Identifier
Created
Classification
Origin
09BASRAH38
2009-06-29 17:04:00
CONFIDENTIAL
REO Basrah
Cable title:
BASRA: LOCAL DISSATISFACTION GROWS IN FINAL RUN-UP TO FIRST
how-toVZCZCXRO1669 RR RUEHDE RUEHDH RUEHIHL RUEHKUK DE RUEHBC #0038/01 1801704 ZNY CCCCC ZZH R 291704Z JUN 09 FM REO BASRAH TO RUEHC/SECSTATE WASHDC 0888 INFO RUEHGB/AMEMBASSY BAGHDAD 0466 RUCNRAQ/IRAQ COLLECTIVE RHEFDIA/DIA WASHINGTON DC RUEAIIA/CIA WASHDC RHEHAAA/NSC WASHINGTON DC RUEHBC/REO BASRAH 0926
C O N F I D E N T I A L SECTION 01 OF 03 BASRAH 000038
SIPDIS
E.O. 12958: DECL: 6/29/2019
TAGS: ECON EINV ENRG EPET PGOV IZ
SUBJECT: BASRA: LOCAL DISSATISFACTION GROWS IN FINAL RUN-UP TO FIRST
OIL BID ROUND
REF: A. BAGHDAD 1648
B. BASRA 36
C. BASRA 31
D. BASRA 29
E. BASRA 27
F. BAGHDAD 955
BASRAH 00000038 001.2 OF 003
CLASSIFIED BY: John Naland, PRT Team Leader, PRT Basra, US State
Department.
REASON: 1.4 (b),(d)
C O N F I D E N T I A L SECTION 01 OF 03 BASRAH 000038
SIPDIS
E.O. 12958: DECL: 6/29/2019
TAGS: ECON EINV ENRG EPET PGOV IZ
SUBJECT: BASRA: LOCAL DISSATISFACTION GROWS IN FINAL RUN-UP TO FIRST
OIL BID ROUND
REF: A. BAGHDAD 1648
B. BASRA 36
C. BASRA 31
D. BASRA 29
E. BASRA 27
F. BAGHDAD 955
BASRAH 00000038 001.2 OF 003
CLASSIFIED BY: John Naland, PRT Team Leader, PRT Basra, US State
Department.
REASON: 1.4 (b),(d)
1. (C) Summary. In the run-up to the long-awaited and possibly
historic late June-early July first round oil auctions, a
growing opposition to the plan has emerged in Basra Province,
where three giant oil fields are included in the first round,
and state-owned South Oil Company (SOC) holds sway. If the
first round goes as planned, a significant influx of
international oil companies (IOCs) could soon ramp up production
in the region. But with this increase in activity, the prospect
of greater Baghdad control of revenues and operations, a less
independent SOC, and greater transparency has raised resistance
in some circles. And while the prospect SOC and worker
resistance, and some observers' fear of sabotage might be
overstated, overall resistance to any wholesale changes is
evident. While SOC officials, its workforce, and some local
politicians have called for a scrapping of the first round,
other leaders are more sanguine, and ascribe this resistance to
politics and an attempt to maneuver for position under new
operating rules. In any event, if the first round goes forward,
it could mark the beginning of the most significant event in
Iraq's oil industry in decades. End summary.
