OIL CONTRACTS LOSE STEAM

S E C R E T SECTION 01 OF 03 BAGHDAD 002354

SIPDIS

STATE FOR E, EEB, NEA-I
DOE FOR GEORGE PERSON

E.O. 12958: DECL: 07/25/2018
TAGS: EPET ENRG EINV IZ
SUBJECT: OIL CONTRACTS LOSE STEAM

REF: BAGHDAD 1401

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


1. (S) SUMMARY: Oil Minister Shahristani is backpedaling on
the technical support contracts that he had previously
intended to sign with international oil companies. He
intends to stop negotiating actively for the contracts. He
will shorten the period of the contracts from two years to as
little as one year, to set up a situation where the IOCs will
walk away from the contracts. He also directed his Ministry
to truncate its work on the previously-announced first
licensing round with IOCs for the supergiant oil and gas
fields, and start work designing a second licensing round for
unexplored blocks. END SUMMARY

TSA Discussion Paper
--------------

2. (S) According to one of the Director Generals at the
Ministry of Oil, Oil Minister Shahristani called a special
meeting on July 22 with his staff. The topic was what to do
about the technical service agreements (TSAs) that the
Minister had announced would be signed with international oil
companies (IOCs) to increase petroleum production at five of
Iraq's oil fields and its Akkas gas field. Last year, the
Minister had billed the TSAs as a way to increase petroleum
production, but by April 2008 had switched to saying they
would be for training and procurement assistance, while a
first licensing round in 2009 would increase oil production.


3. (S) We obtained a copy of a discussion paper circulated
in advance of the July 22 meeting. In it, Natik al-Bayati,
Director General of Exploration and Licensing, noted that
discussions had begun on TSAs in September 2007 with the
IOCs. The IOCs have been operating under MOUs with the MoO
and so have developed expertise about certain fields, but
refused to send personnel to work in Iraq and indicated a
common preference to work under long-term risk contracts.
The MoO began negotiations on TSAs directly with the
companies on a non-competitive basis for remote technical
support to increase petroleum production. Discussion began
about payment using crude oil, and then changed to letters of
credit since many entities objected to payment in kind both
in and outside of Iraq, leading to a delay in reaching
agreement. The administrative division for managing the
contracts consisted of a six-person team from the Committee
for Joint Administration for oversight (the board of
directors role),the 25-person Joint Team Project, and the
field execution team affiliated with the respective
extracting company, numbering around 250 persons.


4. (S) The paper notes that even with all these people,
negotiating the contracts has taken much longer than
expected. Both South and North Oil Company directors were in
agreement with entering into the TSAs, but the MoO is no
longer certain about completing timely preparations, in
particular as to funding appropriations. Since the outset,
there also was a fear of overlapping the TSAs with the first
licensing round for investment contracts for the same
oilfields. Initially the MoO expected to award the licenses
in 2010, but now is leaning toward a target of mid-2009. As
a result, the Minister notified the companies in July 2008
that the period for the contracts would be one year, and that
for procurement actions, advance MoO approvals and invoices
would be required for payment on the letters of credit.


5. (S) The companies positions are as follows:

Shell (Kirkuk and Mayssan): offered to discuss the reduction
to one year; it requires a re-evaluation of the scope of work
and precludes a commitment on increasing production; did not
send a revised contract.

Chevron/Total (West Qurna/first stage): did not send a
revised contract, suggested other changes, think 2 years
needed because some activities like water injection project
cannot be implemented the first year; willing to talk.

ExxonMobil (Al Zubair): sent back initialled revised contract
with one-year term, said had made other changes to avoid
overlap; adjusted price from USD 55-80 million to USD 40
million (not to half the USD 55-80 because they front-loaded
costs); accepted letter of credit formula for payment;
narrowed scope of work to 3 GOSPs instead of 5 due to time
constraints.

BP (North and South Rumailah): no answer yet.

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The paper concludes that the companies' positions will
require more negotiation, which increases the probability of
overlap with the first licensing round.


6. (S) The paper is pessimistic about the chances of getting
the Council of Ministers to approve the contracts for the
reasons above and because of significant media criticism,
both in and outside of Iraq. Moreover, the MoO has
encountered great difficulty in opening a letter of credit
just for the USD 3 million for the consultant GCA on the
first licensing round, which would imply even greater
difficulty for the letters of credit totaling USD 2 billion
for the TSAs.

Conclusion: Nix the TSAs
--------------

7. (S) The paper concludes that conditions for the TSAs are
not available now. Although the operating companies in
Basra, Mayssan and Kirkuk are facing complex technical and
logistical problems including a decline in production, the
paper recommends abandoning the TSAs and focus on the first
licensing round. However, in light of media reports about
the MoO's failures to fix procedural problems, the MoO needs
to make decisions about payment methods since payment in kind
appears to be easier than letters of credit, and ensure
adequate legal coverage for the forms of contracts to be
awarded in the licensing round. The paper also cryptically
recommends that the MoO needs to make decisions about using
"new ways for direct dealings and special agreements" similar
to those made in the Kurdish Region, or for accelerated
procurement processing "similar to what the media reports may
be possible under a National Reconstruction Council". Those
decisions need to be made now to establish the Ministry's
credibility going into the round. Last, the paper recommends
a broader dialogue with the Ministry of Finance, the Central
Bank of Iraq, the Council of Ministers and the oil and gas
committee in the Council of Representatives to avoid
disagreement to obstruct the announcement, negotiating, and
awarding of contracts in the licensing round.


8. (S) According to one of the people present at the July 22
meeting, Shahristani listened to the criticisms and
observations of his DGs, and then indicated he no longer
wished to pursue the contracts. Since the Ministry has
invested so much effort in them, he would not retract his
offers to the IOCs. However, he would insist on reducing
their terms to 12-18 months, with the hope that the IOCs
would balk at signing such short contracts.

Gut the Licensing Round
--------------

9. (S) Persuaded by reports from his operating companies
that the Ministry can increase production with its own
resources on its supergiant oilfields, Shahristani indicated
that conditions also are not right to go forward on the first
licensing round with the IOCs for the producing fields.
Instead of entering into long-term performance-based
technical service contracts, Shahristani plan to only offer
and award Engineering and Procurement Contracts lasting at
most five years. Such a change would present no public
relations problems, he reasoned, since the Ministry has not
yet disclosed the terms of its proposed licenses.


10. (S) Shahristani reportedly instructed the Licensing and
Contracts directorate to begin work immediately on designing
a second licensing round for exploration blocks of
non-producing potential fields. He anticipated that that
second licensing round (not the first) would serve to
increase production. The implication was that conditions
would be right for working with the international oil
companies after Iraq enacts a national hydrocarbons framework
law, and after Shahristani is no longer Minister of Oil.

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

11. (S) The minimalist approach that Shahristani now seems
to embrace would make it difficult for any international oil
company to assume a meaningful role in Iraq for at least
another year to 18 months. A slow production decline is the
most likely consequence. Although enactment of a national
framework hydrocarbons law would help Shahristani address his
procedural concerns, he does not appear to have reached the
same conclusion.


12. (S) We will be looking for opportunities to reinforce
strongly with key decisionmakers the reality that to abandon

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TSAs and to scale back a bid round likely would lead to
erosion in Iraq's production and export volumes. We need to
get the domestic debate away from what IOCs may or may not
want, to what Iraq needs. And that is clearly more oil and
gas production. END COMMENT.
CROCKER