AMBASSADOR AND DPM SALIH DISCUSS FALLING OIL

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 004067 SIPDIS E.O. 12958: DECL: 12/28/2023 TAGS: ECON PREL PGOV KCOR EPET IZ SUBJECT: AMBASSADOR AND DPM SALIH DISCUSS FALLING OIL EXPORTS, CORRUPTION, AND POLITICS Classified By: Ambassador Ryan Crocker for reasons 1.4(b) and (d) ¶1. (C) Summary: The Ambassador and EMIN delivered a letter from Treasury Deputy Secretary Kimmitt to Deputy Prime Minister Barham Salih on December 28. In a wide-ranging discussion, Salih noted with alarm that the GOI's oil exports in 2009 will most likely not exceed 1.6 million barrels per day (mbd) due to declining production capacity in Basra. This will have significant impact on Iraq's budget process and requires major changes at the Ministry of Oil. Iraq's participation in international anti-corruption conventions are major steps towards combating corruption in Iraq, according to the DPM, and Iraq should convene meetings in Iraq to explain what these commitments mean to Iraqi officials. Prime Minister Maliki has accepted President Talabani's invitation to visit Dokan, in the KRG, said the DPM, and the PM's concerns about political plotting against him have been allayed by Talabani, "for now." The DPM also offered his assessment of the role of the Iraqi parliament following the removal of controversial speaker Mashadani, discussed the outlook for provincial elections set for next month, and offered thoughts on Iraq's evolving role in the region. End summary. "Disaster:" Oil Exports Down to 1.6 MBD in 2009 -------------- -- ¶2. (C) The PM is "extremely worried" about Iraq's falling oil export capacity based on initial reports from the special investigation of the oil sector led by Senior Economic Advisor to the Prime Minister Thammer Ghadban. Ghadban has completed his meetings in Basra and was in Kirkuk. "What they have found in Basra is very alarming," said Salih. Basra will only be producing 1.7 mbd all of next year, so only 1.2 mbd will be available for export from the south. "This means a total export next year of only 1.6 mbd. This is a disaster." On top of the falling production levels, Iraq's export facilities are in real trouble. "I was told that we are only one inch from disaster with the infrastructure." Ghadban is due to return this week and give his report. We will address this problem "in a methodical way," said Salih. ¶3. (C) Iraq's problem with oil is its lack of decision-making ability, said Salih. Iraq has structural problems that we have not worked to address. The PM has been misled by Minister of Oil Shahrastani. Shahrastani has been saying, "We are fine. We are doing well." Only a very few, like Minister of Finance Jabr and the DPM, are concerned about the realities of the oil situation. The Ministry of Oil has been too centralized. "And honestly, we on the Kurdish side have screwed it up as well," he said. There has been a too-nationalistic reaction to what the Kurds were doing in the KRG. This is where the Kurds are at fault. When oil was USD 140/barrel the Iraqis were too complacent, added Salih. ¶4. (C) With Iraq's political and economic problems, the GOI needs as much money as it can get. The Iraqi Government needs to be able to satisfy people's needs and so need to be able to export six to ten mbd, he said. "If Iraq were to become a major oil producer, it would be in the interest of the whole world to make sure that Iraq remains stable," Salih said. ¶5. (C) Noting the importance of Iraq's history and the significance of Iraq's nationalization of its oil industry, the Ambassador suggested that now is the time when Iraq needs "other people's money to develop your oil fields." With oil prices so low, the DPM opined that international oil Qprices so low, the DPM opined that international oil companies would no longer see the benefit of coming to Iraq. And even if they come, they would not be able to make any serious progress in the short term, he added. ¶6. (C) Nevertheless, Salih said, there are major oil fields to be developed in Iraq such as Qurnah and East Baghdad. There are entire areas in western Iraq that are unexploited. But companies might not be willing to take the risk. If they take risks they will expect rewards. ¶7. (C) "When Ghadban's report comes out, we will need to come clean with the Iraqi people," he said. The GOI needs to explain very clearly to the Iraqi people -- if you adopt this plan to allow international oil companies into Iraq, this is how much money Iraq will make; if you