RRT ERBIL: KRG OIL MINISTER ON UPCOMING

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001826

SIPDIS

E.O. 12958: DECL: 06/17/2018
TAGS: ECON ENRG PGOV EPET IZ
SUBJECT: RRT ERBIL: KRG OIL MINISTER ON UPCOMING
NEGOTIATIONS ON HYDROCARBON LEGISLATION

REF: A. BAGHDAD 1277

B. BAGHDAD 1447

Classified By: Erbil RRT U.S. Team Leader Jess Baily for Reasons 1.4 (b
,d)

This is an Erbil Regional Reconstruction Team message.


1. (C) Summary: Kurdistan Regional Government (KRG) Minister
of Natural Resources Dr. Ashti Hawrami expressed cautious
optimism that KRG Prime Minister Nechirvan Barzani's upcoming
meetings with PM Maliki in Baghdad could lead to passage of
some hydrocarbon legislation "by October." This optimism is
tempered by his view that other parties in Iraq do not see
hydrocarbon legislation as a priority. He said the provision
for a "strategic project fund" remains the sole issue of
disagreement in the revenue sharing law but revealed few
details about the KRG's negotiating stance. The KRG remains
committed to full transparency regarding oil contracts it has
signed, but any recommendations for changes by a federal oil
and gas commission would have to be accepted by the KRG.
Like PM Barzani, he counseled a low profile role for the U.S.
in the negotiations to avoid heightening suspicions about
U.S. designs on Iraqi oil, suspicions he says Iran is already
fueling.
End Summary.


2. (C) Kurdistan Regional Government (KRG) Minister of
Natural Resources Dr. Ashti Hawrami and Advisor Khalid Salih
met with RRTOffs June 16 to discuss the KRG's positions on
national hydrocarbon legislation prior to the planned visit
of KRG Prime Minister Nechirvan Barzani, now anticipated for
late this week or early next week. (Note: a planned June 16
meeting between EMIN and PM Barzani was cancelled as weather
in Baghdad grounded aircraft. End note.) Dr. Hawrami
expressed guarded optimism about the prospects for the talks,
speculating that some legislation could pass "by October."
He noted that discussions would take place as planned between
PM Barzani and PM Maliki, as there "was no point in speaking
with (Minister of Oil) Shahristani." Per reftels, he
confirmed that KRG has winnowed their number of objections to
the February texts, but declined to cite a number. Nechirvan
will stay in Baghdad two or three days after which Hawrami
believes the "deputies committee" will continue the
discussions. "Dr. Rawsch Shuways (KDP senior official in
Baghdad) knows our positions," he said.


3. (C) On the negative side, Hawrami asserted that only the
Kurds consider national hydrocarbon legislation to be a
priority. Other parties agree in principle on the need for
such legislation, but have other more immediate concerns,
particularly Shi'a politicians jostling for position in the
run-up to provincial elections. He also decried most
politicians' ignorance about the legislation and oil policy
in general; "they are just concerned about which house they
will get in the Green Zone," he chided.

Revenue Sharing Closest
--------------


4. (C) Hawrami asserted that the revenue sharing law is
closest to completion, and is the most important element for
building trust on the remaining pieces and for fostering
political reconciliation. The parties have agreed to
reinstate February text language on a sovereign wealth fund
(i.e., defer specifics to future legislation) and two other
KRG objections. The KRG continues to object to a provision
for a strategic projects fund that would automatically
receive a percentage of revenues and which the Ministry of
Finance would spend. Hawrami said this fund was not in the
February agreement; that the figure of 10 to 15 percent too
high; and that putting it under direct Ministry of Finance
control was "out of the question." He indicated that
Nechirvan was initially inclined to agree to a fund with a
smaller share (five percent) of revenues, but had backed away
from that position. The core problem is control over the
money and who defines "strategic." The KRG believes that
such projects should be funded in a normal budgetary process
requiring justification for each project. The Kurds fear
creating a Finance Ministry controlled slush fund over which
they would have little influence. Hawrami's mistrust stems
from his belief that the central government is not
transparent about reporting current oil revenues. He
estimates that Iraq will earn 30 billion dollars more than
the 2008 budget estimate. "Where is all of that money?" he
asked, even after RRTOffs reminded him of the pending GoI
budget supplemental.

