OIL MINISTER PRESENTS DEVELOPMENT PLAN

C O N F I D E N T I A L BAGHDAD 000647 SIPDIS SIPDIS STATE FOR NEA/I AND EEB DOE FOR GEORGE PERSON E.O. 12958: DECL: 03/04/2018 TAGS: EPET ECON ENRG IZ SUBJECT: OIL MINISTER PRESENTS DEVELOPMENT PLAN REF: BAGHDAD 471 Classified By: A/DCM Ambassador Charles Ries for Reasons 1.4 (b) and (d) ¶1. (C) SUMMARY: The Ministry of OIL has presented to the Council of Ministers his three-part plan for OIL field development in the absence of a national hydrocarbon law: to sign 2-year technical service agreements in 2008 with major international OIL companies (IOCs) to increase production in five giant OIL fields; to hold a licensing round in the next 18 months with IOCs for the giant fields plus Akkas gas field; and to re-activate Saddam-era production sharing agreements. END SUMMARY. ¶2. (C) We obtained a copy of a report OIL Minister Shahristani sent to the Prime Minister seeking approval for a three-part plan to increase production to 6 million barrels of OIL per day and 4 billion standard cubic feet of associated gas, recognizing the need for foreign capital and technology. The plan is ambitious, as it covers Kirkuk, Ninewah, Basra, Mayssan, Al-Nasiriya, the middle region, the western desert, Kurdistan, the upper Euphrates and northwestern Iraq. Part I: TSAs -------------- ¶3. (SBU) The OIL Ministry plans to sign technical service agreements with IOCs with the goal of ending the decline in output and increasing the production in five giant OIL fields from 40,000 to 100,000 barrels per day per field, or up to 400,000 bpd total. In the next two months, the MoO plans to sign a contract for the Kirkuk field with Shell Oil, al-Rumaila with BP, al-Zubair with Exxon-Mobil, West Khorna with Chevron and Total jointly, and Mayssan (Bazergan, Abu Gharb and Fakkah) with Shell and BHP Billiton jointly. The Ministry estimates its direct costs will be USD 2.5 billion, of which up to 300 million (subject to negotiation) will be for the contracts, and the ROI will be USD 9 billion annually. ¶4. (SBU) The contracts will be negotiated directly with the companies, who have been working under MOUs since 2004; the period of the contracts will be 2 years renewable for one year; and payment may be made in cash or crude. Part II: Licensing Round -------------- ¶5. (SBU) The first step for the licensing round was the pre-qualification window for international OIL companies, which closed February 18, 2008. Criteria will include legal condition; suitability and financial capability; experience and technical capability; health, safety, and environment plans; training, R&D. More than 100 companies signed up. The licensing procedure will be announced in March, April, or June 2008 (the plan lists different dates in different sections). ¶6. (SBU) Other steps will include registering branches with the Ministry of Trade; preparing information packages and invitation letters (including model contracts, OIL operation systems, and the OIL & gas law if enacted); sale of information packages; accepting bids; evaluating bids; negotiating and awarding contracts; approval of contracts by the federal OIL and gas council if created, or the Council of Ministers if not. The estimated time frame will be 18 months. Part III: Re-activating old contracts -------------- ¶7. (SBU) The Ministry has started communicating and negotiating with some IOCs that signed exploration development and production, or development and production contracts. These include the Chinese company CNPC which signed in 1997 a production sharing contract for the Al-Ahdab field in Wasit; Petrovietnam which signed in 2000 a development and production services contract for al-'Amara field in Maysan; the Indian company ONGC which signed in 2000 an exploration, development and production contract for exploration block 8 in al-Basra; and the Indonesian company Pertamina which signed contracts for prospecting, development and production in 2000 for exploration block 3 in al-Muthanna province in the western desert. The Ministry plans to transform them into service contracts, with payment according to current prices of OIL and materials, per standard contracts prepared by the Ministry. Initial GOI Reactions: tepid -------------- ¶8. (C) Minister of Finance Jabr provided us a copy of his written response to the plan, which says that the MoO needs to move faster and per free market principles; that re-activation of PSAs that were signed by Saddam in violation of UN sanctions should be canceled and not re-negotiated because conditions are different now; and that a licensing round might be a good idea if IRAQ had an OIL law which ensures transparency - but it does not. In addition, DPM Barham Salih solicited the USG position on the plan. Comment -------------- ¶9. (C) The primary benefit of the plan is the re-entry of the IOCs into Iraq, who no doubt will bring some much-needed expertise. The staged approach does, however, include several major risks. Despite Shahristani's promises, the temporary first-stage TSCs are not likely to result in significantly increased production, considering their term, scope, and cost. Longer term, the fact that the same OIL fields for the TSCs are in first licensing round means the participating companies will have a competitive advantage over other bidders in the licensing round, and so those fields are not likely to attract other serious bidders. The proposals to finance the deals with payment in kind, and the proposal to re-negotiate the Saddam-era PSAs, could lead to corruption. Shahristani has also publicly stated his intent to discriminate against IOCs that have signed contracts with the Kurdish region, which will repel rather than attract potential investment. The plan may be construed or used for political purposes as a substitute to the hydrocarbon framework law, when in fact it falls far short. Nevertheless and on balance, we consider this move a helpful one along the winding road to a full hydrocarbon framework law, as described reftel. That its elaboration has brought out new HCL supporters like MoF Jabr is an unexpected boon. CROCKER