-------------- ---
Countdown to first round oil/gas licensing round
-------------- ---
2. (U) In what industry analysts are calling a watershed event
in Iraq's hydrocarbon sector, the GOI appears set to go forward
on its late June-early July first licensing round. Thirty-two
firms are expected to bid for the right to revive production at
six developed oil fields and two undeveloped gas fields that
have suffered from years of war, sanctions and neglect, and
could pump in an estimated $50 billion in investments in the
next five years (refs A, C). The Government of Iraq (GOI) hopes
this first round will increase national production to six
million barrels per day (bbl/d) by 2014, up from the current 2.4
million bbl/d, and raise badly-needed revenues. Contracts run
for 20 years, with a possible five-year extension. Within Basra
Province, the giant Zubayr, Rumaila, and West Qurna fields are
up for bid. A second round auction is planned for late 2009,
which could increase production by another 2.5 million bbl/d
over five years. Although Iraq sits on the world's fourth
largest proven oil reserves (115 billion barrels, 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. (U) Production will be run via technical service contracts,
unlike more common production-sharing schemes found elsewhere,
in a joint venture between the IOC and SOC, in the case of the
three Basra fields. SOC will continue as sole owner and
operator of the fields, with IOCs providing investment and
expertise. Assuming production increases in line with targets,
IOCs will recover costs and receive a fee in dollars or oil.
The fields will be jointly operated Field Operating Divisions
(FOD),controlled by the GOI and IOC.
-------------- --------------
New joint venture rules might affect South Oil and Baswaris
-------------- --------------
4. (C) Under these joint ventures, operations are expected to be
more transparent than is now the case with SOC, where industry
analysts have long alleged that theft, lack of metering, and
under-reporting of revenue can occur. However, for many
Basrawis, the new rules will unfairly tilt control and revenues
too much in the favor of the GOI and the Ministry of Oil (MOO).
Basrawis widely contend that, given that SOC produces and
exports roughly 70%-80% of Iraq's total crude, they deserve
higher revenues and a greater say in operations, and fear new
rules that might leave them begging to for GOI revenues. Some
PRT Basra contacts also contend that at least some of SOC's
largesse is also spread to rehabilitate the city and province's
public infrastructure -- schools, parks, roads and hospitals --
which has contributed to a palpably more spruced up city in
recent years.
--------------
And could open up a hornet's nest
--------------
5. (C) Some PRT contacts have alleged that some SOC funds also
BASRAH 00000038 002.2 OF 003
must pay "protection" money, an allegation which the PRT cannot
independently verify. Norway-based Petronor oil company
representative Hans Hoisker, who has done business in the Basra
for 19 years, claims that some SOC money "ensures that
operations and transportation run smoothly, with no delays," and
are spent on "certain tribes and trucking companies . . . . why
do you think there has not been any sabotage in recent months?"
Hoisker in fact credits the last two SOC Directors General (DG),
Jabbar Al-Laebi (now a senior MOO advisor) and Kifah Numan for
"doing a good job spreading the wealth, allowing a bit of
pilfering, and keeping SOC and Basra together," for which "Basra
and Iraq owes a lot to SOC." For Hoisker and other local
analysts, this system, as flawed and unpalatable it may be, has
worked, and radically different new rules could threaten these
arrangements, even if they're expected by IOCs. Hoisker stated
flatly: "it is impossible for oil [in Basra] to flow if anyone
along this 'supply chain' is unhappy."
6. (C) Hoisker also expresses some concern that SOC's
12,000-strong security force, tasked to protect pipelines and
installations, could also become "restless" if not satisfied if
enough money is not spread their way. While the force is said
to have been recently and formally transferred from SOC to the
Ministry of Interior, Hoisker said "I'm not sure if they really
have full control." While under SOC, and during the previous,
Fadhilah-controlled government (also widely accused of
pilfering),some contacts said it acted at times like a virtual
Fadhilah militia.
--------------
SOC DG opposes first round
--------------
7. (SBU) Meanwhile, the rivalry between SOC and MOO continues.
Newly installed SOC DG Fayad al-Nema upset the Iraqi oil
establishment and IOCs on June 14 when he urged that the first
round be scrapped. SOC engineers also mounted a petition drive
against the plan. On June 26, the prime minister of the
Kurdistan region also announced his opposition to the auction.
MOO Sharistani himself was grilled in Parliament last week,
accused of "giving away" Iraq's resources.
