RRT ERBIL: KRG OIL LINKS TO IRAQI PIPELINE

UNCLAS SECTION 01 OF 03 BAGHDAD 001447

SIPDIS

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

E.O. 12958: N/A
TAGS: EPET ENRG EINV PREL PGOV CA TU NO IZ
SUBJECT: RRT ERBIL: KRG OIL LINKS TO IRAQI PIPELINE

REF: BAGHDAD 1446

This is an Erbil Regional Reconstruction Team (RRT) cable


1. (SBU) Summary: At a June 1 gala event, Presidents Talabani
and Barzani officially "turned on" pipelines from Tawke and
Taq Taq fields in the Kurdistan Region, which will together
add 100,000 barrels a day (bbl/d) through the Iraq-Turkey
Pipeline to the Turkish Mediterranean port of Ceyhan.
President Talabani also pronounced the Kurdistan Regional
Government's (KRG) Production Sharing Contracts (PSCs)
"constitutional and legal." CEOS from PSC holders DNO
(Norway),Addax (Canada) and Genel Enerji( Turkey) praised
the KRG's cooperation and expressed their commitment to
expanding work in the region - "the last remaining true oil
frontier," according to Addax CEO Jean Claude Gandur.
Pressed by the media on how the companies will actually be
paid (given the Government of Iraq's continued insistence
that these contracts are illegal),KRG officials reiterated
that the oil was for the benefit of the Iraqi population, and
that the issue would be resolved eventually. Behind the
heady mix of self-congratulation and noble-minded
pronouncements (and despite the many unresolved issues
between the KRG and the GoI),the event was a significant
moment for the Kurdistan Region in its coming of age as an
oil producing region. End Summary.

"A New Source of Oil for the West"
--------------


2. (U) Proclaiming Kurdistan Region petroleum "a new source
of oil for the West," Kurdistan Regional Government (KRG)
Ministry of Natural Resources Senior Adviser Khaled Saleh
kicked off a gala event on June 1 to mark the addition of
Kurdistan Region oil to the Iraq Turkey Pipeline. Presidents
Talabani and Barzani, in a rare joint public appearance,
officially "turned on" the pipelines together. Oil will flow
from two sources: 60,000 barrels a day (bbl/d) from a trunk
line connecting DNO's Tawke field directly to the Iraqi
pipeline, and 40,000 bbl/d by truck from Taq Taq field to the
K-1 pumping station in Kirkuk. (Note: A few weeks could be
required for these levels to be reached. End note.)


3. (U) The event, complete with razzle-dazzle light shows, a
levitating stand-in oil pump, Star-Wars sound systems,
multiple-screen video feeds and bespangled Kurdish folk
dancers, took place in the state-of-the art Sami Abdelrahman
Conference Center in Erbil. Genel Enerji (which reportedly
bankrolled the roll-out) presented a small sample of
Kurdistan Region oil encased in lucite to the guests, drawn
from a who's who of the Kurdistan Region, the local
diplomatic corps, and including visiting Norwegians,
Canadians and Turks (representing companies DNO, Addax and
Genel Enerji).

From Victim to Victor
--------------


4. (U) The carefully choreographed presentations and speeches
started on a somber note, with a short video recalling the
horrors of the Anfal campaign and showing victims of chemical
attacks. Oil was described as a "weapon" which had once been
used by Saddam Hussein to buy arms to use against the Kurds.
The video then charted the rapid succession of events from
the Kurdistan Region's 2007 passage of oil and gas
legislation to the conclusion of PSCs with thirty companies
from fifteen countries and concluding with the 100,000 bbl/d
ready to flow into the national coffers. Other than a brief
clip of Oil Minister Shahristani denouncing the KRG PSCs as
illegal, the video did not dwell on disagreements with
Baghdad over hydrocarbons management or revenue sharing.
QBaghdad over hydrocarbons management or revenue sharing.

CEOS looking happy -- are my stocks rising yet?
-------------- --


5. (U) DNO (Norway) CEO Helge Eide pointed out that only five
years had passed since the signing of the PSC - "not a long
time in the oil business." He recalled that DNO had been
ready to start exporting two years ago, and had "patiently
waited for the KRG to make its decision." DNO had no
intention of resting on its laurels, and would continue with
a goal of reaching 100,000 bbl/d at Tawke and continuing work
at new fields in the Erbil license area where early stage
production was expected to start in 2010. Addax (Canada) CEO
Jean Claude Gandur reported that the "KRG's legal and
regulatory systems had fashioned a vibrant upstream oil
industry"; four years ago he would have been hard pressed to
anticipate how fast and efficiently work would proceed. The
45,000 bbl/d at Taq Taq was described as "a stunning result

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to anyone in the oil world." He called the Kurdistan Region
"the last remaining true oil frontier" and one that would
attract serious players from the global oil industry.

