IRAQ OIL MINISTER ON OIL INVESTMENTS, KRG, FUEL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003309 SIPDIS E.O. 12958: DECL: 10/14/2028 TAGS: EPET ENRG MOPS EINV PGOV PREL KU IZ SUBJECT: IRAQ OIL MINISTER ON OIL INVESTMENTS, KRG, FUEL SUPPLY REF: A. BAGHDAD 3241 ¶B. BAGHDAD 3250 ¶C. BAGHDAD 3101 Classified By: EMIN Marc Wall, reasons 1.4(b,d) ¶1. (C) Summary: During a meeting with EMIN, Iraqi Oil Minister Shahristani blamed international oil firms for the end of negotiations on short-term contracts, and said the Ministry of Oil (MoO) would try to raise crude oil production by 250,000-300,000 barrels per day by 2009 on its own. Shahristani said he could be more flexible regarding the four Kurdistan Regional Government (KRG) oil production sharing contracts, including with Norwegian company DNO, that had been concluded before the draft hydrocarbons legislation had been finalized, but not on the others. He said he would consider exporting the oil from these four projects, but would remit only 17% to the KRG, as with any other Iraqi sale of oil. Shahristani said the Ministry of Electricity should increase use of heavy fuel oil in accordance with Iraq's energy master plan and appealed for U.S. Embassy and Coalition assistance in coordinating future construction of a "Single Point Mooring" facility. End summary. The Bidding Process -------------- ¶2. (C) EMIN Wall had a courtesy call October 6 with Iraqi Oil Minister Husayn al-Shahristani. Discussion of the upcoming conference in London to launch bidding on long-term technical service contract reported ref A; discussion of dialogue with Turkey reported ref B. On the question of the sort-term technical service contracts (TSCs) with international oil companies (IOCs) that the GOI launched earlier this year and cancelled last month, Shahristani said that blame lay with the IOCs. He described the negotiations on the short-term contracts as complicated, with each deal "needing to be worked out separately." He asserted that the IOCs had insisted on linking the short-term contracts to eventual awards in the long-term contract bidding. (Note: We understand that several IOCs dispute this claim and apparently expressed willingness to accept any and all of MoO's conditions.) ¶3. (C) Asked how Iraq planned to increase output without the benefit of the short-term service contracts, Shahristani claimed that Iraq, on its own, had succeeded in raising production by 500,000 barrels per day (BBL/D) from September 2007 to the present, and would seek to realize another �A;250,000-300,000 BBL/D by 2009. (Note: The production increase comes from Iraq's northern fields, half of which is exported through the Iraq-Turkey pipeline, and protected by USG-funded Pipeline Exclusion Zones. Future exports of oil are constrained by field and facility limitations. We find these short-term goals overly optimistic.) ¶4. (C) Shahristani noted that the MoO's effort to increase production had been hampered by "difficulties" with suppliers. He singled out GE, which supplies compressors that are essential for Iraq's petroleum infrastructure improvements (he listed Mitsubishi as another critical supplier). Shahristani said that in order to make sure that GE would give Iraq priority as a customer he had insisted that Shell partner with GE for its recent deal to form a joint venture with the South Gas Company to utilize flare gas (ref C). KRG Relations -------------- ¶5. (C) Turning to the Kurdistan Regional Government (KRG), Shahristani noted that the relationship with the Kurds was complicated by such issues as the status of Kirkuk, the KRG's 17% share of national revenue, and the provincial election law. Progress on the many issues related to the KRG, he said, would await the return of Iraqi President Jalal Talabani from the U.S.; Talibani had asked that other GOI officials not take any decisions on relations with the KRG until he returned. GOI and KRG representatives both realized the seriousness of the current situation, however. ¶6. (C) Shahristani continued that the GOI would not be intimidated. Returning to oil, Shahristani complained that the KRG's Production Sharing Agreements (PSAs) had not been awarded on the basis of competitive bidding procedures, and that the KRG had signed agreements with third- and fourth-tier oil companies. Shahristani had heard that there had been corruption in the tendering process. Major IOCs had said they could have offered better terms, but only on the basis of proper procedures and contracts. According to Shahristani, PM Maliki