8. (C) Sharistani was said to have felt betrayed by Fayad,
having handpicked him for the job just last month, with the
backing of Prime Minister Maliki; Fayad is also a Da'wa/State of
Law political ally of them both (ref E). According to media
reports, Fayad's comments were not well received by IOCs,
either, given that billions in investments are on the line, and
millions have already been spent preparing bids. The IOCs could
now face the prospect of uncooperative and unwilling local
partner. Fayad has already established a reputation in Basra
for opposition to IOCs: Basra representatives of U.K.-based oil
services company Mott McDonald, a subcontractor for Shell's gas
project (refs B, F),said that Fayad is "openly hostile" to
IOCs, and regularly obstructs access to oil fields that Shell
needs to visit in order to prepare for its gas project.
-------------- --
Oil workers entity opposes deal, issues warning
-------------- --
9. (C) In a June 23 meeting with PRT EconOff, Iraqi Petroleum
Workers Union head Muhammed Ali Hassan said that his union also
opposes the first round, and "Iraqi workers alone are capable of
increasing production, we don't need foreign companies, and we
don't need outside help." He said that if this first round goes
forward, IOCs should "stay out of Iraq, because we cannot
guarantee their safety."
10. (SBU) Note: It is hard to gauge the legitimacy of Ali
Hassan's "union" (or his threat),which claims to represent
36,000 Iraqi hydrocarbon industry workers outside of the
Kurdistan region. Iraq has never legally established the right
of oil and gas workers to organize; under the Saddam era, such
unions were banned. This "union" was established in 2003, has
no legal basis, and relies on voluntary member contributions.
In 2008, the group claimed responsibility for a small act of
sabotage against a Basra Shell facility, and passed out
anti-Shell pamphlets. At the same time, Ali Hassan said that
his union is not against private sector participation in
principle, as long as it is "within the law, and does not
infringe on Iraqi sovereignty." End note.
-------------- --------------
"The GOI should have auctioned second round oil fields first"
-------------- --------------
11. (SBU) Some GOI officials and private sector reps contend
BASRAH 00000038 003.2 OF 003
that the GOI should have first opened up the eleven largely
undeveloped fields identified in the second round, and only
later offered up the more developed fields of the first round.
Politically, second round fields are popular, as they infringe
on few if any vested interests, and prospects for production and
jobs can only improve. For these advocates, the GOI wasted two
years promoting the first round. (Note: Some petroleum analysts
opine that IOCs might experience legal uncertainties operating
in these less developed fields. End note.)
--------------
Political football
--------------
12. (C) Some observers predict that a successful first licensing
round can and will be used by the opposition Fadhilah party in
the run-up to the January 2010 national elections, in hopes of
regaining political strength in the province. A local
electorate could be open to conspiracy theories pitched by the
Fadillah party. Already, the Da'wa-dominated Basra Provincial
Council (BPC) (and GOI) face charges of "neocolonialism" and
"selling out" SOC to the west (even though the PC plays no role
in this first round). However, according to Ihsan Abdul-Jabar,
senior SOC engineer and member of the Basra Investment
Commission, despite these objections, the "first round will go
forward, it has the strong support of Maliki and Sharistani,"
and "they have the power to make the deal work." On SOC DG
Fayad, he said "they will likely replace him soon anyway."
--------------
Crunch time
--------------
13. (SBU) One factor that could favor the first round is the
provincial council's perilous finances, severely impacted by
declining oil revenues (ref D). Some analysts predict that
provincial salaries will need to be renegotiated, even if crude
prices remain at their relatively higher level. According to
local United Nations and Mott McDonald reps, some sub districts
could start to run out of money as early as July, and already
many planned capital projects are on hold. The prospect of IOCs
creating new jobs will be most welcome. And while world crude
prices have increased from around $50/barrel in April to around
$70 today, Basra crude is discounted by around $15-$20 due to
its poor quality and transportation costs. In addition,
according to industry reports, SOC suffered a 100,000 bbl/d
decline in 2008, and faces further declines ahead. SOC has
papered over this decline by maintaining its export levels, and
sending less crude to local refineries, all while facing
pressure to comply with the MOO's "crash" production program.
