RRT ERBIL: CONSORTIUM TO DEVELOP GAS FIELD IN

UNCLAS SECTION 01 OF 03 BAGHDAD 001446

SIPDIS

DOE FOR GEORGE PERSON, STATE ALSO FOR NEA/I AND EEB

E.O. 12958: N/A
TAGS: EPET ENRG EINV PGOV HU GM IR TU IZ
SUBJECT: RRT ERBIL: CONSORTIUM TO DEVELOP GAS FIELD IN
KURDISTAN REGION TO FEED NABUCCO PIPELINE

REF: BAGHDAD 1073

This is an Erbil Regional Reconstruction Team (RRT) cable.


1. (SBU) Summary: UAE's Crescent Petroleum and Dana Gas have
entered into a consortium with two European energy companies
to develop a natural gas field in the Kurdistan Region (KR)
to supply the Nabucco pipeline. Separately, Crescent/Dana's
plans to develop Gas City, a massive gas utilization
industrial complex, in Sulaimaniyah Province are in limbo due
to foot dragging by the Kurdistan Regional Government (KRG).
Meanwhile, Crescent and Dana are looking to build gas cities
in Anbar and Basra provinces, although progress on these is
being held up by what they describe as central government
"blackballing" of energy companies with stakes in the KR.
KRG Minister of Natural Resources informed RRT Team Leader
that the KRG was not in negotiation with Crescent/Dana,
stating "if and when gas becomes available, then the KRG or
Iraq will need to come up with a commercial arrangement for
selling/pricing the gas - which belongs to all the Iraqi
people." End Summary.


2. (SBU) On May 17, Crescent Petroleum and Dana announced
that they had entered a consortium with two European
petroleum companies to supply gas to the Nabucco pipeline
from fields in the KR. The Nabucco pipeline will pump
natural gas to Austria via Turkey from several possible
sources, including Azerbaijan and Iran, thus reducing the
dependence of European countries on natural gas from Russia.
It is expected to be completed by 2014.

The Consortium
--------------


3. (SBU) Crescent Petroleum, based in the United Arab
Emirates, is the first and largest privately-owned natural
gas company in the Middle East, according to Shakir Shakir,
Kurdistan Branch Manager for Dana Gas. The company is led by
a Cambridge University-educated Iraqi exile, Hamid Jafar,
whose father had been Minister of Development in the cabinet
of Iraq's last king. In 2005, Crescent established Dana Gas
as a publicly-traded natural gas company. Although Crescent
owns a controlling share of Dana (21 percent),Dana has over
300,000 shareholders in over 100 countries. The two
companies established a local subsidiary, Pearl Petroleum, to
handle their upstream interests in the KR.


4. (SBU) The two European companies joining Crescent/Dana are
OMV of Austria and MOL, the Hungarian Oil and Gas Company.
Both companies are shareholders in the company developing the
Nabucco pipeline. Under the agreement with Crescent/Dana,
OMV will purchase a 10% interest in Pearl for $350 million,
which will be reinvested in the project. In exchange for
giving MOL a 10% interest in Pearl, Crescent and Dana will
receive a 3% share in MOL. (Note: The director of
London-based think tank Iraq Energy, who has close ties to
Crescent Petroleum, said the value of the stock swap was also
roughly equivalent to $350 million. End note.) This gives
Crescent/Dana an indirect interest in the Nabucco pipeline
project as well as in MOL's operations in the KR.

Chamchamal Natural Gas Field
--------------


5. (SBU) All the natural gas that the Crescent/Dana
consortium plans to supply to the Nabucco pipeline will come
from the Chamchamal natural gas field, which is still under
development. None of the natural gas from Chamchamal will be
needed to feed the KR's two BBO power plants in Pir Daoud and
Chamchamal power plants. The entire demand for natural gas
for these two power plants will be fully met by
Crescent/Dana's natural gas field in Khor Mor, where
QCrescent/Dana's natural gas field in Khor Mor, where
Crescent/Dana are expanding production with the drilling of a
ninth well. Both fields are in Sulaimaniyah Province.
(Note: Chamchamal's production reserves are estimated to be
2.2 trillion cubic feet, tcf. The USAID Economic Development
Assessment, however, states that the total potential reserves
of both fields are 11.7 tcf, and Chamchamal is the larger of
the two fields. End note.)

Technical Challenges Surmountable
--------------


6. (SBU) The consortium will need to build a pipeline to tie
the Chamchamal field with the Nabucco pipeline. The
mountainous terrain between the two points will present
technical challenges. The consortium, however, is confident
that it will be able to surmount them without problems,
according to Shakir. These challenges, he continued, are

BAGHDAD 00001446 002 OF 003


less daunting than those that Crescent/Dana faced when
building the existing 180 km pipeline between the Khor Mor
natural gas field and the electrical power plants in
Chamchamal and Pir Daoud. That pipeline not only had to pass
through rugged terrain, but through minefields, as well.

