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 BAGHDAD 00002281 002 OF 002 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