do not, then this is how much Iraq can expect to make. Maybe the decline in oil prices will create an opportunity to get something like this done, said Salih. Good Oil Policy Requires Good Leadership -------------- ¶8. (C) "This is why we need good Council of Representatives BAGHDAD 00004067 002 OF 004 leadership, to hold the ministries accountable," said Salih. There is some good talent in the COR, but on oil, there are only a very few that understand it. ¶9. (C) Salih also noted that he has spoken to Maliki about the need to replace Shahrastani in order to change Iraq's oil policy. "This is not politics," he averred. This is an issue of the PM not being well-served. Shahrastani is refusing to acknowledge the failures that have been caused by Kurdish/Arab issues, and historical and political problems. These problems are not all his fault, but "he feeds the PM, the Cabinet, and UIA lies. Shahrastani cannot be the one to change policy," he stated. Regional Implications if Iraq Becomes a Major Exporter -------------- -------------- ¶10. (C) The regional political dynamic would be radically changed if Iraq were able to increase its production capacity to six to eight million barrels per day, said Salih. This would have major policy implications in OPEC for both Iran and Saudi Arabia. "Perhaps this is why whenever Iraq gets close to talking about this, we get enormous pressure." Iran wants to remain OPEC's number two producer. "Think of all of the money that we would have if we produced that much; we would have enough for all of our problems," he said. More Money, More Corruption -------------- ¶11. (C) "Of course, if you get more money there will be more corruption -- and there is more than enough now," said the Ambassador. The DPM agreed, but noted that Iraq has taken two important steps to address corruption. Iraq signed and ratified (in March 2008) the UN Conventional Against Corruption, and has joined the Extractive Industry Transparency Initiative (EITI). Having joined the EITI, Salah suggested, every one that buys oil from Iraq must disclose their deals; Iraqi officials will have to disclose their overseas bank accounts. This means that we will start to address the corruption problem, said Salih. The EITI will "at the end of the day" also cover the KRG, he added. When it is finally ratified by the GOI, "the past and present KRG oil exports will have to be disclosed." ¶12. (C) The DPM agreed that it was important for the GOI to convene a group of Iraqi representatives from government, the COR, and civil society, to publicly discuss Iraq's obligation under the two agreements. "This needs to be a GOI initiative otherwise no one will pay attention," he said. ¶13. (C) In response to a question from the Ambassador on repealing Article 136b, which allows a minister to shield any employee from criminal charges including those for corruption, the DPM said that this could succeed in the COR as long as it is recommended by the Council of Ministers. The DPM understands that Commission on Integrity Commissioner Judge Rahim al-Ugaili and Board of Supreme Audit head Dr. Abdulbasit Turki are both supportive. But there are problems, like Dr. Adil Muhsin, the Inspector General at the Ministry of Health -- "he cannot be touched," said Salih. "The Root of Corruption is Politics" -------------- ¶14. (C) "The root of corruption in Iraq is politics; corruption is the system of the country," said Salih. It starts at the top when "Ministry X is given to Party Y." With our contracting system, the contracts benefit the party and the party shields the minister. The parties cannot be touched since the government needs them to survive. Corruption is a problem at the senior level of government, but not yet at the junior level, he averred. Iraq's Qbut not yet at the junior level, he averred. Iraq's corruption problems are compounded by its weak judicial system and weak judiciary. "We have this problem in the KRG; who could take on a Kurdish minister?" he asked rhetorically. In the GOI, the worst offenders are the Ministries of Defense, Trade, Transportation, and Health. "The PM knows all about this," he added. COR -- Mashadani Successor -------------- ¶15. (C) According to Salih, the PM has called for an Executive Council decision on a successor to former COR Speaker Mashadani. The Kurdish leadership will accept the consensus candidate as "it is not good for us to oppose this," said Salih. Unfortunately, they are looking for a "weak jerk -- like another Mashadani figure -- who