C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000550

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/16/2017
TAGS: ENRG EPET IZ
SUBJECT: DRAFT NATIONAL HYDROCARBON LAW TO GO TO COUNCIL OF
MINISTERS

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

1.(C REL GBR) Summary: Negotiations to finalize the draft
national hydrocarbon law took place all day on February 15.
Progress was made over the course of the week, with Prime
Minister (PM) Maliki chairing an Energy Committee meeting by
on February 12. The Committee reviewed the Kurdistan Regional
Government's (KRG's) compromise proposals arising from the
February 3-4 meetings in Erbil, and central government and
KRG drafters, revisions of the text for high-level political
review. As of this writing, agreement on a text has been
reached, and a "cover letter" describing the importance of
the hydrocarbon law and conditions attached to it is in the
final stages of agreement. Following a meeting between the
Ambassador and the PM on the morning of February 16, attempts
are underway to schedule an extraordinary meeting of the
Council of Ministers (CoM) either in the evening of February
16 or in next day or two so that the law might be approved in
final. In addition to his meetings with PM Maliki and
President Talabani, and the Ambassador has spoken with KRG
President Masoud Barzani and Prime Minister Nechirvan Barzani
to ensure that all parties stay on board. End Summary.

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Cover Letter
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2.(C REL GBR) While the KRG has agreed to allow the draft
framework hydrocarbon law to reach the CoM, this acquiescence
is based on conditions spelled out in a "cover letter" from
the PM stating that the framework law will not go to the CoR
until the revenue sharing law and the appendices listing
fields assigned to the Iraq National Oil Company (INOC);
fields outside INOC operations; and exploration areas are
agreed. Included in this letter is a statement that no
development will be pursued in the Disputed Territories,
unless jointly managed, prior to the referendum stipulated in
Article 140 of the Constitution. The letter also states that
if the law reorganizing the Ministry of Oil (MinOil) and the
law reconstituting the INOC are not submitted to the CoR
concurrently, then these laws--as well as the KRG regional
hydrocarbon law--must be consistent with the framework

law.
In the letter, the KRG agrees to present a list of existing
KRG contracts ) as does the central government for its
contracts - and the federal government pledges to complete
the implementing regulations and establish the relevant
organizations as expeditiously as possible.

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More Kurdish Conditions?
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3.(C REL GBR) Initially, the KRG was demanding that if the
appendices concerning contracting guidelines and model
contracts are not yet completed, the KRG expects that a
subset of guidelines for development in the Kurdistan Region
(KR) and the KRG's model "risk-reward" contract be appended
to the law until a complete set is finalized. Appending the
contract is important to the KRG so that exploration could go
forward while the law and related legislation is being
finalized, a process the KRG argues could take several
months. KRG officials appear to be open to the idea that a
side letter could be issued by the CoM to cover KRG desires
to go forward on the basis of their current separate existing
agreements. It is unclear how or if these demands will be
addressed. Another issue that has not yet been resolved is
the KRG's insistence on adding language to the definition of
authorities that ensures that representation of Iraq,s
ethnic and sectarian makeup will be taken into consideration
in making appointments to key institutions. Government of
Iraq officials uniformly reject this demand as being outside
the scope of the hydrocarbon law. Even officials like
Planning Minister Ali Baban of Tawafuq, who support the
principle of ethnic and sectarian balance are not in favor of
incorporating it into the hydrocarbon law.

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Legislative Timetable
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4.(C REL GBR) It is likely that there will be problems with
de-linking the appendices from the main text of the law, and
completing all of the appendices will take time since they
cover sensitive issues. DPM Salih has said that while the
link with the revenue sharing law should not be direct, he
would recommend making a statement when the CoM approves the
framework law that it will be submitted to the CoR together
with the revenue sharing law when the CoR resumes its session
in March, and that we will continue to work quickly to
complete a draft of the revenue sharing law. He added that
Finance Minister Jabr thought this would be a realistic
timeframe. Thamir Ghadhban, advisor to the PM and principal

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drafter of the law, told us that the PM had assembled a team
to work on the revenue sharing law, and that they were
coordinating with the chair of the CoR's Committee for
Governorate Affairs.

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Comment
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5.(C REL GBR) Great progress on closing the text has been
made over the last week, both on the main issue of the
authority of the Federal Council on Oil and Gas and on a
number of less political and more practical issues in the
text. Without the action forcing deadline of sending the
draft to the CoM this week, progress likely would have been
slower. The text has now largely been agreed, which should
make the endgame of getting the KRG to finally accept a
national law easier. It has also been significant that
Minister of Oil Shahristani, whose unilateral amendments to
the draft in mid-January disrupted a process that was at that
time well-advanced, has also retreated from a maximalist
position. Officials in Baghdad, may feel that the law gives
too much to the Kurds, especially given what is perceived as
an intransigent position the KRG has taken in the last stage
of the negotiations, and it can be expected that adoption of
the related legislation on INOC and the re-structuring of the
Oil Ministry will not be easy. Nevertheless, the principles
upon which Iraq,s future hydrocarbon regime will be based )
a system with checks and balances, scope for foreign
investment, but a very large role for the state-owned INOC )
have now been cast into a document which should be approved
soon.
KHALILZAD