CONOCO PHILLIPS SIZING UP OIL OPPORTUNITIES IN BASRAH

C O N F I D E N T I A L BASRAH 000031 E.O. 12958: DECL: 6/8/2019 TAGS: ENRG EPET EINV ECON EAID PGOV IZ SUBJECT: CONOCO PHILLIPS SIZING UP OIL OPPORTUNITIES IN BASRAH REF: A. (A) BASRAH 27 ¶B. (B) BAGHDAD 955 CLASSIFIED BY: Mark Bocchetti, PRT Team Leader, ECON, State Department. REASON: 1.4 (b),(d) ¶1. (SBU) Summary. Senior ConocoPhillips (CP) representatives briefed Basrah PRTOffs on their latest activities in Basrah during a May 31 visit, and indicated that they would likely bid on a number of fields in the first oil licensing round. They gave the Government of Iraq's (GOI) Ministry of Oil (MOO) generally high marks for handling of the bid process. They said that, in the long run, they foresee a diminishing independence for the state oil companies and an ever-stronger MOO. They expressed great interest in engaging local stakeholders, including local government, NGOS, and local subcontractors, whom they indicated would be the key to any success. Once the first-round contracts are awarded, possibly in late June, they said that there will be a flurry of activity in the province. CP reps also expressed doubt about the prospects for eventual approval of Royal Dutch Shell's gas deal. End summary. -------------- First bid round going "surprisingly well" -------------- ¶2. (SBU) CP Iraq President Tom Drean, Project Development Manager Steve Bross, and Security Director Walied Shater (please strictly protect) said that they were scouting the province ahead of the June 29-30 deadline for bids in the first oil licensing round. Thirty-two companies, including CP, are expected to bid for the right to develop the six major oil fields and two gas fields over 20 years, with a possible five-year extension. Within Basrah Province, the fields up for bid are Zubayr, Rumaila, and West Qurna. CP, like several other international oil companies (IOC) that have visited the province (and PRT) in recent months, is preparing for what could be intense IOC activity soon after the awards are announced. Total first round bids could translate into an estimated USD 50 billion investment, they said. GOI 's stated goal is to reach 6 million barrels per day (bbl/d) in production by 2014, up from the current 2.4 million bbl/d, and raise revenues for an increasingly cash-strapped GOI. Although Iraq sits on one of the largest proven oil reserves in the world (roughly 115 billion barrels, the fourth largest in the world after Saudi Arabia, Iran and Canada),security, bureaucratic, and infrastructure problems have left them largely untapped. There are about 80 oil and gas fields in Iraq, but only 15 of them are producing. ¶3. (C) CP had overall high praise for MOO's conduct of the first round. "To our surprise, the MOO and Petroleum Contracts and Licensing Directorate have done a good job," Drean said. Although "MOO had some problems along the way," it responded to many IOC concerns about bidding conditions. They also said that the MOO has been "super sensitive to any appearance of corruption," and the overall process had been "very transparent." He wryly added, however, that after awards are announced and IOCs begin seeking local service providers, "we might then be introduced to uncles and cousins who just happen to have the only available services." ¶4. (SBU) CP reps noted the contracts unique nature: a service contract under which the winning bidder will not entirely control operations and - unlike production-sharing schemes common elsewhere in the world. The core contract will be a 75-25 percent joint venture between the IOC and the regional state-owned company (South Oil, North Oil, and Maysan Oil - SOC, NOC and MOC),the latter of which will continue to be the sole owners and operators of the fields, with IOCs providing investment and expertise. Assuming production increases in line with agreed targets, the IOCs will recover costs and receive a fee in dollars or oil. The fields will be jointly operated by Field Operating Divisions (FOD),to be equally controlled by the GOI and the relevant IOC. Drean noted that this arrangement marks a major difference between the first and the second oil round; for the latter, the IOCs will be developers and operators, with some participation by an Iraqi entity. -------------- -------------- Tensions between the MOO and regional oil companies -------------- -------------- ¶5. (C) Drean said that the new management structure that the FOD represents is sort of "face-saving compromise" for the regional state companies (SOC, NOC and MOC),who he thinks will see a declining role in years ahead in the face of an ever-stronger MOO. He said that the FOD model could "very well be the management trend" in the future. On the recent removal of SOC Director Kifah Numan (ref A),he said that, while he was technically competent, there was also "a lot of corruption" within SOC in the form of theft and diversion of oil." -------------- -- ConocoPhilips seeks to work with local actors -------------- -- ¶6. (SBU) CP reps were anxious to learn about the local investment, social and political climate, and indicated that if their bid is successful, they will work hard to engage with local stakeholders, including local government, NGOS, and local companies. Without their support, the project will surely fail, they said. CP reps said that they will be interested to learn more about which strategies have worked or not worked for other companies. ¶7. (SBU) PRT officers noted that, given the still relatively recent improvement in security and having only recently assumed control of the PRT, we too are learning the local scene. PRT officers noted that only now is a semblance of order emerging, but the people are tired of war, poor governance, and poverty, and are eager for development and to get on with the world from which they have been cut off for over a generation. Further, the PC - generally pro-development and investment - is especially open to investment right now, given budget woes, increased salary costs for public workers, and a drop in oil revenues. PC members also know that any development and jobs must come from the private sector. ¶8. (SBU) CP reps expressed great interest in our own engagement efforts with NGOs, vocational schools, and youth employment and training schemes. PRT officers directed them to the example of USAID's Community Stabilization Program (CSP),now winding down, that has provided jobs, training, small grants, and small infrastructure projects. Discussion also focused on at-risk, young and unemployed males. CP reps said that they will want as large a percentage of local work force as possible. They said that they would also seek information about reliable local contractors, employment agencies, local security, and the Port of Umm Qasr. -------------- Once awarded, a flurry of activity will ensue -------------- ¶9. (SBU) CP reps said that once the bids are awarded, possibly as early as late June, and given the fact that IOC compensation is strictly linked to performance and timing guidelines, the IOCs "will have to get work immediately," and activity will "ramp up very quickly." CP reps expressed a strong desire to avoid going through Baghdad, and using the Port of Umm Qasr for all imports. (Comment: It remains to be seen just how much of an increase in import volume the Port of Umm Qasr will be able to handle. While generally well-run by Iraqi standards, any substantial increase in volumes will require close cooperation among the IOCs, MOO and the several other GOI ministries that have jurisdiction within the Port. End comment.) Drean noted that with heavy equipment imports such as drilling rigs, pipes, pumps, and generators, there will be an immediate need for warehousing and logistics, as well as office space and housing. -------------- Doubts about Royal Dutch Shell gas deal -------------- ¶10. (SBU) CP reps expressed strong doubts about the prospects for the $4 billion Royal Dutch Shell proposal to collect and market flared gas from associated Basrah province oil fields (ref B). Preliminary approval for this deal was achieved in late 2008 without a competitive tender. Noting what they said was an increasingly long process to reach final GOI approval, CP reps said that they expected that the deal will ultimately be rejected by the GOI Council of Representatives. Drean said that while a sole source deal "may initially appear quick and hassle free, problems always arise, especially in such a conspiracy laden society as this . . . people will always suspect a back room deal." Further, if the first oil round goes relatively well, which he expects will happen, "people will begin asking questions about the Shell deal, particularly why it was not competitively bid." Drean said that in his experience with these types of projects, only an open tender process, "time-consuming and imperfect as it can often be," will work in the long run. However, he said that whatever the project's outcome, Shell would not be negatively affected in any oil project on which it is expected to bid. BOCCHETTI