will not be too strong." This is a bad policy approach, he added. Salih understands that they are considering Hussein al-Jabbouri. (Note: Jabbouri is a relatively obscure Sunni BAGHDAD 00004067 003 OF 004 Independent. End note.) ¶16. (C) The Ambassador commented that this is a critical time for the country and for the COR; Iraq needs someone who can build the institution and who can work with Khalid Attiya. Salih agreed that the COR is an important institution -- "it is the guardian of Iraqi democracy; it could be a lot more with good leadership." However, Salih has heard that there is a movement in the UIA to replace Attiyah. "He does not have good relationships with the members. He is more of a government person, not a COR person." "This is not the time to replace the whole COR leadership -- Attiyah at least knows how the COR should work," advised the Ambassador. Maliki to Go North -------------- ¶17. (C) Salih said that Prime Minister Maliki has accepted President Talabani's invitation to Dokan. Talabani met with Maliki and has allayed the PM's concerns that the Kurds, Sunnis, and other Shi'a had been plotting against him at a gathering in Sulaymaniyah last month. "I think he believed Talabani -- at least for the time being," said Salih. It is important that there be frank Executive Council-format discussions said the Ambassador. The DPM agreed, noting that "there are too many players." "And too many travelers," added the Ambassador. Regional Engagements and Iran -------------- ¶18. (C) The DPM agreed with the Ambassador that it is vitally important to increase GOI engagement with its neighbors. Iraq needs a format where regional countries can join Iraq. However, he is "worried" about extending this to concept of regional neighbors beyond Jordan to Egypt. "If you extend it beyond Jordan then you inevitably bring in the Israeli issue," he said. What Iraq needs, is our own forum with Turkey, Iran, the Gulf. The DPM noted that "there is no way that Iraq will ever get admitted to the Gulf Cooperation Council (GCC)" adding that while the GCC is now modern and prosperous, the Iraqi people would have real problems joining "with those sheikhs." ¶19. (C) The GOI needs to be very careful not to feed Arab suspicions of Iranian influence and role in Iraq, noted the Ambassador. The DPM agreed, but added that while many people express concern about Iranian influence in Iraq, Iran needs to be worried about the influence of a free Iraq on their system. "I recently attended an Iranian-Iraqi business conference in Sulaymaniyah. I know that many of the people who participated were Iranian intelligence, but many were Iranian businessmen who loved the chance to come to Iraq and have a few beers and see what the freedoms we have here," he illustrated. Assistance for Kirkuk and Worried Governors -------------- ¶20. (C) Salih said that the PM will be "accommodating" on assistance for Kirkuk as he understands that they need help. In Kirkuk, aside from the communal issues, the main problem is that the Provincial Council and the Governor cannot work together. They need a change of leadership; they need to hold an election. ¶21. (C) Salih noted the PM recently met with a delegation of provincial governors. "They are really afraid that they are losing the money that they had been expecting to receive in the 2009 budget." Local Elections: "Politics is Interesting" -------------- ¶22. (C) Noting that there will be more than 14,000 candidates in open lists on the ballot, the Ambassador expressed his concern about the sheer complexity of the upcoming local election process. "Politics is interesting," agreed Salih, Qelection process. "Politics is interesting," agreed Salih, noting that while the KRG is not having elections, "we are very concerned about elections in the Kurdish areas -- such as Diyala, Mosul, Kirkuk, and Baghdad." The KRG leadership intends to be "helpful" to non-religious parties. While the outcome of the elections is important, as important is how they go, said Salih. Problems with the elections process could delegitimize the result. December 27 Mosul Bombing -------------- ¶23. (C) What is happening in Gaza is "horrific," commented Salih. Noting that there had been a suicide bomb in Mosul at a demonstration in support of the Palestinians in Gaza BAGHDAD 00004067 004 OF 004 earlier on December 27, Salih said that AQI is just killing people for the sake of killing. "This was an anti-Israeli demonstration, they attacked. This shows what AQI is really about." CROCKER