Framework Law: Contracts and Annexes
--------------


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5. (C) When asked whether the KRG would submit its existing
production sharing agreements (PSAs) to review by the federal
oil and gas commission, Hawrami struck a more defiant tone
than Nechirvan (reftels),saying renegotiating existing
agreements "will never happen" and the provision in the
framework law only concerns future contracts. Stepping back,
he said the KRG was committed to full transparency and would
submit the existing contacts to the commission. After review
the commission could make "recommendations" to the regional
government. In case the regional government did not concur,
the commission could take the matter to a political level or
eventually to the Constitutional Court. Hawrami cited a
legal opinion by a British expert (available on the KRG
website) arguing that articles 115 and 121 of the
constitution allow the regional government to have its own
law as long as it did not violate that federal constitution
and that in case of conflict with a federal law, the regional
law would prevail.


6. (C) Hawrami said the KRG objected to annexes to the
February texts which assigned "93 percent of Iraq's reserves
to INOC (Iraqi National Oil Company) without any performance
conditions." According to the KRG, the federal oil and gas
commission should assign producing, discovered and
undiscovered blocs to producers based on performance
criteria. The INOC should show, for example, its plans for
raising production on the major fields and be held
accountable for performance. The framework law could deal
with this issue by saying that INOC will be assigned blocs
for eventual review by the Commission and that all parties
should understand that such a review would take a while to
complete. In the meantime, INOC would continue operating
existing fields. He also indicated that producing fields in
KRG territory (Khormala in particular) needed to be shared
between INOC and its KRG equivalent, KNOC, as laid out in the
Constitution.


7. (C) Hawrami claimed that the KRG has not received a
definitive text of the laws for the Ministry of Oil and the
INOC. Even though Nechirvan agreed to bring the four laws
forward as a package, Hawrami is skeptical about agreeing to
laws whose drafts the Ministry of Oil has not even shared.

Lobbying the Oil and Gas Committee
--------------


8. (C) Aware of the negative image of the KRG's contracts
among Baghdad politicians, Hawrami said that he held a
productive discussion with members of the Council of
Representatives Oil and Gas Committee on the margins of
Nechirvan's April visit to Baghdad. The KRG's efforts to win
over COR members continued during a three-day visit to Erbil
in early June by nine out of the ten committee members. The
committee members raised questions about revenue sharing and
expressed reservations about losing control of Iraq's oil to
foreigners. Hawrami claimed Nechirvan and others allayed
fears about KRG commitment to sharing revenues, while
explanations of their model contract and visits to DNO
operations in Zakho and Dana Gas/Crescent Petroleum near
Chamchamal showed the benefits of foreign involvement in
exploration. According to Hawrami, Iran is stoking
nationalistic opposition to international oil company
involvement among Iraqi (especially Shi'a) politicians to
prevent Iraq from developing and becoming strong. As an
example, he said the Iranian oil minister told COR Oil and
Gas Committee members during a Moscow conference that PSAs
violated Iraq's national security and should not be signed.
(Comment: Hawrami frequently asserts that Minister of Oil
Shahristani takes orders from Tehran. End Comment.)

U.S. Role
--------------


9. (C) Hawrami echoed Nechirvan's view (reftels) that the
U.S. must not be seen as influencing the negotiations due to
suspicions among many Iraqis about U.S. designs on Iraqi oil.
Stating what he underscored was a personal opinion, he said
Ambassador Khalilzad's intensive involvement in the February
2007 negotiations led to an agreement that none of the
parties wanted and in the end delayed the process. Asking
about U.S. policy toward the technical services agreements
(TSAs) the Ministry of Oil is discussing with international
oil companies, he expressed hope that our policy was to
counsel oil companies against signing these agreements. He
noted that they would be clouded by the same "legal
uncertainty" as the KRG's PSAs. He also believes they are a
trap to minimize international involvement in Iraq's oil
sector. If these small agreements succeed in increasing
production somewhat, Minister of Oil Shahristani will claim
success and will limit foreign involvement to similarly small
deals. If production does not increase, Shahristani will use

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the oil companies as a scapegoat.


10. Comment: Dr. Hawrami revealed few specifics about
compromises the KRG is prepared to make to ensure passage of
national hydrocarbon legislation. He remains convinced that
the negotiations should focus on revenue sharing to build
trust and leave governance of the industry for a later day.
Hawrami freely admits that he is not a politician and
realizes that only a political deal at the highest level will
break the deadlock on hydrocarbons. His comments on how the
Ministry of Oil may seek to marginalize the role of
international oil companies in the long term may be true.
But his query on U.S. policy toward TSAs was really meant to
express the KRG's dissatisfaction on our approach to the
KRG's PSAs and to urge the U.S. to maintain a balanced
approach until national legislation passes. End comment.
BUTENIS