--------------
Comment
--------------
14. (SBU) It is hard to sort out just how strong local
resistance really is to a first round contract award, and how
much of it might be due to politics. Some of this opposition is
also likely attributable to interested parties jockeying for
position under new rules to come, and staking out bargaining
positions for still-to-be-negotiated final contract details and
subcontract tendering after awards are made. Some local
observers are still hopeful that there still exists room enough
for all sides to come to an agreement. However, one thing is
certain: if all goes more or less according to plans, and
despite the opaque nature of Iraqi business and politics, this
first round oil licensing round could indeed be the beginning of
the most significant development in the Iraqi oil sector in the
last four decades.
NALAND
SIPDIS
E.O. 12958: DECL: 6/29/2019
TAGS: ECON EINV ENRG EPET PGOV IZ
SUBJECT: BASRA: LOCAL DISSATISFACTION GROWS IN FINAL RUN-UP TO FIRST
OIL BID ROUND
REF: A. BAGHDAD 1648
B. BASRA 36
C. BASRA 31
D. BASRA 29
E. BASRA 27
F. BAGHDAD 955
BASRAH 00000038 001.2 OF 003
CLASSIFIED BY: John Naland, PRT Team Leader, PRT Basra, US State
Department.
REASON: 1.4 (b),(d)
1. (C) Summary. In the run-up to the long-awaited and possibly
historic late June-early July first round oil auctions, a
growing opposition to the plan has emerged in Basra Province,
where three giant oil fields are included in the first round,
and state-owned South Oil Company (SOC) holds sway. If the
first round goes as planned, a significant influx of
international oil companies (IOCs) could soon ramp up production
in the region. But with this increase in activity, the prospect
of greater Baghdad control of revenues and operations, a less
independent SOC, and greater transparency has raised resistance
in some circles. And while the prospect SOC and worker
resistance, and some observers' fear of sabotage might be
overstated, overall resistance to any wholesale changes is
evident. While SOC officials, its workforce, and some local
politicians have called for a scrapping of the first round,
other leaders are more sanguine, and ascribe this resistance to
politics and an attempt to maneuver for position under new
operating rules. In any event, if the first round goes forward,
it could mark the beginning of the most significant event in
Iraq's oil industry in decades. End summary.
-------------- ---
Countdown to first round oil/gas licensing round
-------------- ---
2. (U) In what industry analysts are calling a watershed event
in Iraq's hydrocarbon sector, the GOI appears set to go forward
on its late June-early July first licensing round. Thirty-two
firms are expected to bid for the right to revive production at
six developed oil fields and two undeveloped gas fields that
have suffered from years of war, sanctions and neglect, and
could pump in an estimated $50 billion in investments in the
next five years (refs A, C). The Government of Iraq (GOI) hopes
this first round will increase national production to six
million barrels per day (bbl/d) by 2014, up from the current 2.4
million bbl/d, and raise badly-needed revenues. Contracts run
for 20 years, with a possible five-year extension. Within Basra
Province, the giant Zubayr, Rumaila, and West Qurna fields are
up for bid. A second round auction is planned for late 2009,
which could increase production by another 2.5 million bbl/d
over five years. Although Iraq sits on the world's fourth
largest proven oil reserves (115 billion barrels, 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. (U) Production will be run via technical service contracts,
unlike more common production-sharing schemes found elsewhere,
in a joint venture between the IOC and SOC, in the case of the
three Basra fields. SOC will continue as sole owner and
operator of the fields, with IOCs providing investment and
expertise. Assuming production increases in line with targets,
IOCs will recover costs and receive a fee in dollars or oil.
The fields will be jointly operated Field Operating Divisions
(FOD),controlled by the GOI and IOC.
