BASRA: BP CONFIDENT ABOUT RUMAILA OIL DEAL, PARTNERSHIP WITH

C O N F I D E N T I A L SECTION 01 OF 03 BASRAH 000056

SIPDIS

E.O. 12958: DECL: 10/16/2019
TAGS: ECON EPET EINV IZ CH
SUBJECT: BASRA: BP CONFIDENT ABOUT RUMAILA OIL DEAL, PARTNERSHIP WITH
CNPC

REF: BAGHDAD 2389, BAGHDAD 2686

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CLASSIFIED BY: John Naland, PRT Team Leader, PRT Basra, US State
Department.
REASON: 1.4 (b),(e)

1. (U) This is a Basra PRT reporting cable.


2. (C) Summary. In an October 1 meeting with PRT Econoffs, BP
Iraq Chief Operating Officer David Campbell (strictly protect)
expressed confidence that BP and its China National Petroleum
Corporation (CNPC) partner would soon finalize a contract with
the Ministry of Oil (MOO) to increase production at the Basra
Province Rumaila field. (Note: On October 8, the MOO initialed
this contract, which will now be referred to the cabinet for
final approval. End note.) He said that the deal could gain
cabinet approval within a few weeks, before the January 2010
elections, and possibly even before the December second oil/gas
round. Campbell insisted that BP/CNPC can make money on the
deal, despite what analysts widely consider to be an
unprofitable, $2 per barrel production fee, on the strength of
sharply increased production. He said that the contract
structure had an advantage in that fees are fixed irrespective
of the world price for oil. He also said that BP would have
full management control. Campbell had high praise for CNPC, and
said that BP sought a partnership with them to share investment
risk and to take advantage of CNPC's current experience in Iraq.
Campbell said that CNPC had gained "undeserved" negative
publicity in its management of the nearby Ahdab field in Wasit
Province. He admitted that while BP/CNPC can make a profit on
the Rumaila field, its acceptance of this low production fee was
also "an attempt to get a foot in door" in Iraq, and to
re-establish its historic presence in this region. Campbell
said that BP is still working on a "corporate social
responsibility" strategy and how to deal with the local
populace, and to ensure that expectations are kept in check.
End summary.

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Background on BP/CNPC deal
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3. (SBU) The BP-led service contract for Rumaila was the only
deal that emerged from the MOO's first oil/gas June auction.
While most oil firms at the auction balked at Iraq's stiff
payment terms, BP and CNPC accepted the MOO's $2 per barrel
remuneration fee to win the Rumaila contract. The MOO will
offer 15 other oil or gas field groups in a second bidding round
in December. The BP-led consortium plans to increase Rumaila's
production, Iraq's largest producing oil field, from around 1
million barrels per day (mb/d) - almost half of Iraq's total
output of 2.5 mb/d) - to 2.85 mb/d within the first six years of
the $27 billion, 20-year contract. BP-CNPC-GOI shares will be
held at 38%, 37%, and 25%, respectively. BP/CNPC is working
with the current Rumaila operator, Iraq's state-owned South Oil
Company (SOC) to set up a dedicated operating company, relying
heavily on Iraqi manpower, with a small team of BP and CNPC
managerial and technical staff.

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Insists that Rumaila can be profitable
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4. (SBU) Campbell insisted that BP/CNPC can make money, largely
due to sharply increased production. "Margin is admittedly
small, but we can make a profit." He said that Rumaila,
presently the fifth largest field in world in terms of
production, when up and running at 2.85 mb/d will become the
number two producing field in the world, after the Ghawar field
in Saudi Arabia, which produces around 5.1 mb/d.


5. (C) Campbell said that while a production sharing agreement
(whereby the GOI would have awarded the execution of exploration
and production activities to BP/CNPC, and BP/CNPC would have
received a percentage of production, instead of the fixed fee
per barrel it will be receiving) was preferable, BP views the
per-barrel fee contract structure as having an advantage of its
own in that fees are fixed irrespective of the world price for
oil. He said that this lessens downside risk, and "it is good
to have some of this type of revenue in a company's portfolio."
On the perennial concern of allegedly high rates of oil theft at
SOC, he said that BP is concerned about this, but he did not
discuss the issue further.

