DEPUTY SECRETARY KIMMITT,S DECEMBER 3 MEETING WITH

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 004046

SIPDIS

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E.O. 12958: DECL: 12/13/2017
TAGS: ECON ENRG EPET IZ
SUBJECT: DEPUTY SECRETARY KIMMITT,S DECEMBER 3 MEETING WITH
OIL MINISTER SHAHRISTANI

Classified By: CLASSIFIED BY EMIN Ambassador Charles Ries, reasons 1.4
b,d



1. (C) Summary: Iraqi Oil Minister Hussein Shahristani told
Treasury D/S Kimmitt that Prime Minister Maliki and President
Talibani have written a joint letter to KRG President Barzani
stating that the KRG,s PSA arrangements with foreign
companies are unconstitutional until they are reviewed by
federal authorities. The letter requests that the contracts
be &frozen.8 Shahristani said the contracts have made it
more difficult to get a consensus for the hydrocarbon
framework law and isolated the Kurds. Shahristani described
his ministry,s active discussions with international oil
majors and stated that he expects shortly to agree to a
series of technical service agreements with them for
engineering and enhanced recovery from Iraq,s supergiant oil
fields. Shahristani also indicated openness to
infrastructure investment by majors to be repaid in oil
liftings (calculated at the daily index price). Such
contracts would not need CoR approval, but Shahristani
intends to seek endorsement by the Council of Ministers. He
planned to meet with senior executives from the companies on
the margins of the OPEC meeting December 5 in Abu Dhabi.
Shahristani recounted ongoing installation of new metering
equipment pursuant to a plan designed by BP. Shahristani
said he intends to secure a foreign partner for the
accelerated development of the Akkas gas field in Western
Anbar to supply gas to Europe via Syria and the Arab Gas
Pipeline. The Europeans are &very keen8 to get this gas,
and have invited him to Brussels to discuss it.



2. (C) Deputy Secretary of the Treasury met in Baghdad
December 3 with Minister of Oil Hussein Shahristani. D/S
Kimmit was accompanied by EMIN, Treasury Attache Smith, and
Treasury officer el-Quolaq. Shahristani was alone.

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Hydrocarbons Framework Law
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3. (C) Deputy Secretary Kimmitt opened the meeting by raising
the hydrocarbons framework law. He commented that as he
travels to Europe and Asia looking for support for Iraq and
the Compact, the first question many governments ask is why
Iraq has not been able to adopt the hydrocarbons law. He
said that Under Secretary of State Jeffery would be returning
to Iraq shortly to help accelerate work to secure a new law.
He asked Minister Shahristani to update him on the situation
as he saw it.


4. (C) Shahristani began by noting that formally not much
has &changed.8 The draft hydrocarbons law is before the
Council of Representatives. Tawafuq, Sadrists, Fadila and
the Allawi group have all said at various times that they
wish to amend the draft law to rule out the possibility of
production sharing agreements (PSA,s). Within the UIA (Shia
alliance) there is also sympathy for this view. Thus it will
be a complicated matter to get consensus for the bill, which
has been made all the more difficult by the KRG,s recent
raft of exploration agreements. Prime Minister Maliki has
invited KRG President Masoud Barzani to visit Baghdad
December 5-6 to discuss hydrocarbons and Peshmerga funding
(differences on the latter are holding up the 2008 Budget
Law). Shahristani said he expected to join the PM,s
meetings with Barzani on December 6, after his return from
the December 5 OPEC Ministerial.

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Maliki-Talibani Letter to Barzani
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5. (C) The Kurdish exploration and production PSA agreements
are obstacles to agreement on the HCL. The Kurds are
&marketing8 the notion that opposition to these contracts
are a &personal8 issue for him. That is not the case. The
issue is constitutional. The determination of the KRG to
plow ahead in signing so many PSA,s is causing a &strong
reaction8 against the KRG in Baghdad. President Talibani
and Prime Minister Maliki recently signed a joint letter to
Masoud Barzani stating that what the KRG has done is
unconstitutional and strongly requested that the contracts be
&frozen8 until they are &cleared8 by the federal
government, stating that otherwise there &will be
consequences.8 Also, CoR members are &very upset.8 The
Kurds are isolated on the issue. In any case, without
federal endorsement the contracts are unlikely to be of much
value to the investors. There will be not export routes for
any oil discovered. The neighboring countries are telling
us they will not allow KRG oil exports without federal

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government concurrence.