-------------- --------------
New joint venture rules might affect South Oil and Baswaris
-------------- --------------
4. (C) Under these joint ventures, operations are expected to be
more transparent than is now the case with SOC, where industry
analysts have long alleged that theft, lack of metering, and
under-reporting of revenue can occur. However, for many
Basrawis, the new rules will unfairly tilt control and revenues
too much in the favor of the GOI and the Ministry of Oil (MOO).
Basrawis widely contend that, given that SOC produces and
exports roughly 70%-80% of Iraq's total crude, they deserve
higher revenues and a greater say in operations, and fear new
rules that might leave them begging to for GOI revenues. Some
PRT Basra contacts also contend that at least some of SOC's
largesse is also spread to rehabilitate the city and province's
public infrastructure -- schools, parks, roads and hospitals --
which has contributed to a palpably more spruced up city in
recent years.
--------------
And could open up a hornet's nest
--------------
5. (C) Some PRT contacts have alleged that some SOC funds also
BASRAH 00000038 002.2 OF 003
must pay "protection" money, an allegation which the PRT cannot
independently verify. Norway-based Petronor oil company
representative Hans Hoisker, who has done business in the Basra
for 19 years, claims that some SOC money "ensures that
operations and transportation run smoothly, with no delays," and
are spent on "certain tribes and trucking companies . . . . why
do you think there has not been any sabotage in recent months?"
Hoisker in fact credits the last two SOC Directors General (DG),
Jabbar Al-Laebi (now a senior MOO advisor) and Kifah Numan for
"doing a good job spreading the wealth, allowing a bit of
pilfering, and keeping SOC and Basra together," for which "Basra
and Iraq owes a lot to SOC." For Hoisker and other local
analysts, this system, as flawed and unpalatable it may be, has
worked, and radically different new rules could threaten these
arrangements, even if they're expected by IOCs. Hoisker stated
flatly: "it is impossible for oil [in Basra] to flow if anyone
along this 'supply chain' is unhappy."
6. (C) Hoisker also expresses some concern that SOC's
12,000-strong security force, tasked to protect pipelines and
installations, could also become "restless" if not satisfied if
enough money is not spread their way. While the force is said
to have been recently and formally transferred from SOC to the
Ministry of Interior, Hoisker said "I'm not sure if they really
have full control." While under SOC, and during the previous,
Fadhilah-controlled government (also widely accused of
pilfering),some contacts said it acted at times like a virtual
Fadhilah militia.
--------------
SOC DG opposes first round
--------------
7. (SBU) Meanwhile, the rivalry between SOC and MOO continues.
Newly installed SOC DG Fayad al-Nema upset the Iraqi oil
establishment and IOCs on June 14 when he urged that the first
round be scrapped. SOC engineers also mounted a petition drive
against the plan. On June 26, the prime minister of the
Kurdistan region also announced his opposition to the auction.
MOO Sharistani himself was grilled in Parliament last week,
accused of "giving away" Iraq's resources.
8. (C) Sharistani was said to have felt betrayed by Fayad,
having handpicked him for the job just last month, with the
backing of Prime Minister Maliki; Fayad is also a Da'wa/State of
Law political ally of them both (ref E). According to media
reports, Fayad's comments were not well received by IOCs,
either, given that billions in investments are on the line, and
millions have already been spent preparing bids. The IOCs could
now face the prospect of uncooperative and unwilling local
partner. Fayad has already established a reputation in Basra
for opposition to IOCs: Basra representatives of U.K.-based oil
services company Mott McDonald, a subcontractor for Shell's gas
project (refs B, F),said that Fayad is "openly hostile" to
IOCs, and regularly obstructs access to oil fields that Shell
needs to visit in order to prepare for its gas project.