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Praises for CNPC partner
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6. (C) Campbell expressed satisfaction with BP's prospective
partnership with the Chinese oil giant. He said that BP's
original objectives for teaming with CNPC were to share some of
the investment risk and to take advantage of CNPC's experience
in Iraq. (Note: CNPC currently operates the Ahdab oil field in
nearby Wasit Province. End note.) Campbell also said that BP
views CNPC as a potential strategic partner for other projects

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in Iraq and elsewhere in the world. He said that BP views
CNPC's operational experience in Iraq, and particularly its
capital equipment vertical supply chain as a key advantage, the
latter which BP plans to use (and in which he said BP has no
such ability in Iraq). "Supply chain management is critical: I
am less worried about any problems related to production, SOC
workers, or the GOI bureaucracy than I am about getting
equipment to fields on time," and in this area he said that CNPC
will help. Campbell also said that CNPC has an altogether
different view of risk than BP and many western firms do, and
provides a "refreshing outlook" on all areas of doing business
in Iraq. He said that senior BP executives had visited CNPC's
China operations, and were favorably impressed, including with
its Daquing oil field operations that produces about 1 mb/d, the
sixth largest field in the world.


7. (C) Campbell was adamant about what he said was an
"undeserved" negative reputation that CNPC has gained as a
result of its Ahdab field operation in nearby Wasit Province.
Campbell said he and his BP colleagues had closely researched
CNPC's work there (as part of its due diligence) and concluded
that the negative reputation appeared to originate entirely from
an "unwarranted and unfair" September New York Times article.
He said that CNPC contends that it complied "100 percent" with
every aspect of the CNPC-GOI agreement, including complete
cooperation with the provincial council, governor and other
groups. He said that while the article was unfair, a certain
"Asian viewpoint" and way of doing business in Iraq might at
times cause some miscommunication with Iraqis, and in these
areas BP might help CNPC.

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Ownership and management structure
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8. (SBU) Campbell confirmed recent press reports that BP
recently gave CNPC a larger equity share. The new stakes cuts
BP's share to 38% from an initial 50%, raised CNPC's share to
37% from 25%, and maintains the GOI's portion at 25%. Campbell
confirmed media reports that the GOI will pay nothing upfront.
He also said that BP will have full management control, with "no
GOI interference." He said that the concept of the Field
Operating Division (FOD),conceived by the MOO to keep the most
prized fields of Iraq in the hands of Iraq's national operating
companies, has been dropped, and that a "Rumalia Operations
Organization," run by BP, will operate the field, to include
exploration, development and production. At the same time, he
admitted that a complete definition of roles and
responsibilities between and among the three entities isn't
entirely defined yet, beyond BP being the primary entity.

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BP "wants to show the world that this deal can work"
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9. (SBU) Campbell admitted that BP faces real risks, citing what
he acknowledged was a low production fee, as well as the always
present legal and political risks in Iraq. "It will not be
easy, but these kinds of risks are in the nature of the oil
business, and sometimes the public does not understand this."
At the same time, he contended that the deal was potentially
vast and lucrative, at $27 billion over 20 years. Campbell
acknowledged that BP's own CEO had publicly admitted that
accepting the $2 per barrel fee was part of the overall goal of
"getting a foot in the door [of Iraq]." He said that BP "needs
to re-establish" its presence in this region, given that this is
where the company got its start. (Note: British Petroleum began
its operations in 1908 in present day Iran. End note.) He said
that nowadays, BP's activities and reserves are almost
exclusively located in Alaska and the North Sea, and "we need to
be in more regions of the world." But he again stated that BP
can make money under these tight financial conditions, and the
deal stands up on its own without these non-financial
considerations.

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Hearts and minds
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10. (SBU) Campbell said that BP is still working on its
"corporate social responsibility" strategy and dealing with the
local populace and government, and sought our opinion about
strategies and ideas. We agreed that a limited scope and
managing what might be too high expectations are important.
Campbell said that BP planned to have an open dialogue with the
provincial government, local sheikhs, worker groups, and other
stakeholders. He also confirmed that BP/CNPC does not
anticipate significant employment increases, and that this fact
will have to be understood by the local populace. Instead, BP
and CNPC will "sprinkle" a few of its senior management and

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technical staff within the ranks of SOC, and that most work will
come from the existing 20,000-odd SOC employee base.


11. (C) Campbell said that BP plans to have a small headquarters
in Basra, and will construct a compound for offices and
accommodations. He said that BP is will also acquire a turbo
prop to plane reach nearby oil fields from Basra airport, and is
negotiating with Kuwait-based Arab Wings to secure charter
rights to transport personnel into and out of Basra.
NALAND