IRAQI OIL MINISTER ON HIS MEETING WITH KRG

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 004014 SIPDIS E.O. 12958: DECL: 12/23/2018 TAGS: EPET ENRG PGOV EINV EFIN IZ SUBJECT: IRAQI OIL MINISTER ON HIS MEETING WITH KRG REF: A. BAGHDAD 3729 ¶B. BAGHDAD 3309 ¶C. BAGHDAD 3844 Classified By: EMIN Ambassador Marc Wall, reasons 1.4(b,d) ¶1. (C) Summary: Oil Minister Shahristani told UN Ambassador Khalilzad December 1 that oil issues took up "only 10 percent" of his two-hour meeting with KRG Prime Minister Nechirvan Barzani on November 24 (ref A),but that he and Barzani had agreed to allow Ministry of Oil employees back to work on the Khurmala Dome area. In addition, they agreed to connect the pipeline from two oil fields in KRG territory, but that the oil would not flow until financial arrangements had been settled. The next step would be a meeting of KRG representatives with the GOI Ministry of Finance. On December 18, a deputy minister of oil said that, while all sides have agreed that the Ministry of Oil would negotiate a new contract with the private companies operating the fields, no one is willing to make the first move to conclude such an arrangement. He appealed for Embassy assistance in bringing KRG PM Nechirvan Barzani and Shahristani together. End summary. Extending an Olive Branch -------------- ¶2. (C) During a December 1 meeting, Minister of Oil Husayn al-Shahristani briefed visiting UN Ambassador Zalmay Khalilzad on his one-day trip to Erbil for meetings with Kurdistan Regional Government (KRG) officials, including KRG Prime Minister Nechirvan Barzani, KRG Deputy Prime Minister Omar Fatah, and KRG Minister of Natural Resources Ashti Hawrami. He said he had discussed a number of issues, starting with oil contracts. The central government continued to take the position, however, that all such oil contracts (i.e., including the approximately two dozen production sharing contracts, PSCs, which the KRG has signed with foreign oil companies) were not legitimate unless the central government had first reviewed and approved them. ¶3. (C) Shahristani complained that the Kurds continued to press for de facto recognition of areas outside the Blue Line, which had led to friction over Khanaqin. Indeed, Shahristani claimed, some schools in Mosul were not allowed to teach in Arabic now. Iraq's entire Arab population, including the Sunni community and a range of political parties such as the United Iraqi Alliance and Tawafuq, realized the KRG was polarizing the entire country. The KRG, however, had not been ready to negotiate seriously until recently, but now there were some indications of greater Kurdish flexibility. ¶4. (C) Shahristani continued that he had taken the first step by going on November 24 to Erbil. He had a long discussion, more than two hours, with KRG Prime Minister Nechirvan Barzani, of which "only 10 percent" of the discussion concerned oil issues. PM Barzani had said he realized that he had to resolve problems with the GOI in discussions with PM Maliki and Shahristani. KRG President Masoud Barzani had not been in Erbil. He telephoned to request that Shahristani stay an additional day, but this had not been possible, Shahristani noted, since he had to be back in Baghdad for a Cabinet meeting the following day. Shahristani said he would need to consult with PM Maliki before continuing any further discussions with KRG representatives. Issues Clarified -------------- ¶5. (C) During his meeting with PM Barzani, both Shahristani and Barzani realized that individuals on both sides had misrepresented the situation to them. The meeting had been successful in clarifying a number of serious issues, such as relations with Israel, which was important to the Shia Qrelations with Israel, which was important to the Shia marja'iyya. They had also discussed other topics, such as the role of the peshmerga and relations with Turkey, Iran, and Syria. As a first step, Barzani had agreed to allow the Ministry of Oil to resume its work on Khurmala Dome (an area of the Kirkuk oil field located in the KRG's Ta'mim Province),which had been halted for more than a year. They had also agreed that production from the Tawke and Taq Taq oil fields could be exported, with the KRG receiving its share of the additional revenue through the Development Fund for Iraq (DFI) and distributed through GOi's normal budget allocation process. Finally, Shahristani and Barzani had agreed in principle to move forward on an oil revenue distribution law. Shahristani commented that Barzani's approach was a good indication that the KRG was not seeking to establish its ownership of Iraqi oil. Tentative Agreements BAGHDAD 00004014 002 OF 003 -------------- ¶6. (C) Shahristani noted that the KRG wanted certain amendments to the hydrocarbons legislation that were difficult to