Political Risks Acceptable
--------------


7. (SBU) All parties in the consortium have studied the
political risks they face, and are confident that these will
not impede the project's success, Shakir asserted. All of
the companies did due diligence, and the three publicly
listed companies are answerable to stockholders, adding to
the cautious approach they took. The first consideration was
the GoI. According to Shakir, lawyers assured the consortium
that the Iraqi constitution and all relevant laws supported
their venture, even though the GoI has already expressed its
disapproval. Shakir discounted a press report quoting Iraqi
government spokesman Ali Dabbagh, who said that the
consortium's deal to export gas to the Nabucco pipeline was
illegal. Not only does the law favor the consortium , Shakir
said, quoting the findings of the consortium's lawyers, but
the fact that the GoI recently allowed oil to flow to the
strategic pipeline from Tawke and Taq Taq shows that the
government, in the end, is responsive to the need for higher
export revenues a
nd the facts on the ground.


8. (SBU) The consortium must deal delicately with the issue
of Iran for two reasons, according to Shakir. First, Iran
itself is a competitive source of natural gas. Second, the
success of the consortium in the KRG would strengthen Iraq at
the expense of Iran; and Iran wants a weak Iraq. Russia,
also, stands to lose ground if the Nabucco pipeline succeeds.
On the other hand, Turkey is delighted with the prospect of
receiving gas from Kurdistan, according to Shakir. The
success of the Nabucco pipeline is very much in Turkey's
strategic interest, he observed. The more possible sources
of natural gas, the greater the advantage to Turkey.


9. (SBU) Comment: OMV and MOL are already exploring for oil
in the KR under production sharing agreements (PSAs),so both
OMV and MOL already have an exposure in the KR that might
have led them to conclude "in for a penny, in for a pound."
OMV signed a PSC in November 2007 to develop two exploration
blocks, while an MOL subsidiary partnered the same month with
a UK Gulf Keystone subsidiary to develop another block. End
comment.

Other Crescent/Dana Projects inside Iraq
--------------


10. (SBU) Crescent Dana is negotiating with the United Cement
Company to provide natural gas from the Khor Mor field to
cement factories at Bazian and Tasluja, both located in
Sulaimaniyah Province. United Cement's major shareholder is
the French building materials giant, Lafarge. Currently,
these factories rely on fuel oil trucked from the Bayji
refinery. Natural gas, besides being environmentally
cleaner, will be a much cheaper source of energy. Lower
energy costs should enable United Cement to compete more
effectively against cement imported from Iran, which
currently undercuts the locally produced product (reftel).


11. (SBU) Meanwhile, Crescent/Dana's ambitious plans to build
Kurdistan Gas City, a gas utilization industrial complex near
Chamchamal, remain on hold. As envisioned, the project would
cover 43 square miles, an area larger than the size of the
city of Sulaimaniyah, and create up to 200,000 jobs in the
Qcity of Sulaimaniyah, and create up to 200,000 jobs in the
region. The project will require active coordination by
several ministries, as well as the participation of many
investors. But so far, Shakir said, the KRG has not focused
on it, and has not even allocated any land.


12. (SBU) On the other hand, Crescent/Dana has been actively
studying plans to build a gas city in Anbar Province, using
natural gas from the Akkas gas field. According to Shakir,
Anbar tribal chief Sheikh Ahmed Abu Risha enthusiastically
supports the idea. Sheikh Ahmed told Crescent/Dana he
welcomes the jobs that the project would create, adding that
right now the only possibilities open to young men in Anbar
are either to join the police or Al Qaeda. Shakir also
mentioned plans to build another gas city in Basra Province.
The problem with proceeding forward with either of these
plans, Shakir explained, is that Oil Minister Shahristani has
blackballed hydrocarbon companies doing business with the KRG
from doing business in the rest of Iraq.


BAGHDAD 00001446 003 OF 003


Comment
--------------


13. (SBU) This announcement was made by consortium itself,
and not by the KRG. But this project fits in well with the
KRG's strategy to develop its hydrocarbon resources at all
deliberate speed, consistent with regional legislation passed
in 2007. KRG Minister for Natural Resources Ashti Hawrami
told the RRT Team Leader that the KRG supported the idea
although it was not negotiating with the consortium at this
time. "If and when gas becomes available, then the KRG or
Iraq will need to come up with a commercial arrangement for
selling/pricing the gas - which belongs to all the Iraqi
people," he stated.
HILL