-------------- --
Oil workers entity opposes deal, issues warning
-------------- --
9. (C) In a June 23 meeting with PRT EconOff, Iraqi Petroleum
Workers Union head Muhammed Ali Hassan said that his union also
opposes the first round, and "Iraqi workers alone are capable of
increasing production, we don't need foreign companies, and we
don't need outside help." He said that if this first round goes
forward, IOCs should "stay out of Iraq, because we cannot
guarantee their safety."
10. (SBU) Note: It is hard to gauge the legitimacy of Ali
Hassan's "union" (or his threat),which claims to represent
36,000 Iraqi hydrocarbon industry workers outside of the
Kurdistan region. Iraq has never legally established the right
of oil and gas workers to organize; under the Saddam era, such
unions were banned. This "union" was established in 2003, has
no legal basis, and relies on voluntary member contributions.
In 2008, the group claimed responsibility for a small act of
sabotage against a Basra Shell facility, and passed out
anti-Shell pamphlets. At the same time, Ali Hassan said that
his union is not against private sector participation in
principle, as long as it is "within the law, and does not
infringe on Iraqi sovereignty." End note.
-------------- --------------
"The GOI should have auctioned second round oil fields first"
-------------- --------------
11. (SBU) Some GOI officials and private sector reps contend
BASRAH 00000038 003.2 OF 003
that the GOI should have first opened up the eleven largely
undeveloped fields identified in the second round, and only
later offered up the more developed fields of the first round.
Politically, second round fields are popular, as they infringe
on few if any vested interests, and prospects for production and
jobs can only improve. For these advocates, the GOI wasted two
years promoting the first round. (Note: Some petroleum analysts
opine that IOCs might experience legal uncertainties operating
in these less developed fields. End note.)
--------------
Political football
--------------
12. (C) Some observers predict that a successful first licensing
round can and will be used by the opposition Fadhilah party in
the run-up to the January 2010 national elections, in hopes of
regaining political strength in the province. A local
electorate could be open to conspiracy theories pitched by the
Fadillah party. Already, the Da'wa-dominated Basra Provincial
Council (BPC) (and GOI) face charges of "neocolonialism" and
"selling out" SOC to the west (even though the PC plays no role
in this first round). However, according to Ihsan Abdul-Jabar,
senior SOC engineer and member of the Basra Investment
Commission, despite these objections, the "first round will go
forward, it has the strong support of Maliki and Sharistani,"
and "they have the power to make the deal work." On SOC DG
Fayad, he said "they will likely replace him soon anyway."
--------------
Crunch time
--------------
13. (SBU) One factor that could favor the first round is the
provincial council's perilous finances, severely impacted by
declining oil revenues (ref D). Some analysts predict that
provincial salaries will need to be renegotiated, even if crude
prices remain at their relatively higher level. According to
local United Nations and Mott McDonald reps, some sub districts
could start to run out of money as early as July, and already
many planned capital projects are on hold. The prospect of IOCs
creating new jobs will be most welcome. And while world crude
prices have increased from around $50/barrel in April to around
$70 today, Basra crude is discounted by around $15-$20 due to
its poor quality and transportation costs. In addition,
according to industry reports, SOC suffered a 100,000 bbl/d
decline in 2008, and faces further declines ahead. SOC has
papered over this decline by maintaining its export levels, and
sending less crude to local refineries, all while facing
pressure to comply with the MOO's "crash" production program.
--------------
Comment
--------------
14. (SBU) It is hard to sort out just how strong local
resistance really is to a first round contract award, and how
much of it might be due to politics. Some of this opposition is
also likely attributable to interested parties jockeying for
position under new rules to come, and staking out bargaining
positions for still-to-be-negotiated final contract details and
subcontract tendering after awards are made. Some local
observers are still hopeful that there still exists room enough
for all sides to come to an agreement. However, one thing is
certain: if all goes more or less according to plans, and
despite the opaque nature of Iraqi business and politics, this
first round oil licensing round could indeed be the beginning of
the most significant development in the Iraqi oil sector in the
last four decades.
NALAND