IRAQ MINISTRY OF OIL PREPARES TO INVITE IN FOREIGN

S E C R E T SECTION 01 OF 04 BAGHDAD 003241

SIPDIS

USDOE FOR PERSON

E.O. 12958: DECL: 10/07/2018
TAGS: EPET ENRG EINV IZ
SUBJECT: IRAQ MINISTRY OF OIL PREPARES TO INVITE IN FOREIGN
OIL COMPANIES

REF: A. BAGHDAD 1180

B. BAGHDAD 647

Classified By: Economic Counselor Michael Dodman, reasons 1.4(b,d)


1. (C) Summary: Iraq will launch talks with international oil
and gas companies on long-term Technical Service Contracts
(TSCs) at a conference in London on October 13. Oil Minister
Shahristani will meet with representatives of 41
pre-qualified companies to invite their participation in six
oil and two gas fields. These contracts will provide help to
reverse declines in current production, although it will be
at least two years before the first fruits are seen in output
levels. Shahristani appears to be resigned to lack of
progress on the Hydrocarbons Framework Law. Success of the
TSCs, however, would signal that Iraq is open to
international investment, which might renew the Kurdistan
Regional Government's (KRG) interest in passage of
hydrocarbons legislation as an avenue to develop its oil and
gas fields further. End summary.

The Bidding Process
--------------


2. (SBU) Iraqi Oil Minister Husayn al-Shahristani will
present TSC terms and conditions to international oil
companies (IOCs) at an October 13 meeting in London.
Shahristani has told the media in the past that he wants the
TSCs, with a duration of up to 20 years, to add 1.5 million
barrels per day (mbbl/d) to Iraq's current oil output of
approximately 2.5 mbbl/d. IOC representatives have
complained to us that they have not received advance
information regarding the meeting, but Shahristani has also
indicated publicly that the IOCs will have until March 2009
to review the proposals and submit bids, which would then be
awarded the following June. Every company bidding must have
an Iraqi partner and pass along at least 25% of the value of
the contracts to Iraqi companies. Shahristani has said that
the emphasis would be on the financial terms offered, rather
than the technical qualifications of the bidder. In repeated
public statements Shahristani has boasted of his desire to
defend Iraq's resources and interests: he has rejected
production sharing agreements in favor of straight, fixed-fee
service contracts. We have also heard that he will encourage
the bidders to form consortia among themselves to better
their chance of receiving a contract. This "first licensing
round" opens six currently producing oil fields and two gas
fields, and will be followed by a second before the end of
the year for undeveloped fields.


3. (SBU) During an October 6 meeting, Shahristani provided
additional details of the licensing process to EMIN Wall.
(Other topics will be reported septels.) He said the
qualified companies who pay the required fee will be provided
passwords to access field data packages on the internet.
(Note: MoO has contracted with Gaffney, Cline, and
Associates, GCA, an international energy consulting firm, to
implement the licensing round.) On October 13, MoO will also
provide a model contract on the internet to be used in
preparing bids. MoO had decided to award technical service
contracts, since the fields on offer were already producing;
the TSCs would require winning bidders to implement enhanced
oil recovery, among other measures. MoO has determined a
baseline production level based on the field's average
monthly output. The winning bidder would receive a fee per
barrel for maintaining the level of output and another fee
(note: presumably higher) for each additional barrel of
output. While the primary determinant would be financial,
MoO would also be looking at technical details. Shahristani
noted that, for example, he might not want to select a
company that might ramp up production and quickly exhaust the
field's resources over a company that managed the field's
potential more conservatively.


