(C) BASRA: SOUTH OIL COMPANY DIRECTOR OPTIMISTIC ABOUT

C O N F I D E N T I A L SECTION 01 OF 03 BASRAH 000059

SIPDIS

E.O. 12958: DECL: 11/5/2019
TAGS: ECON EINV ENRG EPET ELAB PGOV IZ IR
SUBJECT: (C) BASRA: SOUTH OIL COMPANY DIRECTOR OPTIMISTIC ABOUT
FUTURE

REF: BAGHDAD 2204; BAGHDAD 2057; BASRAH 38

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

1. (C) Summary: South Oil Company (SOC) Director General Dheyaa
Jaafar told Basra Provincial Reconstruction Team and visiting
Embassy Baghdad officers that a "completely different point of
view" existed at SOC compared to just a few months ago, and
international oil companies (IOCs) are now welcome to partner on
the several SOC-managed oil fields. He said that the BP/China
National Petroleum Company (CNPC) joint venture (JV) developing
the nearby Rumaila oil field could begin within a few weeks.
Jaafar dismissed the possibility of any significant public or
political opposition to this or any other SOC-IOC JVs. At the
same time, he said it was crucial for the public to see the
benefits to these partnerships, in the form of more jobs and
more prosperity. He hailed the arrival of several U.S.-based
oil and gas service companies now establishing a presence in the
province, and encouraged more of them to come. He reviewed the
"excellent progress" of the major export capacity and pipeline
infrastructure projects in the province. He said that there
were limited hopes for any early re-establishment of export
pipeline links to Syria, Saudi Arabia or Kuwait, due to the
current political atmosphere. On the oil and gas fields that
border Iran and Kuwait, he said that while the GOI continues to
have good initial talks with Iran on how to deal with such
fields, Kuwait was not yet ready for any such cooperation.
Jaafar's positive attitude about SOC's outlook was encouraging.
At the same time, expectations regarding job creation and
improvement in the lives of local citizens will be high - and
these expectations will need to be managed carefully. While
IOCs will surely find doing business challenging in the months
and years ahead, nonetheless, a palpable optimism exists today,
one that was unimaginable even six months ago. End summary.

SOC now "on board" with IOCs
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2. (C) Jaafar said there was a "completely different point of
view and attitude" among SOC engineers and workers compared to
just a few months ago, especially in the lead-up to the first
oil/gas licensing round (ref C). Back then, SOC's rank and file
"was not encouraged to cooperate with IOCs," and they "only
heard the bad point of view" about them. He said that as a
result of the Minister of Oil (MOO) Shahristani and Prime
Minister (PM) Maliki's active promotion of these SOC-IOC
partnerships, now "around 80% of workers are satisfied with the
[IOC-SOC partnership] concept," and they all believe that this
is the "right start for the oil sector." More important, he
said, "local society sees these partnerships as a good thing."
He said that if the BP/CNPC deal moves forward well, it will
cause the population to support still other companies who seek
to work in other Basra oil fields, such as West Qurna, Az Zubair
and Majnoon, and in the next two or three years, "big and
positive changes" will continue. He said a recent oil road show
in Istanbul had attracted 42 companies, and all expressed
confidence about the Iraqi oil sector. Jaafar expressed
optimism about the recently-initialed Az Zubair field project,
to be developed by an Italy-based ENI, U.S.-based Occidental,
and South Korea-based Kogas. Jaafar said that the West Qurna
(phase one) field could also soon be awarded to the Exxon-Shell
partnership. Jaafar half-jokingly said that, in fact, there is
so much activity that could come on line that he hoped the
second round did not bring any more IOCs-SOC partnerships: "This
is enough! We're not sure we can absorb any more [IOC JVs]
right now. It is too much work and capacity for SOC to handle."


BP/CNPC activities to start soon
--------------


3. (C) Jaafar confirmed that "within the next two weeks," senior
BP and CNPC representatives and SOC officials would begin the
precise calculation of current ("baseline") SOC production at
Rumaila field, an important step that will establish the
baseline production numbers from which BP/CNPC will calculate
its own subsequent production targets - and compensation. He
said that SOC's own preliminary figure was around 1,050,000
barrels/day (b/d),while the Ministry of Oil's (in Baghdad)
initial estimate was about 950,000 b/d. Jaafar said that "we
need to come to an agreement on how to measure our current
production . . . we will have to negotiate . . . this will be a
team effort." (Note: BP reps later told PRTOffs that the
1,050,000 figure could have been an "initial guess," rather than
a precise figure. End note.) He said that once a metering
program establishes an agreed-upon production rate, which he
said could occur within two weeks, a full ramp-up of activities
could begin.


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Downplays political opposition to IOC deals
--------------


4. (C) Jaafar dismissed the possibility of any significant
public or political opposition to these SOC-IOC JVs. He said
that the public strongly supports them. Noting that the Council
of Ministers (COM) had already approved the BP/CNPC deal, he
said that the Council of Representatives (COR) would not seek to
vote on the issue, and the MOO's Petroleum Contract and
Licensing Directorate's Legal Advisor had made a clear legal
argument that this was strictly an executive branch role (i.e.
COM),not one for the legislative branch (COR). Jaafar, a
former member of the Basra Provincial Council (PC) who resigned
to take up his present post in July, said that "only around two
or three [of the 35 total] PC members" are opposed to the
BP/CNPC or other SOC-IOC JVs; "they want the project to go
ahead." He acknowledged that a few PC members are against it
for political, rather than any technical or economic ones.
(Note: While the PC has no legal role in approving these
national contracts, any strong opposition could complicate IOCs'
ease of doing business. End note.)