accept. Before the central government could agree, it would want a definite commitment that the KRG would implement fully all measures of the legislation. Shahristani said he had agreed with PM Barzani that the KRG would receive a standard 17 percent from the new oil revenue, but KRG Minister of Natural Resources Ashti Hawrami had objected, saying this would not be enough to pay the oil field operator, Norwegian independent oil company DNO. Nonetheless, the two sides had reached a general agreement to connect the pipeline from DNO's Tawke field to the Iraq-Turkey pipeline, but no oil would be sent until the financial arrangements had been agreed upon. Shahristani said he had urged the KRG officials to turn over their contract with DNO to MoO; Barzani and KRG DPM Fatah were agreeable with this approach, thinking that handing over all the contracts would be best. MoO would renegotiate the terms, turning it from a PSA into a technical service contract, like the ones being offered through the MoO licensing round. ¶7. (C) Shahristani said the next step would be for a KRG delegation to meet with the Ministry of Finance (MoF). The MoF would substantiate for the KRG delegation what petroleum sector infrastructure improvements MoO had undertaken with its 83 percent share of oil revenues and that the KRG's 17 percent had been transferred. Shahristani said Hawrami would not be able to make a case to increase the KRG share and that he had told Barzani that the MoO would assume the KRG's financial obligations to DNO if the KRG returned its 17 percent of revenue from DNO's field to the MoO. Distribution of Refined Products and Other Issues -------------- ¶8. (C) Shahristani also provided a brief update on other issues. (Comment: These are mostly self-serving statements whose accuracy is doubtful.) -- He was satisfied with distribution of refined oil products, even kerosene. He said distribution was proceeding smoothly, including to Iraq's south, Anbar and Kirkuk provinces, and the Kurdistan Region, and he was not hearing any complaints. Pricing had not changed, but, with the recent drop in crude oil prices, the domestic price of kerosene was approaching the international price. (Note: The unregulated price for kerosene, at 500 Iraqi dinars, ID, per liter, is approximately three times the regulated price of 150 ID/liter.) (See Reftel C for another view.) -- Bayji oil refinery was operating smoothly, at 85-90 percent of design capacity. MoO had also signed contracts to construct an additional four refineries. -- Shahristani also commented that the Ministry of Oil took a position somewhere in the middle of two opposing views. One view advocated that Iraq could be self-sufficient in petroleum sector development, returning to a Saddam-era approach and reestablishing the Iraq National Oil Company. Another view argued that Iraq's petroleum sector had to rely on bringing international oil companies (IOC) for their advanced technology and expertise. The MoO approach was to seek cooperation with IOCs, but to retain a leading role for itself. Shahristani said he believed he could obtain Cabinet approval for future deals. Deputy Oil Minister's Update -------------- ¶9. (C) During a December 18 meeting, Deputy Oil Minister Mu'tasam Akram took credit for arranging Oil Minister Shahristani's November 24 trip to Erbil, a development which QShahristani's November 24 trip to Erbil, a development which he claimed irritated DPM Barham Salih, who thought the meeting with KRG officials had been unnecessary. Although Shahristani and KRG PM Nechirvan Barzani had agreed to connect a pipeline from a KRG oilfield, KRG Minister of Natural Resources Ashti Hawrami had objected to Shahristani's position that KRG should receive a standard 17%, arguing that this was insufficient to permit KRG to pay oilfield operator DNO's costs and profit. Mu'tasam said that, on the return to Baghdad, he suggested to Shahristani that the MoO should negotiate directly with DNO to conclude a technical service contract in which MoO would cover DNO's cost and pay a profit on a per barrel basis. Shahristani responded positively to the suggestion, but said he would consult with members of the United Iraqi Alliance (Itilaf) faction. When Shahristani relayed his approval, Mu'tasam telephoned Barzani, who also approved the proposal. Mu'tasam lamented that, despite the BAGHDAD 00004014 003 OF 003 general consensus, neither side appeared to be willing to take the first step. DNO also agreed, but DNO executives could not begin negotiations without KRG authorization, even though Shahristani had said he would welcome the opportunity to meet with them. Mu'tasam requested U.S. Embassy assistance to bring Shahristani and Barzani together again. ¶10. (U) Ambassador Khalilzad cleared the sections on his meeting with Shahristani. CROCKER