft.


5. (C) Shahristani summarized the political alignment for and
against the law. He said that Minister of Planning Ali Baban
(Sunni),even though he voted for the law in February, had
changed his mind and now opposed it; in fact, Baban said he
would resign if the law was passed. Baban, according to
Shahristani, said that the KRG had broken the agreements
accompanying the law by moving ahead with petroleum
development in the Kurdish region. The KRG will disobey the
law, Baban reasoned, so why pass it? Shahristani admitted
that it would not be advisable to pass the Hydrocarbon Law

BAGHDAD 00002372 002 OF 004


with only Shi'a and Kurd bloc agreement, i.e. without Sunni
buy-in. He said the Sadrists, with 30 members of parliament,
will also vote against it, as will a few independents. He
said the Iraqiyya (secular) party would vote against the law,
but that a significant minority of Iraqiyya's 25 MPs might
vote for it. Tawafuq publicly opposes the law, but
Shahristani noted that a new Sunni faction under Abid Mutlek
al Jaburi, called the Arab Independent Bloc (AIB),had been
formed recently. He said that the group has 12 members, and
that he believed the government could work with AIB and get
their support. (Note: According to al Jaburi on July 14, the
actual number is 6). This would allow the law's supporters
to package the law as passing with some Sunni support.


6. (C) Econ Minister Ries noted that the local press was
reporting opposition to the law. The government should make
an affirmative case for the law, explaining how it would help
unlock Iraq's oil potential, he said. Shahristani replied
that the strong opposition was in the Arab regional media
more than the local press, adding that the Arab media was
largely funded by Saudi Arabia. He added that the Saudis'
motive was to prevent the law from passing in order to
inhibit Iraqi petroleum development. (Note: Earlier on July
15, independent Sunni MP Mithal al Alusi told poloff that
both Iran and Saudi Arabia, to forestall the development of a
competitive Iraqi oil industry, were behind the Arab media
campaign to discredit the law.)

--------------
Revenue Management Law
--------------


7. (C) Shahristani said that the KRG and Shi'a coalition had
agreed on the draft text of the Revenue Management Law. He
said that this also was something that they should not adopt
without the Sunnis, however. Sunni Minister of Planning Ali
Baban had reservations on the present draft. The two issues
to be resolved were 1)how Iraqi revenue will be allocated to
"strategic" national investments and the KRG insistence on
the right of regional veto of such allocations, and
2)settlement of the "pending accounts," in which the KRG is
holding $160 million in customs receipts. Shahristani said
that he favored a 10% off-the-top allocation to the strategic
investment fund, and believed that that figure would be
agreeable to most other ministers. He mentioned DPM Barham
Salih was pushing for 5%. With regard to the KRG request for
regional approval of strategic projects, Shahristani said
that you simply cannot have a federal decision held hostage
to regional veto. He added that the dispute was the reason
the Revenue Management Law was taken off the COM agenda on
June 23.

--------------
Pending Accounts
--------------


8. (C) Shahristani said that the original text of the Revenue
Management Law called for the KRG and GOI to settle the
magnitude of the pending accounts within one month. The
Kurds were pushing to eliminate the time limit. Shahristani
said that the Kurds seemed to have the mistaken impression
that this provision meant payment was due in 30 days. In
fact, the KRG could pay over time, but that the issue of how
large were the KRG balances held for the GOI had to be
resolved within one month. If the two issues (proportion of
strategic investments and pending balances) were resolved,
Shahristani said that he believed that the Shi'a coalition
and VP Tarik al- Hashemi would be able to support the Revenue
Management Law, but he did not know the total number of votes
the law would ultimately attract. Economic Counselor Daniel
Weygandt, who accompanied Ries to the meeting, suggested that
more Sunni support could be gained by offering a compromise
gesture of some sort in another area. Shahristani agreed,
suggesting an agreement to review detainee files would be an
appropriate gesture.

-------------- --------------
Ministry of Oil Reorganization and INOC Reconstitution Laws
-------------- --------------


9. (C) Shahristani said that they had made much progress on
the Ministry of Oil reorganization law and the Iraq National
Oil Company (INOC) reconstitution law. The MinOil law was
done, and was not controversial - it simply followed the HC
Law. It had already been submitted to the Shura Council.
The INOC law was almost ready. The KRG wants the law to
specify that INOC is not part of MinOil, a request that
Shahristani said he can easily accept. Shahristani promised,
in answer to Ambassador Ries's request, to forward us copies
of the laws after they come out of the Shura Council. He
added that it is important not to hold up the Revenue

BAGHDAD 00002372 003 OF 004


Management Law and the HC Law while waiting for the MinOil
and INOC laws.

--------------
Daura Refinery Interdiction
--------------


10. (C) Shahristani expressed concern about the security
situation on the pipeline supplying crude oil to Daura
refinery, which had been out of service until the day before
the meeting following an insurgent interdiction on July 4.
(Comment: the pipeline was also interdicted on June 28, but
was repaired before the refinery had to shutdown.)
Shahristani said that the security situation was worsening
and he expected the pipeline to be attacked again. He noted
that the pipeline crew had been shelled by mortars while
repairing the line. In answer to Ambassador Ries's question
about installing a new pipeline to Daura (Note: the existing
line is corroded and can not carry enough crude to keep Daura
at full capacity. End note),Shahristani replied that it
would make no sense to put a new pipeline through hostile
territory, where it could be interdicted as easily as the old
one. He noted that they had added a third 40" pipeline
between Kirkuk and the Bayji refinery, and that the line was
hit three times before it was even commissioned. Shahristani
said that they still cannot export crude oil through the
North.


--------------
Kuwait and Iran
--------------


11. (C) Shahristani said that the Cabinet had approved $9.9
million to pay arrearages (on 2006 contracts) to Kuwaiti fuel
transport companies, so that Kuwait would allow the Iraqi
Ministry of Electricity to receive $150 million worth of
critically needed diesel fuel for Baghdad area power
stations. He said that the State Oil Marketing Organization
(SOMO) also had $2.4 million available to settle the debt.
He added, however, that the Ministry of Finance would have to
pay the $9.9 million. MinOil did not have the authority to
do so on its behalf.


12. (C) Shahristani said that the crude oil pipeline project
being discussed with Iran was part of an old, 2005 agreement.
Iraq, he said, viewed the 150,000 bbpd pipeline simply as
another export facility that would relieve the pressure on
ABOT. Iraq would sell the crude to Iran at prevailing export
prices. Iran would use it in the nearby Abadan refinery and
export an equivalent amount of Iranian crude. The value of
the project would be more export volume for Iraq, and, on the
Iranian side, the ability to maximize its current exports so
that it does not lose OPEC market share. In effect, the
Iranians would be importing crude simply to re-export it.


13. (C) Shahristani was generally fairly upbeat about
prospects for the oil framework and revenue laws, and avoided
denunciations of the KRG which had characterized earlier
meetings or negotiations. He also offered to cooperate with
the United States on supply issues, and warmly welcomed
Minister Ries's arrival, saying he would be seeking U.S.
assistance to overcome GOI bureaucratic hurdles as Iraq
sought to improve its oil and gas sector.




























BAGHDAD 00002372 004 OF 004




CROCKER