Genel Enerji Lauds Turkish/Kurdistan Region Ties
-------------- ---


6. (U) Genel Enerji CEO Mehmet Sepil praised the "original
vision of Mam Jalal Talabani and Barham Saleh" (who had
signed the original Taq Taq agreement for the PUK Government
in Sulaimaniyah before it was renegotiated by the KRG
government 2004) and the full "confidence of the KRG in
Turkish entrepreneurship." He noted that Genel Enerji's work
in the Kurdistan Region was the first time a Turkish
independent producer had worked on a reservoir of this size.
Like his Norwegian counterpart, Sepil lamented the fact that
it had taken so long to export the oil; "if we had been able
to export two years ago, we could have sent out billions of
dollars of oil." Sepil explained that Genel Enerji was
expanding its activities in the region in what he termed a
"life-long partnership" which would also "strengthen
political cooperation in the region" and "add value to the
Turkish economy." He noted that Genel Enerji would also be
investing $1.1 billion in new infrastructure projects to
benefit the Kurdistan region, projects that would be
"transparent" and consistent with Genel Enerji's good
corporate citizenship standards.

KRG Speakers Stress Benefits to All Iraqis
--------------


7. (U) KRG Minister of Natural Resources Ashti Hawrami opened
his statement by praising the Federal Constitution which had
"laid the foundation for achievements of today" and
"witnessed the end of decades of discrimination." Events had
shown that oil was not a curse - rather, it could be a source
of prosperity and stability. More importantly, today the KR
showed the world that "competition and market driven policies
could revive the economy of Iraq." He called on "friends in
Baghdad" to engage in a fair and strategic policy for
hydrocarbons. He committed to continuing to work
transparently and efficiently. Exports would increase by
100,000 bbl/d after June 1. Within a year he promised that
KR's total crude oil exports would rise to 250,000 bbl/d
within a year, to 450,000 bbl/d by 2010 and to a million
bbl/d by 2013. This would eventually increase Iraq's overall
exports by 50 percent and, at today's oil prices, increase
the Iraqi budget by $2 billion in one year, by $5 billion by
2010, and by $20 billion within four years. Stressing that
"our intention is to maximize the benefits for all Iraqis"
Minister Hawrami mentioned that the KRG was also planning a
strategic gas pipeline (reftel) which would generate even
more revenue.

...But Policies Need to Change
--------------


8. (U) Minister Hawrami cautioned, however, that that "if
Federal oil policies did not change to increase production
and if fair and transparent revenue sharing law is not passed
soon, the consequences will be very serious." Lack of
cooperation, according to him, had thus far cost Iraqis $10
billion. "This must not be repeated." Policies that
maximized revenues needed to be put in place. By example, he
stated that the cost of Taq Taq - a field with an 180,000 b/d
potential - had been under $500 million. Investors had the
incentive to move fast and efficiently. In the rest of Iraq,
by comparison, investors were rewarded for having higher
costs, rather than for stepping up production. Minister
Qcosts, rather than for stepping up production. Minister
Hawrami reiterated that the KRG was committed to the
principle that revenues were for all of the Iraqi people, and
that Article 115 of the Constitution empowered the region to
manage all new oil and gas resources. (Note: Inter alia,
Article 115 states: "All powers not stipulated in the
exclusive powers of the federal government belong to the
authorities of the regions and governorates that are not
organized in a region." End note.)


9. (U) Minister Hawrami also observed that there had been
doubts that investors would come; doubts that oil could be
exported; and doubts that the companies would get paid. So
far two of those had been accomplished. As for the third,
(turning away from his prepared statement) Hawrami simply
stated (with a grin) "oil talks money. We will get paid."
In closing, the Minister highlighted the relationship with
Turkey, "with whom the KR was entering a new era of
friendship."


10. (U) Prime Minister Barzani stated that the KRG was

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contributing to a better and more stable Iraq. Oil investors
must be rewarded according to their entitlements. He also
stated "we want justice for the people of Kirkuk and the
disputed territories" and the "right of return" as promised
in the Constitution. The Prime Minister regretted the fact
that the KRG's budget allocation was stalled in Baghdad, and
noted that if a revenue sharing law was in place, this would
not be the case. So long as it was a "budget allocation," it
would be subject to delays and political pressures.

President Talabani Declares PSCs Constitutional
-------------- --


11. (U) President Talabani took the floor to "reaffirm the
constitutionality and legality of the KRG contracts according
to Article 112 (d) of the Constitution." Furthermore, he
stated, these contracts were in the best interests of the
Iraqi people. (Note: Applause greeted both of these
statements. End note.) The last speaker, KRG President
Masoud Barzani, summed up the event by stating that the
Region was showing "by deeds, not words" that revenues belong
to all the people of Iraq. "We will continue with this
policy." He also took the opportunity to congratulate the
PUK on its 31st anniversary, and reaffirm the KDP/PUK
coalition.

But the Press is Skeptical
--------------


12. (U) At a press conference before the opening, foreign
media pressed hard on the question of how the companies would
actually be paid. Senior Adviser Khaled Saleh fielded the
questions, and reiterated that a mechanism would be found and
the issue would be resolved soon, but left reporters with
more questions than answers.

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


13. (SBU) Behind the heady mix of self-congratulation and
noble-minded pronouncements, the event did indeed mark a
significant moment for the Kurdistan Region. Exploitation of
the region's impressive natural resource endowment and
shaking off the mantle of victimization and poverty will be
part of a new discourse and sense of identity in the region.
This will, in turn, create new expectations on the part of
citizens - expectations for higher standards of living, but
also expectations that their leadership will move to resolve
the many outstanding issues with Baghdad. The KRG leadership
is banking that its concrete achievement and contribution to
central government coffers will encourage an equal degree of
flexibility on the part of the GOI.
HILL