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