4. (C) Shahristani also said MoO had been careful to
incorporate all procedures and conditions of the draft
Hydrocarbons Framework Law, although he lamented that the law
had been caught up in the political process leading to
elections and was unlikely to be passed any time soon. The
Cabinet, for example, would approve the TSCs, which would
mean the GOI had reviewed the contracts at a level higher
than the Federal Council for Oil and Gas envisioned in the
draft law. Shahristani added that a second bid round would
be held by December. MoO was currently discussing which
fields to offer, but the fields would be similar to the ones
in the first bid round, large producing fields with declining
production. He realized the bid round was a learning
process, but he had been pleased with IOC feedback.
Shahristani said that MoO might begin holding bid rounds

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about every three months until contracts had been awarded on
all of Iraq's discovered fields, which numbered around 80.
Then, MoO would license exploration blocks, which would
probably require some contractual arrangement other than a
TSC. He optimistically forecast that Iraq would be able to
reach 4.5 million barrels per day (BBL/D) of production in
five years, and, through the second and third bid rounds,
reach 6 million BBL/D in 10 years. This approach was
consistent with a Cabinet decision to increase production as
quickly as possible by utilizing IOC expertise.

The Qualified Bidders
--------------


5. (SBU) As we reported ref B, the Ministry of Oil (MoO)
announced the 35 companies which qualified to bid in the
upcoming licensing round on April 14. (On June 24, MoO
qualified six additional countries' national oil companies,
NOCs, for a total of 41.) In doing so, the MoO stated that
120 companies had applied, and that it would continue
updating its list to qualify as many more companies as
possible in the second licensing round. Shahristani said
separately that he had ruled out any company that had signed
contracts (usually Production Sharing Contracts, PSCs) with
the KRG. The media reported on September 29 that state-owned
Turkiye Petrolleri AO replaced Premier from the original
list. Following are the companies:

U.S. (7):
-- Exxonmobil
-- Chevron Iraq Ltd.
-- Conoco Phillips
-- Hess Corporation
-- Marathon International Petroleum Limited
-- Occidental Petroleum
-- Anadarko Iraq Company

UK (2):
-- BP
-- BG International

Russian (2):
-- Lukoil
-- JSC Gazprom Neft

Other European (8):
-- Edison International SPA, Italy
-- ENI, Italy
-- Maersk, Denmark
-- Statoil Hydro, Norway
-- Repsol, Spain
-- Shell Iraq, Netherlands
-- Total, France
-- Wintershall BASF Group, Germany

Chinese (4):
-- CNPC
-- CNOOC China Ltd
-- Sinochem
-- Sinopic Group

Japan (4):
-- Inpex Holding
-- Japex
-- Mitsubishi Corporation
-- Nippon Oil

Australian (2):
-- BHP Billiton Petroleum Pty Ltd
-- Woodside

Other Asian (4):
-- Pertamina, Indonesia
-- Kogas, Korea
-- Petronas, Malaysia
-- ONGC, India

Others (2):
-- Nexen Inc. (International Oil & Gas Nexen Inc.),Canadian
-- Turkiye Petrolleri AO, Turkish

Additional countries' NOCs (6):
-- Vietnam (Petrovietnam)
-- Algeria (Sonatrach)
-- Angola (Sonangol)
-- Pakistan (Pakistan Petroleum, Ltd., PPLKA)
-- Thailand (PTT, formerly Petroleum Authority of Thailand)
-- Turkey (TPAO)


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6. (S) Comment: The licensing round, despite Shahristani's
claims, might be neither a transparent nor open process, but
we can speculatively handicap this race. The major IOCs
(including Exxon, Shell, Total, BP, and Chevron),which had
been in negotiations that were cancelled originally for
two-year TSCs, have the technical capability and financial
resources to deliver on their commitment to increase
production. MoO might now decide to compensate them for the
no-cost assistance rendered in the past and the time spent on
ultimately fruitless negotiations by awarding contracts to
them. The companies on the list that were awarded PSCs
during the Saddam regime, Lukoil, Pertamina, and
Petrovietnam, could also have an edge. Finally, we have
received information that ENI, Repsol, and Nippon Oil were
informally advised that they would not receive awards in the
licensing round, and so have instead been invited to develop
the Nasiriya oil field (septel). The information suggests
that, whatever bids are offered, Shahristani has possibly
already short listed which companies will get licenses and
that part of his strategy is to spread the licenses as widely
as possible among different companies and countries. End
comment.

