(C) LUKOIL TELLS AMBASSADOR SATTERFIELD IRAQ CAN'T

S E C R E T SECTION 01 OF 02 MOSCOW 000912

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 04/03/2018
TAGS: EPET ENRG ECON PREL RS
SUBJECT: (C) LUKOIL TELLS AMBASSADOR SATTERFIELD IRAQ CAN'T
MODERNIZE WITHOUT PRODUCTION SHARING AGREEMENTS

Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d)

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SUMMARY
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1. (S) Lukoil president Vagit Alekperov told Ambassador
Satterfield April 2nd that production sharing agreements
(PSAs) are a prerequisite to multi-billion investments needed
to modernize Iraq's oil infrastructure and develop fields.
Alekperov indicated that Lukoil may still be willing to work
in Iraq under less-preferable service contracts, but would
invest less. He said that Oil Minister Shahristani is the
impediment to adoption of the PSA model in pending
hydrocarbon legislation, adding that Shahristani "spent too
much time in Iran." At Ambassador Satterfield's suggestion,
Alekperov said he would reiterate his views on the need for
PSAs to Prime Minister Maliki, emphasizing the benefits to
Basra's economic development. Alekperov welcomed continued
dialogue with us on Iraq and said his staff in Iraq will
reach out to our EMBASSY in Baghdad. End summary.

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LUKOIL READY TO INVEST
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2. (C) In an April 2 meeting with Coordinator for Iraq (S/I)
Ambassador David Satterfield, Lukoil president Vagit
Alekperov said Lukoil is eager to move forward with potential
investments in Iraq. He said Lukoil is closely coordinating
its efforts with ConocoPhillips, which owns 20% of Lukoil.
Ambassador Satterfield responded that we welcomed Lukoil's
involvement in Iraq and its engagement with the GOI.


3. (C) Alekperov said the sooner major investments in oil can
proceed, the sooner Iraq will develop its physical and social
infrastructure and stabilize. Referring to Lukoil's own
interest, the West Qurna 2 field, Alekperov explained that
Lukoil's investment in creating the supporting infrastructure
alone would create some 7,000 jobs, "drastically improving
the economic situation in the South." He said West Qurna 2
would produce some 400,000 barrels per day when developed,
with all production to be exported.


4. (C) Alekperov said all his interlocutors during his recent
trip were positively disposed to Lukoil proceeding with
"direct negotiations" in Iraq with the exception of Oil
Minister Shahristani. He said Shahristani "seemed nervous"
during their meeting and simply said "everything needs to go
through a tender, according to the hydrocarbon law."
Alekperov noted to us, however, that there is no hydrocarbon
law but that existing legislation allows for direct
negotiations "as approved by (assistant to the Prime
Minister) Ghadban." He called Ghadban "a real professional
-- professional with a capital 'P'."

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THE NEED FOR PSAS
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5. (C) Ambassador Satterfield noted that it was not just
Shahristani that was the problem; many in the Oil Ministry
shared the same "dirigiste" mindset. He said we were pushing
the Iraqis in the direction of production sharing agreements
(PSAs) rather than service contracts and private sector
development of the oil sector instead of state-driven
development. He stressed the importance of that message
being reinforced by private companies like Lukoil.


6. (C) Alekperov agreed that transformative investments would
not occur without an appropriate hydrocarbon legal framework,
including PSAs. Lukoil, he said, would not spend the
billions of dollars necessary to modernize Iraq's oil and
ancillary physical and social infrastructure without the
"insurance and guarantees" offered by PSAs. "Service
contracts just don't offer the returns we need." That said,
Alekperov suggested Lukoil and ConocoPhillips could still
operate in Iraq under service contracts.


7. (S) Alekperov said Shahristani is the impediment to

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inclusion of the PSA model in pending hydrocarbon
legislation. He said "Shahristani has spent too much time in
Iran" and is fixated on the Iranian model. He said
"Shahristani will never agree to PSAs" and that this is "a
big problem." He agreed that perhaps the Oil Ministry in
general is too "statist" in its approach, but added that,
according to a Russian saying, "a fish rots from the head
down."

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TATARSTAN = KURDISTAN
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8. (C) Ambassador Satterfield said a major problem was the
inability of the Kurds and the central government to agree on
how to develop Iraq's oil resources. Alekperov agreed,
likening the situation in Iraq, with regional desires for
autonomy, to the situation in Russia during the 90s, when the
oil-rich Tatarstan and Bashkorostan regions wanted control
over their hydrocarbon resources. He said the resolution in
Russia of allowing some autonomy to spur development of those
regions while spreading the wealth through central taxation
was largely successful -- "Everyone got bread; Tatarstan and
Bashkorostan got bread and butter."

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RUSSIAN DEBT FORGIVENESS
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9. (C) Alekperov said the government of Russia is eager to
see movement on Lukoil and Russian oil interests in Iraq. He
said that the GOR must be able to show the public that
writing off some $12 billion of Iraqi debt will yield some
result for Russian companies.

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LUKOIL WILL CONTINUE DIALOGUE WITH US
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10. (C) Ambassador Satterfield suggested that Alekperov
reiterate to Prime Minister Maliki the importance of PSAs to
economic development and employment generation, especially in
Basra. Alekperov said he would pass on his views through his
staff to Maliki's staff and that he expects to meet with
Maliki again in May.


11. (C) Alekperov also agreed to meet with U/S Jeffery in the
future and asked to meet with Ambassador Satterfield when he
is next in Washington. He said he would be there soon to
meet with ConocoPhillips CEO James Mulva. Responding to
Ambassador Satterfield's suggestion that Lukoil keep us
updated on their progress in Iraq, Alekperov said Lukoil
staff in Baghdad would reach out to our EMBASSY there.


12. (U) This message has been cleared with Ambassador
Satterfield.
BURNS