IRAQI OIL MINISTRY NEGOTIATING UNITIZATION OF

S E C R E T SECTION 01 OF 02 BAGHDAD 000530

SIPDIS

DOE FOR PERSON

E.O. 12958: DECL: 03/01/2019
TAGS: EPET ENRG EINV ETTC PREL KU IR IZ
SUBJECT: IRAQI OIL MINISTRY NEGOTIATING UNITIZATION OF
CROSS-BORDER FIELDS

REF: A. BAGHDAD 410

B. BAGHDAD 388

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


1. (U) This is a request for guidance. See para 2.


2. (C) SUMMARY: Some modest movement recently has generated
publicity regarding the possible signing of agreements
between Iraq and Kuwait or Iraq and Iran to develop
cross-border oil and gas fields. A committee formed by the
Iraq Ministry of Oil in 2007 to consider the issue and
develop policy proposals is continuing its work quietly in
the background. While we assess with a high degree of
certainty that no/no agreements have actually been signed,
the issue retains the potential to create bilateral tension.
We request Department guidance on whether Western oil and gas
companies can develop fields that Iraq shares with Iran under
the terms of a field unitization agreement. END SUMMARY

Diplomatic Overtures
--------------


3. (U) Recent high-profile visits appear to have created some
momentum on negotiations between Iraq and neighboring Iran
and Kuwait to develop protocols and mechanisms to develop oil
fields whose reservoirs cross national boundaries. Although
primarily technical in nature, exploitation of cross-border
fields is a sensitive issue, requiring a high level of trust
and cooperation in bilateral relations. One pretext that
Saddam Hussein used to invade Kuwait was an allegation of
Kuwait's theft of oil from the giant Rumaila oil field.


4. (C) Iraq seemed to be making progress on the issue with
Kuwait (ref A) with Iraqi Deputy Foreign Minister (DFM)
Hamoud's February 4 visit to Kuwait. Hamoud told Senior
Advisor Gordon Gray that the two countries would employ
experts to make recommendations on how best to share the
resource when oil fields are ready for exploitation.
Hamoud's visit had been preceded by Iraqi President
Talabani's meetings in January at the Arab Economic Summit in
Kuwait. The media also reported Iraqi Oil Minister
Shahristani's February 5 statement that he expected to reach
an agreement with Iran regarding exploitation of the two
countries' cross-border fields. He noted, "It is
unacceptable that neighboring countries are extracting oil
from the shared fields while Iraq stands motionless."


5. (SBU) The Iraqi MoO calculates the following distribution
of promising cross-border fields and structures:

Country Fields Structures
-------------- -------------- --------------
Kuwait 2 4
Iran 8 11
Syria 1 7
Saudi Arabia 0 7


6. (SBU) The issue is becoming a more pressing one for Iraq,
since several fields in the first and second bid rounds are
shared with Iraq's neighbors. Two of the three fields
comprising the Maysan fields in the first bid round, Abu
Ghirab and Fauqa, cross into Iran. In the second bid round,
the Siba gas field in Basrah Province straddles the Iraq-Iran
border and, according to the Iraqi Ministry of Oil (MoO),
Iran is currently producing from the reservoir. The Badra
oil field in Wasit Province, which crosses into Iran,
presents the same problem. Iraq is producing from the
Majnoon oil field, but some geologists consider Majnoon and
Iran's Azadegan to belong to the same structure, so
unitization issues will eventually need to be resolved there.
Joint exploitation of the Rumaila and Zubair fields that
cross the Iraq-Kuwait border must also be settled.

Still Waters Barely Running
QStill Waters Barely Running
--------------


7. (C) The Iraqi MoO formed a Border Committee in 2007 to
examine all fields and structures adjacent to and crossing
Iraq's borders. The Committee is focusing, in priority
order, on Iran, Kuwait, Syria, Saudi Arabia, Jordan, and
Turkey. At the same time that the Iraqi MFA is engaging
Iraq's neighbors to form bilateral committees to consider
exploitation of cross-border fields, the MoO is attempting to
accelerate Iraq's own development of such fields. Inclusion
of the cross-border fields in the first two bid rounds was a
deliberate decision, with structures and remaining fields

BAGHDAD 00000530 002 OF 002


possibly being included in the third bid round. The MoO
Legal Directorate is seeking to contract the services of an
international law firm to develop a model unitization
agreement to exploit the cross-border fields.


8. (S) The MoO Border Committee has been examining several
technical issues, among which are assessing the level of
development on the non-Iraqi side of cross-border fields,
determining which side has the structural advantage, and
estimating cost of field development. In addition, the
Border Committee is considering an over-all strategy that
would look at all fields along the Iranian border as a
package. The Committee believes this would prevent Iran from
negotiating isolated deals on certain fields where it has an
advantage in terms of cost and potential output. The
Committee contemplated, and then for now suspended its
consideration of, a three-stage process. The process would
begin with the MoO hiring its own reservoir consulting firm,
then agreeing with the neighboring country to hire a
reservoir engineering firm jointly as an intermediary to
determine total reserves, and finally to agree on the hiring
of a joint operating company for the field.


9. (S) The MoO BC especially recommended that the Badra field
be included in the second bid round with the hope of bringing
the Iranians to the table. Little to no development has been
undertaken on either side of the border, but Norwegian firm
StatoilHydro had carried out, and then suspended, some
exploration and development activity on the Iranian side. If
it were to win the bid for Badra in the Iraqi MoO's second
bid round, StatoilHydro could become a credible Western oil
company working on both sides of a cross-border field, which
would present an ideal basis to develop a unitization
agreement for the field. Other international oil companies
(IOCs),including Chevron, have approached the MoO to be the
single operator on a cross-border field under a unitization
agreement. In the meantime, some members of the Border
Committee have advocated a very aggressive general approach,
such as by drilling a large number of offset wells, to bring
neighboring countries to the negotiating table.

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


10. (C) Exploitation of cross-border fields remains a
sensitive issue. Iraq's recent moves to address the issue on
the diplomatic front are therefore a welcome development.
International oil companies have the potential to act as
honest brokers, but, in the case of Iran, U.S. sanctions
create an additional complication. We look forward to
Washington's clarification of the U.S. legal and policy
restrictions on possible IOC involvement in fields that Iraq
shares with Iran and hope that an approach can be crafted
that will not leave the field wide open to Russian and
Chinese companies while protecting our policy interests
vis-a-vis Iran.

BUTENIS