OIL MINISTER HANGS IN THERE, BUT REFORMS NEEDED

S E C R E T SECTION 01 OF 03 BAGHDAD 000856

SIPDIS

DOE FOR PERSON

E.O. 12958: DECL: 03/30/2019
TAGS: EPET ENRG PGOV IZ
SUBJECT: OIL MINISTER HANGS IN THERE, BUT REFORMS NEEDED

REF: A. BAGHDAD 791

B. BAGHDAD 651

C. BAGHDAD 388

D. BAGHDAD 148

Classified By: Acting Economic Counselor Ruth M. Hall, reasons 1.4(b,d)


1. (C) SUMMARY: The Iraqi Cabinet has received
recommendations from the "oil policy symposium" called by DPM
Barham Salih to reform management of the petroleum sector,
but postponed any decision until the week of March 29. In
the meantime, the Ministry of Oil (MoO) continues the bid
round process, although the due date for submission of bids
has slipped by at least a month. In addition, MoO announced
that it had invited a consortium of Chevron and France's
Total to compete against Norway's StatOil Hydro to bid on
development of the Nahr Bin Umar oil field. Possibly as a
result of increasing criticism of his handling of Iraq's oil
production, Oil Minister Shahristani will promote the current
MoO Inspector General, a petroleum engineer, to the position
of deputy minister for the upstream sector, replacing someone
who had been carrying out the responsibility in an acting
capacity. END SUMMARY

Oil Policy Symposium -- Plusses and Minuses
--------------


2. (C) DPM Barham Salih sent a written summary to
participants of the main conclusions of the February 27-March
1 oil policy review symposium that was consistent with the
verbal outline that PM Advisor and former Oil Minister Thamir
Ghadban provided (ref B). Barham's transmittal letter noted
that the conclusions had been "approved with the coordination
of the Minister of Oil and the others who dealt with the
seminar administration." (Interestingly, the letter also
referred to the symposium as the "first" seminar, implying
that others would follow.) The Cabinet was due to consider
the recommendations at a March 22 meeting, but action was
postponed by at least a week, due to Oil Minister
Shahristani's absence as head of an Iraqi delegation to
France.


3. (C) Also as noted ref B, Shahristani was not unhappy with
the symposium's outcome or recommendations, indicating that
he felt that he had handled the event to limit its negative
fall-out. Primarily, he personally attended the entire
session and had a significant MoO contingent on hand. To be
sure that he could attend, Shahristani had, about two weeks
before the event, requested a week delay, which had also
probably reduced participation by international experts.
Among the positive outcomes from the MoO's perspective, the
symposium emphasized the importance of obtaining
international oil company (IOC) investment and technology and
endorsed the importance of the bid round continuing.

Symposium Recommendations
--------------


4. (U) Various other recommendations could also potentially
enhance the MoO's operational efficiency by removing certain
constraints. The symposium recommended that:

-- The MoO and operating companies receive additional
"financial resources" "for the development and training of
staff";
-- The operating companies receive "extraordinary powers" "to
speed up implementation of plans and to overcome
administrative bottlenecks and restraints";
-- The MoO and operating companies be authorized to "contract
with experts" and provide "competitive wages"; and
-- The GOI should "improve living and working conditions in
the oil sector" and the "upgrading of salaries and wages to
workers in the oil sector."

Criticism of Oil Policy
--------------


5. (C) On the other hand, various participants' statements
and the Prime Minister's closing remarks were directly or
Qand the Prime Minister's closing remarks were directly or
indirectly critical of the Oil Ministry's handling of oil
policy, and the recommendation to form a federal "oil and gas
council" and reconstitute the Iraq National Oil Company
(INOC) would restrict MoO authority and freedom of action.
In the event, however, an Oil Ministry Director General (DG)
said that the Prime Minister's legal advisor Fadhil Mohammed
Jawad was insisting that both actions had to be submitted to
the Council of Representatives (CoR, Parliament) for
approval. The DG opined that Fadhil's position was akin to
"putting a stick in the wheel" of the GOI's efforts to

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increase oil production quickly and no action would be taken
on the symposium's recommendations until after Iraq's
national elections and the formation of a new government.

The MoO's Unfolding Strategy
--------------


6. (U) In the meantime, Shahristani is proceeding with what
he described at the symposium as a three-track process for
rapidly increasing oil production: (a) moving forward with a
series of bid rounds to invite international oil company
(IOC) participation in oil and gas field development; (b)
negotiating separate deals directly with some IOCs for
development of certain fields that have been kept out of the
bid rounds; and (c) having MoO operating companies continue
with implementation of an accelerated production plan,
including by contracting with oil field service companies.