The Oil and Gas Fields
--------------


7. (U) The two gas fields, Akkaz and Mansouriyah, have not
been developed and also have not been fully explored. The
six oil fields are the following:

-- The Rumaila field, in Basra Province, comprises North
Rumaila, with 10.3 billion barrels of reserves, and South
Rumaila, with 7.5 billion barrels. North Rumaila currently
produces about 500,000 barrels per day (bbl/d) and South
Rumaila, approximately 530,000. BP was earlier offered a
short-term TSC on the Rumaila field.

-- Originally developed in 1987, West Qurna holds 8.6 billion
barrels of reserves, and was offered on a short-term TSC to a
Chevron/Total partnership. The field, also in Basra
Province, currently produces approximately 300,000 bbl/d.

-- Zubair, in Basra Province, holds 4.1 billion barrels of
reserves and produces 250,000 bbl/d. The Zubair field was
offered to Exxon on a short-term TSC.

-- The Maysan field, in Maysan Province, comprises Buzurgan
with 612 million barrels of reserves, Fauqa with 1.5 billion,
and Abu Ghirab with 450 million barrels. A short-term TSC on
the field was offered to Shell in partnership with BHP.

-- Kirkuk, in Tamim Province, has 8 billion barrels of
reserves and produces 375,000 bbl/d, but production is
constrained by export and refinery capacity. The field was
originally put on stream in 1934. It requires major
subsurface and infrastructure rehabilitation to maintain and
increase production.

-- Bai Hassan, also in Tamim Province, produces 115,000 bbl/d
and 2.4 billion barrels of reserves. It also requires major
subsurface and infrastructure rehabilitation to maintain and
increase production.

The Potential and the Need
--------------


8. (SBU) With passage of hydrocarbons legislation stalled and
unclear prospects for the future, the licensing round
provides the opening for expanding IOC involvement in the
transformation of the Iraqi petroleum sector. IOC expertise,
particularly in modern enhanced recovery techniques, could
help arrest production declines caused by years of neglect
and aging of the fields. IOC procurement channels can also
deliver world-class equipment and services expeditiously in
an environment where oil exploration and production equipment
is in short supply. The major oil fields in the south, which
produces four-fifths of Iraq's oil, have been in gradual
decline and especially require enhanced recovery techniques
to increase production.


9. (C) On September 28, Shahristani called an emergency
meeting of his Director Generals and Technical Experts,
including former South Oil Company Director General Jabbar
al-Luaibi from Basra, to discuss measures to deal with
production declines. Southern Oil fields, notably the
Rumaila field, are faced with increasing levels of water
being lifted with crude. The increase in water can be
attributed to improper water injection techniques, poor
pressure maintenance, and a strong reservoir water drive.

BAGHDAD 00003241 004 OF 004


(Note: BP and Chevron carried out independent reservoir
management studies and arrived at the same conclusion for
production declines; they recommended many of the same
corrective measures. The MoO was unable to implement the
majority of recommendations due to a general lack of
technical expertise, availability of equipment and materials,
and security. Measures required include additional wells,
well re-completions, seismic surveys, mine removal, reservoir
simulation models, and new surface facilities.)


10. (C) Comment: The TSC licenses are an avenue to build
political acceptability of an IOC role in the Iraqi oil
sector. In addition, by demonstrating that Baghdad is moving
towards engagement with the private sector, the TSCs could
motivate the Kurdistan Regional Government (KRG) to come back
to the table to conclude a national level hydrocarbon law.
The licensing round is significant, with the potential to
progress toward the GOI's high priority goals: increased
production and breaking the impasse on the hydrocarbons
framework law. However, in terms of production, the TSCs to
be discussed this month are not a quick fix. It will be at
least two years before the country will see increased output
from these contracts. End comment.
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