WILL THE OIL MINISTRY LICENSING ROUND PROCESS

C O N F I D E N T I A L BAGHDAD 000166

SIPDIS

DOE FOR PERSON

E.O. 12958: DECL: 01/22/2019
TAGS: EINV ENRG EPET TU IZ
SUBJECT: WILL THE OIL MINISTRY LICENSING ROUND PROCESS
IMPLODE?

REF: A. BAGHDAD 148

B. BAGHDAD 84

C. BAGHDAD 45

D. 08 BAGHDAD 3397

Classified By: Economic Counselor Michael Dodman, reasons 1.4(b,d)


1. (S) Summary: The Iraqi Ministry of Oil has announced the
next step in the licensing round process to invite
international oil company (IOCs) participation in Iraq's
petroleum sector -- a February 12-14 workshop in Istanbul for
the 16 companies (out of 41 pre-qualified) who had paid the
required fees. Several international oil companies
complained that the model contract offered to IOCs had overly
restrictive terms and conditions; they hope to be able to
press for changes that reflect drastically lower crude oil
prices and the scale of the investments required to meet the
contractual obligations. At the same time, the Iraqi Oil
Ministry seems to be grasping the implications of the lower
crude prices, with Oil Minister Shahristani reportedly
floating the possibility of cancelling the licensing round
with his staff (ref A). Notwithstanding, the Oil Ministry
launched a second licensing round December 31. The Oil
Ministry's best approach would be to continue the licensing
round process by seriously taking on board IOC input at the
workshop to modify the model contract and the arrangements
for IOC entry into Iraq's petroleum sector. End summary.

Forward Movement
--------------


2. (U) Spokesman Assem Jihad announced January 18 that the
Ministry of Oil (MoO) would hold a workshop in Istanbul to
receive suggestions and input from international oil
companies (IOCs) regarding the model contract and bidding
procedures for the licensing round that Oil Minister
Shahristani presented at an October 13 workshop (ref D).
(Note: The licensing round invited tenders on six producing
oil fields and two gas fields that are not currently
producing.) While Jihad did not specify the date, a wire
service story, citing an unnamed Iraqi oil official, said the
workshop would occur February 12-14. The same source said
only 16 companies, out of the 41 which had been pre-qualified
to participate, had paid participation fees and purchased the
draft model contract, initial tender protocols, and data
packages. The 16 companies, however, included most of the
oil majors. (Note: Oil Minister Shahristani, however, said
over 30 companies had purchased data packages during a
January 4 meeting with EMIN. End note.)


3. (U) In another development, MoO announced December 31 that
it would launch a second bid round for 11 additional oil and
gas fields. During a news conference, Shahristani said the
fields comprised Majnoon, West Qurna Phase II, Halfaya, East
Baghdad, Gharaf, Qayiarah, Najmah, Badrah, Kifil/West
Kifil/Merjan, a group of fields in Diyala Province (composed
of Qumar, Gilabat and Nau Domman oil fields along with
Khashim al-Ahmar gas field),and Siba gas field in Basrah
Province. Three of the fields are cross-border, extending
into the territories of Iran or Kuwait. Shahristani said the
11 fields could increase production by up to 2.5 million
barrels per day (bbl/d),or potentially doubling Iraq's
production, within three to four years of the contracts being
signed by the end of 2009.

Shell Unenthusiastic
--------------


4. (SBU) During a January 12 meeting with MNF-I's Energy
Fusion Cell (EFC),Shell Exploration and Production
executives described the licensing round contracts as
"extremely challenging," since the contractor would incur
financial penalties to maintain and increase production with
Qfinancial penalties to maintain and increase production with
limited influence and control over the entire process.
(Comment: One area that has been previously highlighted is
the inability independently to verify current production and
MoO's assumption that current production is stable, rather
than declining. Since some profits will be calculated from
the barrels of oil increase from a baseline, an artificially
low baseline production would cut into the profit.) The
Shell executives also noted that profit margins were very
low. For example, with the Kirkuk field, the contractor
would need to maintain current production of about 350,000
bbl/d. Profit would be calculated on the basis of the number
of barrels above the baseline. Shell calculated that $4
billion or more would be needed to increase production from
the Kirkuk field.


