TUSSLE FOR KIRKUK OIL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002281

SIPDIS

STATE FOR E, EEB, NEA-I

E.O. 12958: DECL: 07/17/2018
TAGS: EPET PGOV IZ
SUBJECT: TUSSLE FOR KIRKUK OIL

Classified By: CETI Ambassador Charles Ries, reasons 1.4 b,d


1. (C) SUMMARY: Recent events at the Kirkuk oil field
threaten to increase tensions between the Kurdish Region and
the GOI. Both the KRG and the GOI are making tentative moves
to assert greater control over the disputed oil resources.
END SUMMARY

The Khormala Dome
--------------

2. (SBU) Khormala lies within Erbil governorate, about 30km
south of Erbil and 70km north of Kirkuk, with around 75
percent behind the March 2003 "green line." It is one of
three domes of the Kirkuk field, which the Minister of Oil
argues is a producing field and therefore subject to central
government control. In mid June 2008, a Kurdish Peshmerga
military unit forced a team from the Iraq Drilling Company
(one of the operating companies of the central government's
Ministry of Oil) off the site, claiming it for the Kurdish
Regional Government.


3. (C) Minister of Oil (MoO) Shahristani told the press that
he threatened the KRG with "drastic action" if the KRG did
not remove its obstacles to the field, and within 24 hours,
the KRG restored access. RRT Erbil Team Leader on July 15
spoke with Baz Karim, the CEO of Kar Group, an Iraqi-Turkish
engineering joint venture that is the main contractor for the
site, who said that the KRG did indeed disrupt shipments from
the wells to a degassing plant for a day, but ultimately
allowed the MoO to deliver the shipments. However, Baz noted
that work has not resumed on the development of the field.

A Disappointing History
--------------

4. (SBU) In 2005, the Iraq State Company for Oil Projects
(SCOP) awarded KAR the USD 136 million contract for
engineering and equipment for three degassing stations at
Khormala, as part of three tenders in the Kirkuk area. The
other tenders were for Hamreen and Khomor, and at the time,
they were touted as one of the more significant steps in the
reconstruction of Iraq. The field presently has 20 wells but
it is not developed; if developed, it could have as many as
60 other wells. SCOP was to complete 80 percent of the
construction, with KAR to complete the other 20 percent,
including telecommunications. At the time, the KRG objected
to the awarding of contracts inside KRG territory.


5. (C) According to Baz, KAR completed its work, sinking USD
20 million in the project, but SCOP never began construction,
citing as an excuse the lack of budget. In 2006 KAR proposed
adding a refinery or build-own-operate power plant (which
would have raised the project cost to USD 750 million) to
resolve the issue about exporting crude oil issue from the
disputed territories, but the GOI never followed up after
initial conversations with then Minister of Planning Barham
Salih. KAR then went to the KRG, received PM Nechirvan
Barzani's approval and began talks with KRG Minister for
Natural Resources, Dr. Ashti Hawrami. Ashti pushed KAR to
get a Turkish partner (TPIC, but the deal fell through
because TPIC's political demand for Turkoman participation
was not acceptable),then an Anglo-Dutch partner (Shell, but
Shell pulled out in December 2007 for fear of getting
blacklisted by the MoO, after Shahristani threatened any
international oil company that signed contracts with the
KRG).


6. (C) Baz says its equipment is still sitting in the field.
In January 2008, SCOP's Director General asked Kar to
protect the equipment. Kar hired 45 guards. The DG
subsequently reiterated SCOP has no funds to complete the
project, and suggested the KRG pay for it from its 17 percent
of the national budget.

Ill will
--------------

7. (C) The MoO began to interfere in the project just to
scuttle KRG development of the field, according to Baz.
First the North Oil Company (NOC, another ministry operating
company) tried to pull out the equipment, and then it sent up
two drilling rigs. The KRG (Asayeesh) prevented the movement
of the rigs, arguing that the Mayor's permission was needed
(e.g., the KRG's permission). Baz believes the MoO's main
motive is to disrupt KRG plans, and that the NOC only began
to take action when the Kurds began to move forward. He
noted that NOC has shown little interest in proceeding in
Hamreen, where there is no dispute.


8. (C) We spoke separately with NOC DG Manaa Alobaydi on
July 10, who acknowledged the difficulty around Kirkuk but

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said he viewed the issue as purely political. He said the
field now is producing 35 thousand barrels of crude oil per
day, and could produce up to 100k bpd once drilling is
completed. He expects the Ministry will resolve the
situation with the KRG.

A War of Words
--------------

9. (C) KRG Minister Ashti, for his part, has been waging an
intellectual jousting campaign with his nemesis, MoO
Shahristani. Stung by Shahristani's statements in November
2007 that the KRG production sharing contracts (PSCs) are
illegal, he commissioned a report by the law firm Clifford
Chance arguing that the KRG PSCs are far superior to the
MoO's proposed technical service agreements with
international oil companies. The Ministry's TSAs are a sore
point for the KRG, insofar as one, with Shell, purports to be
for development of the Kirkuk field. Ashti released the
report on June 30, the very day that international media was
speculating that the MOO would announce the signing of the
TSAs. Shahristani announced the opening of a first licensing
round instead.


10. (C) Ashti has shown himself to be quite the gamesman
with his timing on other matters. For example, he announced
signing another PSC in June 2008 on the day that KRG PM
Barzani arrived in Baghdad to continue negotiations on the
hydrocarbons framework law, and in May 2008 when Barzani was
in Washington meeting with the Secretary. Ashti has stated
that Khurmala is a non-producing field entirely within the
KRG, a claim that is questionable on both counts. In
November 2007, his Ministry awarded to the Kurdish National
Oil Company a service contract to develop Khurmala. KNOC was
created with the passage of the Kurdish Regional hydrocarbons
framework law in August 2007. The contract envisaged crude
oil production at 250,000 bpd and a 50,000 bpd refinery,
which provides an indication of KRG estimates of the field's
value.

COMMENT
--------------

11. (C) At this point, despite the disappointing history,
record of ill will, and continued jousting, the conflict over
Kirkuk's oil is mostly bark rather than bite. The "drastic
action" remains an empty threat, since neither the Minister
of Oil nor the KRG Ministry of Natural Resources have the
capability to call up anyone other than engineers and
roustabouts to pursue their designs over the oil fields. The
continuing standoff has, nevertheless, a real economic
impact, because each day in this one field alone, it prevents
the production of tens of thousands of barrels of petroleum.
Getting Iraq's political leaders to resolve this one dispute
might build trust and help passage of the broader
legislation.
CROCKER