WHAT IS THE U.S. VIEW OF THE PROPOSED IN-KIND

UNCLAS SECTION 01 OF 02 BAGHDAD 001021

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SENSITIVE
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STATE FOR U/S JEFFERY; TREASURY FOR D/S KIMMIT AND U/S
MCCORMICK; NSC FOR GENERAL LUTE, ENERGY FOR DAS HEGBURG

E.O. 12958: N/A
TAGS: ECON EPET EFIN IZ
SUBJECT: WHAT IS THE U.S. VIEW OF THE PROPOSED IN-KIND
ELEMENTS OF IRAQI OIL TECHNICAL SERVICE AGREEMENTS WITH OIL
MAJORS

REF: BAGHDAD 647


1. (SBU) This is an action request. See paragraph 7.


2. (SBU) Minister of Oil Husseyn Shahristani spoke to EMIN
by phone April 1. Asked about progress on the negotiation
of the oilfield technical service agreements (TSAs) under
negotiation with major international oil companies (IOCs),
Shahristani said that the MoO and the companies have
completed draft contracts with the only open issue that of
payment-in-kind and the related process of giving notice of
such in-kind liftings to the Development Fund for Iraq.
The Minister said he is "not sure" what our attitude is on
the payment-in-kind proposition, which is important, he
says, to the IOCs. He recalled that, when in Baghdad in
February, U/S Jeffery undertook to consult on the issue in
Washington. What was our view, he asked?


3. (SBU) Shahristani admitted that within the GOI, the
Ministry of Finance has reservations, partly based on its
direct contacts with the DFI and the IMF. (The MoO itself
has not had any contact with the DFI.) For his part,
Shahristani said that he had no problem with complete
transparency for crude liftings against TSA obligations,
and would be fine with a requirement that calls for the
parallel notification to the DFI by IOCs to establish an
audit trail. He noted that the entire issue would likely
come to the Council of Ministers for resolution soon.
Minister of Finance Jabr says he would not sign off alone
on payment in kind, dismissing what he termed, "barter
arrangements" more appropriate for a bankrupt country.
Asserting that Trade Bank of Iraq letters of credit should
be satisfactory for payments to the IOCs, he added that
past counter-trade agreements in Iraq had been plagued with
corruption. Nevertheless, Jabr said that he would go along
with a consensus on the issue endorsed by the Council of
Ministers (COM).


4. (SBU) Some of the international oil companies have
explained this aspect of a TSA would be important to them
as it would substantially reduce credit risk, especially
now that the GOI wants to enlarge the scope of the TSA to
cover the purchase on behalf of the MoO of capital goods
and tech services from third parties. In its presentation
to the COM (reftel) the MoO projected that over two years
some USD 2.5 billion would be cycled through this vehicle
for oilfield development.


5. (SBU) As described reftel, Embassy believes that early
conclusion of these TSAs is in the U.S. interest for
several reasons. Most importantly, there are indications
of diminishing production from Iraq's once prolific
southern fields that will affect short term revenue streams
available to the GOI for reconstruction and building
political stability at a critical juncture. Bringing the
expertise of the IOCs to bear on the problem, particularly
their expertise in modern enhanced recovery techniques,
could help arrest production declines caused by primitive
reservoir engineering and years of production. IOC
procurement channels can deliver world-class equipment and
services expeditiously in an environment
where oil exploration and production equipment is in short
supply. Second, such agreements could help build political
acceptability of an IOC role in the Iraqi oil sector. And
third, by demonstrating that Baghdad is moving towards
engagement with the private sector, the early conclusion of
TSAs would be likely to motivate the KRG to come back to

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the table to conclude a national level hydrocarbon law. It
is of course a national hydrocarbon law that would lead to
private foreign investment in hydrocarbon development under
production sharing agreements and would transform the Iraqi
oil sector.


6. (SBU) We therefore see the conclusion of TSAs as an
important means to several high priority goals: higher near
term production and breaking shibboleths and obstacles
preventing conclusion of the hydrocarbons framework law.
Also, not only will the IOCs benefit from managing these
agreements, they will provide a considerable commercial
opportunity for oil and gas equipment firms domiciled in
the United States.


7. (SBU) ACTION REQUEST: Embassy requests a coordinated USG
view on whether we would support allowing the IOCs to be
paid through crude oil liftings for their work under the
TSAs, and if so, what safeguards we should suggest to

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BAGHDAD 00001021 002 OF 002


secure the DFI's and international community's interests and
to ensure Iraq's compliance with its obligations concerning
the United Nations Compensation Commission(UNCC).
(One major oil company has suggested to us that perhaps a
counterparty, e.g., JP Morgan, could maintain an open
account in both directions and could handle the DFI notice
issues.) These safeguards are important, as they will help
address the Finance Minister's arguments that payment in
kind will be fertile ground for corrupt practices. Embassy
also requests legal views as to the implications of an
in-kind deal for Iraq's obligations under UNSC resolutions,
in particular with respect to the UNCC, as well as to any
UNSC oversight arrangements that might be required for an
in-kind deal with IOCs.
CROCKER