OIL MINISTER FLEXIBLE WITH IOC IN PRIVATE ... BUT

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002389

SIPDIS

E.O. 12958: DECL: 09/04/2019
TAGS: EPET ENRG ECON EINV EAID PREL IZ
SUBJECT: OIL MINISTER FLEXIBLE WITH IOC IN PRIVATE ... BUT
IN PUBLIC?

REF: BAGHDAD 02299

Classified By: EMIN John Desrocher for reasons 1.4 (b) & (d)


1. (C) Summary: British Petroleum Iraq (BP) said Oil Minister
Shahristani is under intense pressure to get the GOI's
contract with British Petroleum/China National Petroleum
Corporation (BP/CNPC) signed. According to BP, Shahristani
has been personally engaged and responsive to BP's concerns,
and the Oil Ministry's Petroleum Contracts and Licensing
Directorate (PCLD) and its South Oil Company (SOC),the
stipulated joint-venture partner in the BP/CNPC contract,
have had minimal involvement in the ongoing negotiations. In
preparing for business in Iraq, BP said it is much more
concerned about security risks than legal risks, and more
concerned about criminal security (e.g., theft and smuggling
of oil production) than physical security. End Summary.

Oil Minister May Be under Pressure to Close BP/CNPC Contract
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2. (C) In a September 1 meeting, the president and the
vice-president of BP-Iraq said they had spent five to six
full days during three rounds of negotiations with Oil
Minister Shahristani on the BP/CNPC contract for Rumaila oil
field, the only field awarded during Iraq's first oil and gas
bid round on June 30. The BP representatives expected two
more rounds of negotiations. They said Shahristani has been
personally engaged and responsive to their concerns, because
he is under intense pressure to get the BP/CNPC contract
signed. BP indicated that during private sessions without
his staff, Shahristani was unexpectedly receptive to contract
changes. BP claimed this receptiveness led to a change in
terms for the upcoming (second) oil and gas bid round. This
change in terms gives companies more operational control in
developing awarded fields. (Comment: Shahristani's alleged
behavior during private meetings suggests he is being forced
by events to be more reasonable and flexible. However, in
public or with his staff, he reportedly continues to
demonstrate the opposite behavior. We hope these glimmers of
change presage some conciliatory behavior by Shahristani
during the upcoming second bid round. End Comment) BP said
Shahristani had originally expected to have a signed BP/CNPC
contract before the Istanbul "road show" on August 25. BP
expects the contract to be signed "in the fall."

Oil Ministry Contract-Negotiation Capacity Woefully Limited
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3. (C) Without Shahristani's direct involvement, BP said,
there would be no progress in the BP/CNPC contract
negotiations. Both SOC, the stipulated joint-venture partner
in the contract, and PCLD have had minimal involvement in the
negotiations. (Comment: This claim and Shahristani's
orchestration of the first bid round continue to indicate his
tight control over all decisions. End Comment) BP also
observed that the contract negotiations have absorbed all
available Ministry of Oil (MOO) resources and that MOO would
have been unable to negotiate a second oil field contract
concurrently, had another one been awarded during the first
bid round. (Comment: Given PCLD's reported insufficient
staffing and technical capacity to negotiate multiple complex
contracts at once with international oil companies (IOCs),we
question whether PCLD can successfully negotiate multiple
Qquestion whether PCLD can successfully negotiate multiple
contracts if more than one field is awarded in the second bid
round in late November. Significant delays in negotiating
contracts for awarded fields could exacerbate the oil
sector's negative perceptions of MOO's competence and further
undermine confidence in MOO and the GOI. End Comment)

BP's Most Worrisome Business Risk in Iraq
--------------


4. (C) BP said it is much more concerned with the security
risk than any political or legal risk in Iraq, and more
concerned about criminal security risk (e.g., theft and
smuggling of oil production) than physical security.
(Comment: Rumaila oil field, the field for which the BP/CNPC
contract is being negotiated, has limited metering to track
production, which allows theft and smuggling to go unnoticed.
BP expects that the rigorous metering that would accompany
their development of Rumaila field will surprise MOO and
could provoke anyone benefiting from the currently poor
record keeping at Rumaila. End Comment) While disappointed
that no hydrocarbons legislation has been passed, BP

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expressed little concern and gave no indication that this
lack of legislation would prevent it from pursuing business
in Iraq. In BP's view, the fact that 32 IOCs paid to
participate in the first bid round demonstrates the
industry's tolerance for doing business in Iraq's poorly
defined legal and political environments.

BP's Thoughts on the Upcoming Second Oil and Gas Bid Round
-------------- --------------


5. (C) BP asserted that the second bid round is occurring too
soon after the first bid round, because MOO has not yet had
time to fully assimilate lessons learned from the first bid
round. The oil fields in the upcoming second bid round are
either underdeveloped or undeveloped (so called "green
fields"),so BP assumes that MOO will have some leeway to
allow a higher maximum remuneration fee for bidders.
Nevertheless, BP expects MOO will make very few changes in
terms from the first bid round to the second bid round,
because it is concerned about the resulting public
perceptions.
HILL