HYDROCARBON LAW "COVER LETTER" AGREED, PATH

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000720

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/26/2017
TAGS: ENRG EPET IZ
SUBJECT: HYDROCARBON LAW "COVER LETTER" AGREED, PATH
CLEARED FOR CABINET APPROVAL

Classified By: Ambassador Zalmay Khalilzad for reasons 1.4 (b) and (d).


1. (C REL GBR) Summary. The Ambassador traveled to Lake Dokan
on February 24 to get Kurdistan Regional Government (KRG)
endorsement of a compromise text of the cover letter to the
hydrocarbon framework law, setting the stage for approval of
the draft law by the Council of Ministers (CoM) at a meeting
scheduled for February 26. The agreement reached at Dokan
was confirmed in writing by the KRG Prime Minister on
February 25 ) complete agreed text of the cover letter
below. Despite broad agreement in the cabinet on the
hydrocarbon draft, the cover letter proved difficult to
agree, taking over a week to resolve and ultimately involving
intensive brokering by the Ambassador. End summary.


2. (C REL GBR) The framework law was approved in principle as
early as February 16, but then got hung up on a cover letter
) originally advanced by the KRG - describing the conditions
under which the law was to go forward to the Council of
Representatives (CoR),and most importantly, whether
contracts negotiated in the interim until the law's adoption
would be legally valid. The Kurds had long argued that the
central government could hold up Kurdish contracts for as
much as a year given the uncertain prospects for approval of
the series of at least four laws covering the hydrocarbon
regime framework, revenue-sharing, the creation of the Iraq
National Oil Company and the re-structuring of the Oil
Ministry. Consequently, the Kurds wanted assurances that any
contracts they negotiated between now and the implementation
of the law would be approved, as long as such contracts were
consistent with the draft framework law and model contract
principles. Oil Minister Shahristani countered with a
proposal of a moratorium on any contract signings, leading to
protracted wrangling over the formulation, with the
Ambassador acting as a mediator over several days between the
Kurdish side and Maliki and Shahristani.

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Agreement at Lake Dokan, Next Steps
--------------

3. (C REL GBR) Finally, on February 24, the Ambassador made a
quick trip to Lake Dokan where the KRG politburo was holding
meetings, and which was consequently attended by the full
Kurdish leadership. This discussion produced an agreement on
the text of the cover letter, accepting a formulation based
on language provided February 22 by KRG President Massoud
Barzani. The formulation clarified the conditions under
which parties would be authorized to conclude contracts
negotiated in the interim until full legal implementation
(Article 5 below). This clause is effective in the case the
laws are not passed by the end of May. Nechirvan's letter
and the text of the cover letter will be sent to NEA/I.
There is an additional point in the cover letter which says
that if the deadline isn,t reached, the PM and the President
of the KRG can agree to extend the deadline.


4. (C REL GBR) Once this text was agreed between the
Ambassador and the senior Kurdish leadership, Presidents
Talabani and Barzani joined the Ambassador in a phone call to
Maliki, who agreed to the slight changes made. The
Ambassador followed up this agreement in a meeting with
Maliki on February 25 to confirm that a Cabinet meeting would
take place soonest to formalize the decision to send the text
to the CoR. Maliki, who had planned the cabinet meeting for
the 27th, agreed to hold it on the 26th and signaled his
satisfaction with the compromise on the cover letter. The
Kurds had announced the agreement at their joint press
conference already on the 25th. GoI DPM Barham Salih said
the discussion of the agreement among the Kurds was very
positive for those, like him, who are in favor of working to
promote Kurdish interests in cooperation with Baghdad rather
than through confrontation, so the positive political
benefits of reaching an agreement seem to be reinforcing
moderate forces.


5. (C REL GBR) Comment. Resolving the impasse on the cover
letter required intensive personal diplomacy. The reluctance
of the parties to agree over quite minor differences in the
text reflects the lack of trust that existed between the KRG
and especially Minister Shahristani. Approval by the CoM
should go a long way to reversing this mistrust, and in any
event, provide positive momentum for concluding the rest of
the hydrocarbon legislation package. End comment.

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Agreed Text of the Hydrocarbon Law Cover Letter
-------------- --

6. (C REL GBR)
"Recognizing the importance of legislating a law for oil and
gas to enhance the benefit derived from the oil wealth for

BAGHDAD 00000720 002 OF 002


all components of the Iraqi people and to constitute a firm
pillar for the unity of Iraqis and the coherence of their
structure, the Iraqi Government submits this draft law to the
Council of Representatives for the management of oil
operations on institutional basis taking into consideration
the full application of articles 111 and 112 of the
Constitution, which makes the oil and gas wealth a property
of all Iraqis consistent with the federal nature approved by
the Constitution, and to achieve the highest benefit for the
Iraqi people in a way that gives greater importance to
national interest, and allows for the development of this
important sector in a manner that motivates private
investments, transfer of skills and technologies which
requires legislative and political stability in the oil
sector to ensure the flow of investments and skills.

The legislation of this law is a huge national accomplishment
for all Iraqis and their sincere forces which contributed to
its drafting and will have a positive and decisive effect on
strengthening the fabric of all components of the Iraqi
people. The supreme interests of Iraq are the main reasons
for the legislation of this law and are the principal
criteria upon which the government relied in approving it.

The technical and legal considerations which governed the
articles of this law in all of its details and was based on
public national considerations and strived to grasp it fully
and to create the necessary legislative and technical
environment for growth and prosperity of this vital sector
for the benefit of the nation and the citizen which is the
firm goal that led the government in this lofty national
endeavor and which we present as a gift to all Iraqis.

Accordingly, the following procedures shall be taken in order
to complete the organization of the oil and gas extraction
sector in Iraq.


1. This Law of Oil and Gas with its four appendixes shall be
submitted to COR after agreement on conditions and general
principals for the criteria and model contracts
simultaneously with the draft law of the Management of
Financial Resources. The parties shall work to accomplish
this before the 15th of March, 2007.


2. The draft law of the National Oil Company and the law of
the Oil Ministry shall be accomplished in a way that is
consistent and in harmony with the texts and the provisions
of this law. Also, it is necessary for the draft law of oil
and gas in the Region of Kurdistan to be in harmony with the
text and provisions of the Federal Law of Oil and Gas and in
agreement with the Constitution.


3. Execution of oil operations and granting contract licenses
for production and exploration in the areas covered by the
provisions of Article 140, in which administrative changes in
its borders may take place, except for oil operations of the
National Oil Company which will continue in the current
producing fields according to the Constitution, shall be
suspended.


4. All parties shall commit to refrain from concluding any
contracts or entry into new obligations in the exploration
and production activity in all Iraqi territories and until
this Law enters into force.


5. The Federal Government shall work in coordination with the
Government of the Region to complete the requirements of
enforcement of the Law and to activate the commissions and
structures stipulated in the Law within a period not to
exceed the end of May 2007. If this date is exceeded, the
Prime Minister of Iraq and the President of the region of
Kurdistan shall meet to look for ways of accomplishing this
within one month and finding a solution on the basis of one
of the following options:

A- In the case paragraph five above is not implemented until
May 31, 2005, the two parties shall have the right to
conclude exploration, development and production contracts in
accordance with what is stated in the Constitution and the
provisions of the draft Law of Oil and Gas and the general
principals for the criteria of model contracts.

B- To extend the period mentioned in the paragraph above."
KHALILZAD