BUILDING BETTER IRAQI OIL CONTRACTING PERSONNEL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001075

SIPDIS

E.O. 12958: DECL: 04/21/2019
TAGS: EPET ENRG EINV EAID PREL IZ
SUBJECT: BUILDING BETTER IRAQI OIL CONTRACTING PERSONNEL

Classified By: Classified By: Acting Economic Counselor Ruth Hall, Reas
ons 1.4 b, d, e, g.


1. (C) Summary: From March 29 to April 2, the Department
of Commerce's Commercial Law Development Program (CLDP) held
a four day workshop for Ministry of Oil (MoO) personnel on
negotiating and contracting with International Oil Companies
(IOC). Dr. Sabah Al-Saidi, senior legal advisor to the
Petroleum Contracts and Licensing Directorate (PCLD),led the
MoO participants, who came from PCLD, the two main operating
North and South Oil Companies, and representatives of various
directorates active in contracting within the MoO. The MoO
participants included accountants, lawyers, and petroleum
experts. Two U.S. law professors with extensive oil related
experience and a U.S. Lawyer with prior experience in the
Iraqi hydrocarbons sector provided the instruction, which
covered the basics of oil contracting and negotiations. The
MoO participants' questions showed active interest and
listening, but also a low level of general knowledge in the
areas of their job responsibilities. The MoO personnel
generally spoke freely about their current contracting
efforts and issues they have faced in their work. This cable
contains market sensitive information, please protect
accordingly. End Summary

Contracting Officers Needed: Experience not Necessary
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2. (C) The contracting terms and ideas introduced in the
course would not challenge those with more than a passing
knowledge of the subject matter. For example, the Iraqi
participants generally were unfamiliar with the basic
terminology used in oil contracting, "R factor," describing
the ratio between company costs and revenues. The
participants also exhibited a poor understanding of the role
of arbitration in disputes. Their questions showed a greater
comfort level with taking disputes to court rather than
arbitration. They had no knowledge of major bodies that
conduct arbitration like the International Chamber of
Commerce. The Iraqis recognized their deficiencies in most
cases and were eager to improve their knowledge.

They're Coming to Steal our Oil
--------------

3. (C) The Iraqi participants also showed distrust for
outside actors. The subject of "booking reserves" was
brought up and the MoO delegation reacted strongly against
the idea. They believed that when a company booked Iraqi oil
reserves, the company was claiming ownership to the oil in
the ground. The Iraqi participants rejected explanations
that the concept is mainly an accounting issue and could help
Iraq to attract valuable contracting bids. Later, in
one-on-one conversations with Econoff, the Iraqis remained
mystified by the concept, but they did seem more willing to
explore the idea. Dr. Sabah said that Iraq should join the
New York Convention on the Enforcement of Arbitral Awards
because it would be good for Iraq to attract investors. He
recognized the Convention's benefits, but he also identified
arbitration in a third country as an IOC stratagem to gain an
unfair contractual advantage over Iraq.

Opinions on Oil Production Contracts
--------------

4. (C) Outside the actual course work, the Iraqis discussed
current contracting efforts. The group repeatedly asked what
type of production contract was best. As a group, they
remarked that international media overstated and perpetuated
the negative security situation in Iraq. They believed that
the IOCs would otherwise be eager to enter Iraq because of
Qthe IOCs would otherwise be eager to enter Iraq because of
its huge reserves and the ease of production from the Iraqi
reservoirs. In contrast to recent announcements by Oil
Minister Shahristani, Dr. Sabah said that Iraq would allow
risk service contracts for the exploration blocks and not
resort to production sharing agreements. They also commented
that, in addition to the revival of a Saddam-era contract
signed with CNPC for the Ahdab field, the MoO was conducting
negotiations with Petrovietnam for the Amara field, another
Saddam-era PSC contract.

Discussion of the Bid Rounds
--------------

5. (C) The group also talked about issues directly related
to the first and second bid rounds. They said that the
contract had only three biddable parameters; Production
Target, Incremental Remuneration Fee, and the Baseline
Production Rate. (Comment: This seemed to be at odds with
the original contract and its articles, but points to a heavy
emphasis on the financials of the contract rather than the
technical side. It ignored the minimum work requirement,
Iraqi on-the-job training or "local content", and budgeting
training for Iraqi personnel, all included in the written
contract. End Comment.) Mr. Basim Ibraheem Dawood, a
petroleum engineer of the Field Development Directorate,

BAGHDAD 00001075 002 OF 002


expressed a concern about the oil recovery factor, the
percentage of oil actually produced from the field over its
lifespan. He noted that oil is an asset for all Iraqis and
their children. His concern demonstrated that some Iraqis
prefer to contract with an IOC with the technical capability
to produce as much oil as possible, and not simply to
increase production as quickly and cheaply as possible.

Bid Round Management Structures
--------------

6. (C) In reference to the brown fields, i.e., developed
fields, offered in the first round, Dr. Sabah said that the
operating company currently working the field would create a
Field Operating Division (FOD). The FOD would continue to
manage the field while the IOC would submit its work plan to
the FOD for approval. The FOD would have the final say in
what work would be done, not the IOC. In lesser developed or
undeveloped "green" fields and the new gas fields, the Iraqis
would form a Joint Management Company (JMC) to manage the
fields. This would differ from the JMC in that, as a group,
the IOC and the Iraqi operating company would create a work
plan by consensus. The Iraqi training participants said
that, unlike normal contracting practice to encourage
transparency, the bid parameter evaluation criteria were
proprietary to the MoO.

Oil Experts Express Concerns
--------------

7. (C) In private discussions, the expert trainers and
Econoff agreed about several areas of concern. On the MoO's
EPC contracts, the experts said that the IOCs would view them
as loss leaders and not the type of contract they would
normally enter into. They also said that the terms of the
model contracts in the first and second bid round seemed very
unattractive. They noted that the model contract terms
called for the use of "state of the art" technology and not
the best technology for the particular field, which could be
problematic when the IOCs present their work plans. The
experts uniformly opined that a Western company and not the
Iraqis had written the contract, since it addressed all the
right issues and said all the right things. The particulars
of the contract, however, clearly had a heavy Iraqi hand,
which the experts did not believe had been for the better.

Comment: More Training Needed
--------------

8. (C) Overall, the team the Iraqis sent to Jordan seemed
eager to learn, but lacked the experience and knowledge
needed to fully engage the IOCs in negotiations. Certain
members showed strengths in their individual technical fields
as accountants, lawyers and geologists, but lacked base
knowledge in international contracting. With further
training the team can become the nucleus for an excellent
contracting department in the MoO. Time may not allow them
to develop the needed skills, however, before the bulk of the
Iraqi oil production contracts are completed. This could
present difficulties both for the MoO as it struggles to
complete the bid rounds according to a shortened and
ambitious timetable and for the IOCs as they work to finalize
contracts and make the investments that Iraq's petroleum
sector so desperately needs. We recommend the USG and other
donors continue to find ways to increase MoO's capacity to
develop its petroleum resources for the good of the Iraqi
people.
BUTENIS