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. BAGHDAD 00002354 002 OF 003 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 BAGHDAD 00002354 003 OF 003 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