had commented that, if asked, he would BAGHDAD 00003309 002 OF 002 have freely provided the few million dollaQthat the KRG was earning.Qhahristani opined that the U.S. had not been as supportive as in the past of the GOI's position regarding the illegality of the KRG contracts. Wall assured him that there had been no change in the U.S. position. ¶7. (C) Shahristani said that he believes that KRG has lately realized that it had gone too far. If the GOI had been consulted regarding PSAs that had been negotiated before April 2007, before the Hydrocarbons Framework Law had been drafted, then the KRG might have been able to proceed without a problem. Shahristani said the contracts signed subsequent to the drafting of the Hydrocarbons legislation were "completely unacceptable" and some contracts had even been signed for areas outside the "blue line," or the KRG's territorial boundary. Now, the KRG was in a dilemma, since it could not export the 10,000-15,000 BBL/D produced from the new fields (note: specifically, DNO's Tawke field) and had been forced to smuggle them by truck to Iran, receiving a price of $20-$30 per barrel. ¶8. (C) Shahristani asserted that he would make no accommodations on the newer contracts, but that he could show some flexibility regarding the four contracts concluded before April 2007, including a contract with Norwegian independent oil company DNO. A pipeline bringing output from DNO's field to the Iraq-Turkey crude oil export pipeline was almost completed. If MoO accepted the DNO oil, this would not mean that MoO had recognized the contract. Shahristani remarked that "that oil is Iraqi oil," and the KRG "would get its share from the oil (i.e. 17%) just like it gets its share from Basra oil." Energy Planning -------------- ¶9. (SBU) Shahristani said the GOI, under UNDP auspices, had developed an energy master plan. During a 2006 meeting in Jordan, he had signed an agreement which laid out fuel requirements for the next 10 years. (Note: Although Shahristani used the same terminology, "energy master plan," employed in the International Compact for Iraq, we have not previously heard of the existence of such a plan. We believe this is the Ministry of Electricity's plan for installing new power generation. In fact, a team led by former Oil Minister Thamir Ghadban, currently the head of the Prime Minister's advisors, is preparing a "national energy strategy.") Although heavy fuel oil (HFO) was cheapest, diesel demand for power generation kept rising. The energy master plan had forecast a requirement for 20,000 tons of HFO per day. During quarterly reviews of the energy master plan, this figure had not changed, yet the Ministry of Electricity was taking only 6,500 tons, just a third of what the plan provided for. The Ministry of Electricity's new generation was supposed to burn HFO, but Shahristani said he feared that the Ministry would change its requirement and begin demanding diesel. ¶10. (U) Shahristani said testing was beginning October 6 on a new natural gas pipeline from the north of Iraq to Baghdad. The pipeline would provide 50 million cubic feet per day to Baghdad and eliminate the requirement to burn diesel. (Note: Combustion turbines would still need to be converted to burn natural gas.) Within a year, the Shell project would also begin processing natural gas and eventually make it available to the electrical network. (Note: This is highly optimistic, since Shell representatives estimated to us, ref C, that one year would be required just to finalize the agreement to form its joint venture with the South Gas Company.) In the meantime, MoO could supply as much HFO as required. Single Point Mooring -------------- ¶11. (U) Shahristani appealed for USG assistance in helping to coordinate surveys that were to be conducted in preparation for possible construction of a Single Point Mooring (SPM) offshore crude oil loading structure. The surveys would be conducted in a sensitive area that the U.S. Navy monitored and protected. He wanted to get construction material delivered directly to the seabed site to expedite the project, so the U.S. Navy would need to be alerted to allow safe passage. Wall reminded him that Iraq needs to make arrangements with the Kuwaiti government to allow the survey work to take place. Shahristani said he had seen a draft Memorandum of Understanding (MOU),prepared with assistance from the U.S. Embassy, which he had requested be expeditiously passed to MFA. He was unsure of the status of the MOU, and said he would look into it. CROCKER