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Federal Government Technical Service Agreements with
International Majors
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6. (C) At the Deputy Secretary,s request, Shahristani
described his contacts with major international oil
companies. He has appointed a new DG for Licensing and
Contracts, whom he described as one of the most able
technocrats in the MoO. The new DG held meetings last week
in Amman with representatives of major oil companies. The
Ministry,s goal is to convert existing memoranda of
understanding (providing for gratis training and advisory
services from the oil companies to the MoO) into formal
reimbursed technical service agreements (TSA,s). Before
concluding such agreements, Shahristani said senior
executives of the major oil companies wanted to meet with him
directly (Comment: presumably to gauge his commitment to
theses relationships). Such meetings have been arranged
for the margins of the OPEC Ministerial in Abu Dhabi December

5.


7. (C) As he has explained before, Shahristani said the
TSA,s would provide for engineering, design and procurement

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assistance to the Iraqis in enhancing production from Iraq,s
super giant fields, including Rumaylah, Zubayr, Majnoon, and
West Qurna. Under these contracts, each one of the majors
would partner with the Iraqis for a specific field.
Discussions are being held with Exxon-Mobil, Shell, BP,
Total, Chevron and Conoco-Phillips. Dedicated teams on the
company and MoO sides would share data and design elements by
dedicated internet links, CAD/CAM software, etc. (He had
previously told Embassy that the companies are reluctant to
send their staff to Iraq at present, but would likely do so
at a later stage.)


8. (C) Shahristani said his goal for the investment program
was to enable Iraq to increase its production from these
existing fields by 1 million b/d in little over a year,
depending on access to key items of equipment (custom-built
immersible pumps etc.),which at present are difficult to
acquire from the &saturated8 equipment market. He said
these relationships with the majors are very important to him
and that he would &be generous8 in the profit margins
accorded in the deals to ensure the companies had an interest
in applying their top talent to the projects.

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Rising Export Performance and Future Capital Investment
Plans
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9. (C) Asked to comment on volumes, Shahristani said the
average exports in October were 1.82 mb/d and for November he
expected the final number to be about 1.98 mb/d. Many days
the MoO is managing to load over 2 mb/d although it cannot
sustain this with the approaching winter weather affecting
tanker berthing. Overall November production was 2.36 mb/d,
of which about 70kb/d went directly as crude to power station
fuel. While Iraq,s refineries are old and some 50 percent
of the output is in the form of heavy fuel oil (HFO),the
Council of Ministers recently gave final approval for
construction of the MoO,s new state-of-the art refinery in
Nasariya. This new refinery will process 300 kb/d but
because of hydro-cracking it will produce the product
equivalent of an older 600 kb/d old refinery. It will take
several years to complete this $5 billion project, but
Shahristani said he would be signing the project agreements
shortly and will be making a first payment of $128.5 million
from the 2007 capital budget. Overall, the ministry has
committed $1.35 billion of its 2007 capital budget and
intends to open L/C,s for another $250 million (for imported
equipment and services orders) before year-end, making the
Ministry,s projected total capital investment $1.6 billion
for the year. Shahristani said he expected to spend the
entire $2 billion MoF capital budget allocation for 2008.

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Oil Majors May Invest in Infrastructure and Get Paid in Oil
--------------


10. (C) D/S Kimmitt asked if the oil majors would be
involved in such infrastructure modernization. Shahristani
said that several of the international oil companies were
keen to invest themselves in infrastructure and get paid in
oil liftings. This would be fine with him as long as the
accounting is in dollars with pricing based on the index
price on the day of delivery. As an inducement, Shahrisatni
said he would even be prepared to &lock-up8 additional

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volumes (over and above those needed to pay for the
investment) up to 100 kb/d for the benefit of partnering
majors.