But "public needs to see the benefits [of IOCs' work]"
-------------- --------------


5. (C) Jaafar confirmed recent press reports of recent SOC
hirings, and said that about 1600 mostly engineering and
technical positions had recently been filed. (Note: SOC has an
estimated workforce of around 16,000. End note.) He said that
this was the first time in recent memory that so many people had
been hired. He said that it was necessary to "start training
new workers to be ready for increased demand," and also so that
"locals can see the benefits [of the BP/CNPC deal]." He said
that for every SOC job, around four to five indirect jobs are
created. Jaafar said that he expected similar new hiring for
the West Qurna (phase one) and Az Zubair JV projects.

U.S. and other service companies are welcome to Basra
-------------- --------------


6. (SBU) Jaafar expressed optimism about the several
international oil and gas-related service companies now
establishing a presence in the province, including U.S.-based
Baker Hughes and U.S.-based Halliburton, and said that he
"encourages any such company to come here and form a JV."
(Note: U.S.-based Weatherford has already been in Iraq for a few
years. End note.) He said that he had regular meetings with
Baker Hughes about their plans to set up a large facility on SOC
grounds. "For these service companies, now is the right time to
be here: they are good for Basra, they employ a lot of people,
and bring training programs for workers." He said that the
recent Washington investment conference on Iraq had showcased
Baker Hughes's work here, and was a "good example."

Other infrastructure improvements moving forward
-------------- ---


7. (C) Jaafar said that the South Export Redundancy Project,
(SERP, which will replace Iraq's offshore fueling points and the
feeder pipelines; refs A, B) was on schedule and fully funded,
to be completed by around 2013, "which will give us the ability
to export around 4.5 million b/d." He said that still other,
subsequent expansion plans could increase export capacity more
("six to eight 8 million b/d"),with possible IOC assistance.
He said that all these projects had the full support MOO
Shahristani and PM Maliki. He said that work to find any
unexploded ordnance (UXO) within the paths of these pipelines
was also progressing well. Jaafar said that two SOC pipeline
projects to run from Az Zubair and Safwan to Al Faw were also
progressing. He also noted the progress of other infrastructure
work (tanks, pumps) at Al Faw. In response to a question
whether the planned production increases might be crimped by the
still-limited export capacity, he acknowledged that some IOCs
have voiced this concern, but was confident that capacity
increases would come on line in time. Jaafar said that apart
from these improvements, SOC itself will be increasing its own
production in the coming year by about 250,000 b/d, by
rehabilitating or drilling new wells at Az Zubair, West Qurna
and North Rumaila.

Neighboring states: export pipelines, shared fields
-------------- --------------


8. (C) Presently, Iraq's oil exports pass though Persian Gulf
off-shore oil terminals and overland via Turkey. In response to
questions about future additional routes, Jaafar said that in

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principle, PM Maliki and MOO Shahristani were supportive of this
concept, and that "we want good relations with all our
neighbors." But he acknowledged that present relations with
some of its neighbors complicated this idea for now. He said
that the Iraq-Syria pipeline, presently not in use still
"technically feasible," was complicated by the current state of
Iraq-Syria relations. He similarly discounted any early
restoration of long-dormant pipelines to Kuwait or Saudi Arabia.
In response to questions about oil and gas fields shared by
neighboring states (particularly Iran and Kuwait),Jaafar said
that Iraq and Iran have held initial and "constructive" talks on
how such fields could be handled. He was less optimistic about
Kuwait, noting that the latter was "not ready at this time" for
such discussions.

Bio
---


9. (C) Prior to becoming DG in July 2009, Dheyaa Jaafar, a
petroleum engineer by training, had for many years worked his
way up the ranks of SOC, most recently as Operations Director.
He was elected to the PC in January 2009, as a member of the PM
Maliki's Da'wa Islamiya party. (He is said to be very close to
Maliki.) He held this office only for a few weeks. Local
contacts have told us that during this time in office, PM Maliki
assured him that he would soon be named SOC DG. Jaafar became
SOC DG in July 2009 in the wake of former SOC DG Numa's firing
after publicly opposing the first oil round (ref C). Jaafar is
a long time contact of the former Basra U.S. Regional Embassy
Office, now PRT, and is understood to be favorably disposed
toward the United States in general, and U.S. oil firms in
particular. Jaafar is originally from Basra, and is married
with several children. He speaks broken but adequate English.

Comment
--------------


10. (C) Dheyaa Jaafar's positive attitude about SOC's near and
medium term outlook, particularly about working with IOCs, was
encouraging. His comments clearly reflect a sea change in SOC's
attitude from just a few months ago. At the same time,
expectations regarding job creation and improvement in the lives
of local citizens will be high - and these expectations will
need to be managed carefully. And while IOCs will find doing
business challenging in the coming months and years - training
and certifying workers, a glacial GOI bureaucracy, shortage of
suitable sub-contractors to utilize, shortage of office and
hotel space, and the always-worrying security situation -
nevertheless, a palpable optimism exists, one that was
unimaginable even six months ago.
NALAND