7. (C) Bid Rounds: As various analysts widely expected, the
timeline for the first bid round has slipped. An IOC contact
advised us that bids will not be due until May and opined
that the submission date could slip again until June or July
(which means that MoO will miss the original target by at
least two months to sign contracts by the end of June). The
IOC contact added that a revised bid round model contract had
been distributed on March 20, but that few IOC concerns had
been addressed, including who can provide security, control
over the projects, legal framework, and payment structure.


8. (C) Separate Deals: Almost certainly responding to
pressure from PM Maliki, MoO also announced March 24 that it
had invited a consortium of Chevron and France's Total to
compete against Norway's StatOil Hydro to bid for what was
described as an engineering, procurement, and construction
(EPC) contract for the Narh Bin Umar oil field. A
still-to-be-determined company would also be invited to
participate. The Nahr Bin Umar field currently produces
around 50,000 barrels per day (bbl/d),but could rise to a
production level of 450,000 bbl/d within a few years. The
Nahr Bin Umar offer follows on the heels of a similar tender
for the Nasiriyah oil field, which is being competed among
Spain's Repsol, Italy's Eni, and a consortium of Japanese
companies Nippon Oil, JGC, and Inpex. On March 26, an MoO
Director General (DG) told us that a third field, Rafae, was
also under negotiation, with a fourth unnamed field to be
offered shortly. (Note: Discovered in 1980, Rafae is located
in Maysan Province and holds reserves of 100 million barrels.)

New Deputy Minister for Upstream
--------------


9. (C) The same DG said MoO Inspector General (IG)
Abdulkareem Luaibi Bahedh would become the next Deputy
Minister (DM) over the upstream sector. The office had been
vacant since mid-year 2008, with Oil Minister Advisor
Abdulsaheb Al-Qutub holding the DM responsibility in an
acting capacity. The DG was pleased with the personnel
change, noting that Luaibi had a petroleum engineering
degree, unlike Qutub and that Qutub had not handled the
upstream sector well. Another MoO source had earlier
suggested that a condition that Luaibi imposed to accept the
appointment was the right to remove current South Oil Company
DG Kifah Kamal Nu'man, but we have no confirmation of this
information or whether Luaibi was successful with his demand.


10. (S) In our view, the appointment is motivated partly by
Qutub's declining health, but could also reflect
Shahristani's dissatisfaction with Qutub's handling of the
upstream sector, with oil production declining. The
appointment has a positive aspect, since the IG has been more
Qappointment has a positive aspect, since the IG has been more
willing to meet with Embassy staff and does not share Qutub's
negative opinion of Americans. The IG played an important
role on the committee that investigated declining oil
production, which resulted in support for recommendations
from Deputy Prime Minister Barham Salih's February's Oil
Policy Symposium. He could thus be expected to strengthen
MoO efforts to implement Barham's reforms. However, Luaibi's
past comments indicate reluctance to confront Oil Minister
Shahristani or to advocate disagreeable or controversial
positions, suggesting that he might not be a strong advocate
for needed reforms. When the unassuming Luaibi was asked
whether Shahristani accepts the committee's recommendations,
he noted, "the Minister does not have a personality that
takes criticism well." On another occasion, Luaibi remarked,
"Shahristani has a strong will and does not always take the
advice of others when he thinks he is right." Luaibi could
thus end up playing a balancing act between Shahristani and
Barham, preferring caution to reform.


BAGHDAD 00000856 003 OF 003


Comment: Fundamental Reforms Needed
--------------


11. (S) Adoption of the symposium's recommendations or
implementation of the MoO's programs will not halt declining
oil production or turn the situation around quickly. The
current situation is a result of years of under investment in
the petroleum sector and resolving problems will take time.
In addition to a renewed focus on upstream production, the
GOI will need to tackle the fundamental reforms needed to
improve MoO operational capability as recommended by the oil
policy symposium. The stalemate with KRG continues, however,
preventing any meaningful progress on hydrocarbons
legislation, which could facilitate foreign investment in the
petroleum sector and obviate the need for the key reforms
coming from the symposium. According to a KRG source's
account of KRG Prime Minister Nechirvan Barzani's point to PM
Maliki, progress on hydrocarbons legislation would not be
possible as long as Shahristani remains Iraqi Minister of Oil.

BUTENIS