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Iraqi Gas for the European Grid
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11. (C) Turning to gas, Shahristani said that if there is
any significant new delay in the hydrocarbons bill, he plans
to hold a &bid round8 to get a foreign firm to partner in
the development of the Akkas gas field in western Anbar. The
Europeans, he said, are &very keen8 to get supplies of dry
gas from this Iraqi field into the Arab Gas Pipeline, and
&so are we.8 He believes that initial supplies of gas can
reach the AGP by the end of 2008 if development is started
soon, since it is less than 30 km from the field to the
Syrian border (and existing infrastructure). Shahristani
said that he had been invited to Brussels to discuss the
project and will be going soon.

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CoR Approvals Needed?
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12. (C) D/S Kimmitt asked if a field development contract
for Akkas, or the service contracts with the majors, would
need to be approved by the CoR. Shahristani replied that
only contracts in the form of PSA,s would need CoR
ratification under the current law. The Ministry has full
competence to make technical service contracts under existing
law, although Shahristani said he intends to take them to the
Council of Ministers for endorsement, given their
significance, even if they don,t exceed the $50 million
threshold. (Comment: The Ministry of Oil is only obliged to
take contracts in excess of $50 million to the CoM for
ratification ) while most other Ministries have to get
approval for all contracts above $10 million.)

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Saddam-Era PSA,s Chinese and Russian
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13. (C) D/S Kimmitt asked about the existing Saddam-era PSA
with a Chinese firm. Shahristani explained that together
with the Chinese the ministry had completed a review and
amendment of the contract to &meet all the conditions in
light of the HCL.8 This would ensure that the contract
could continue to be implemented if the HCL should pass. At
this point however the Chinese firm is considering its
options. The PSA is a very old one for a small field named
Ahdab and the provisions are not too attractive given current
oil prices (e.g., any revenues from oil prices in excess of
$28 bbl goes to the GoI). Shahristani explained they are
awaiting the Chinese decision but they will give them a
deadline since if the Chinese don,t choose to proceed the
MoO will do so on its own. The oil deposit is not
technically difficult and there is a power plant planned for
the area that needs the fuel source to be developed with
dispatch.


14. (C) As for the Saddam era deal with Lukoil to develop
West Qurna Phase II, that contract was annulled by Saddam and
never approved by the Parliament anyway, said Shahristani.
So the MoO,s position is that there is no contract and he
has told the Russians they must compete for the field in an
open process. The Russians &keep coming back8 to the
matter and try to associate it with debt relief. Kimmitt
asked if the MoO had relations with other international
state-owned oil companies. Shahristani said the Ministry has
an ongoing memorandum of cooperation and training
relationship with the Norwegian firm Statoil. It had had
such relations with the Austrian OMV and Indian firm Reliance
but recently had suspended these after OMV and Reliance
signed improper contracts with the KRG.

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Corruption and Metering
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15. (C) On corruption, Shahristani said the ministry had NOW
installed the latest generation of meters on all its ABOT
export terminals. (Comment: This was a project funded by
IRRF.) These new meters are working well. He said he was
also happy with the correspondence with the old meters. The
agreement of the two was within tolerances. The ministry has
now ordered a set of the new generation meters for the older,
smaller KAAOT platform as well as for pipeline pump and
gathering stations. As yet however the ministry does not
have a complete system of controls from wellhead to export
terminal although it is working to build it. The design and

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controlling software was provided by BP, which is also
training operators on the software. As soon as all the
hardware arrives and is installed, the metering system will
be fully operational. Even now, the Ministry,s recorded
export volumes completely agree with the measurements by the
lifting oil companies.


16. (C) Kimmitt asked whether the opportunities for
corruption were more on the domestic product side.
Shahristani agreed and said we &are intensely following
this.8 The opportunities for corruption based on corrupt
individuals are &almost over,8 he asserted. The biggest
problem the ministry faces NOW are the gangs and insurgents
who attack pipelines and trucks to steal crude and product.
The main method is to blow up a pipeline. The crude pools in
the area. The repair crew comes to repair the pipeline and
immediately afterward the gang comes back to collect the
crude from the pool. This threat is prevalent in the south,
especially in Meysan province. The gathering pipeline from
Bazargan field has been hit every week recently, just to
steal the oil.

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