5. (SBU) Despite these challenges, Shell intended to
participate in the licensing round, since their competitors
were sure to do so and Shell needed to keep its foot in the
door. The Shell executives noted that Shell has been working
in the Kirkuk field for the past three years, and also in the
Maysan fields. In 2005, the company had started negotiating
a technical service contract for Kirkuk and Maysan that was
subsequently cancelled. (Comment: Given this record, Shell
could be expected to bid on Kirkuk and/or Maysan in the
licensing round.) Shell also noted that, since the bids
would be assessed on the basis of the lowest cost to the GOI,
companies could deliberately submit an unrealistically low
bid.

Other Negative Indicators
--------------


6. (U) A third company, Cairn Energy PLC, in a conversation
with MNF-I, made the same points, i.e., that the terms were
too stringent but that oil companies would participate and
then try to modify contract terms during the workshop and in
follow-on negotiations.


7. (SBU) We had commented previously that a bellwether of IOC
interest in the licensing round would be whether they
participated in the December 5-7 "Energy Expo" held at the
Baghdad International Airport (BIAP) convention center. In
the event, ConocoPhillips, Repsol, Maersk, and Woodside (of
the 41 pre-qualified companies and all of them mid-sized
companies) participated, but not any of the oil "majors."

Problematic Contracts
--------------


8. (U) Although the model contract is supposed to be business
confidential and available only on payment of a fee, at least
one internet analysis of the model contract is available.
According to the analysis, the model contract, dated November
13, employs strict procedures and a cumbersome structure to
ensure that Iraq maintains sovereignty and control of the
producing oil fields while allowing entry of foreign
partners. The contracts provide for a "field operating
division" to be established within the existing regional oil
companies -- North Oil Company, South Oil Company, and Maysan
Oil Company -- that would "exclusively serve as operator of
the field" on behalf of the contractual parties. At the same
time, the foreign company or consortium and the Iraqi
regional oil company would form a joint venture "contractor,"
which would appoint one company to act as "co-operator" of
the field to coordinate field operations. The co-operator
will take a "substantial role" in planning, decision-making,
and day-to-day operations by the Iraqi operator. In
addition, a "joint management committee" will oversee the
entire structure.


9. (U) The internet analysis cites an expert who suggests
that "if the foreign company is not in charge, it cannot be
held responsible." The analysis notes that the foreign
partner, while holding a minority stake of 49%, would
implicitly be responsible for providing all necessary
capital, technology and services, and incurring all costs to
achieve targets for incremental, enhanced, and plateau
production. According to the draft, the establishment of the
field operating division "shall in no way relieve the
contractor of its obligations to achieve the production
targets under the contract." The model contract for the
green-field natural gas fields, while still using an overly
complicated structure, is not as onerous.

GOI Perhaps Reviewing Its Approach
--------------


10. (S) As reported ref A, Oil Minister Shahristani surprised
Q10. (S) As reported ref A, Oil Minister Shahristani surprised
his staff by inquiring what the fall-out would be of
cancellation of the licensing round. MoO officials urged him
not to take such a step, emphasizing the negative
consequences. The media report announcing the workshop also
quoted an unnamed MoO source as saying the workshop would
provide the opportunity for the Ministry to "listen to
proposals, comments and suggestion from oil companies" and
reported that the goal was "to narrow the gap between the Oil
Ministry and companies." (Comment: This contradicts
Shahristani's earlier suggestion to us during an October
meeting, immediately after the licensing round was launched,
that the model contract would not be substantially modified
as a result of the workshop.)

Comment

--------------


11. (C) The launch of Deputy Prime Minister Barham Salih's
initiative to review existing MoO procedures and policies
(ref B) and develop recommendations to boost oil production
has further complicated the picture and will likely increase
pressure on Shahristani to make the bid round successful.
The best outcome of the February workshop would be a
simplified bidding procedure which allows the IOC to act as a
real operator of the field in true partnership with the MoO
regional oil company. Chevron Vice President Jay Pryor will
be in Baghdad January 25, and will have the opportunity to
urge this approach in a meeting with Shahristani. The stakes
are high. Failure or suspension of the licensing rounds
would further delay the substantial investments required to
rehabilitate Iraq's oil fields, stop production declines, and
boost production to levels commensurate with Iraq's oil
resources.

CROCKER