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.

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First bid round going "surprisingly well"
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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.

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Tensions between the MOO and regional oil companies
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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."

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ConocoPhilips seeks to work with local actors
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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.

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Once awarded, a flurry of activity will ensue
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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.


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Doubts about Royal Dutch Shell gas deal
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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