DIALOGUE ON ECONOMIC COOPERATION (DEC): ENERGY

UNCLAS SECTION 01 OF 04 STATE 112853 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: IZ EPET ENRG EINV ECON SUBJECT: DIALOGUE ON ECONOMIC COOPERATION (DEC): ENERGY SESSION REF: 2005 BAGHDAD 1656 ¶1. (SBU) This cable reports on the October 19, 2009, DEC Energy Sessions. The discussions on Public Financial Management, Financial Services, Investment and Trade, and Industry and Private Sector Development will be reported separately. Interlocutors are recorded in paragraph 16. ¶2. (SBU) SUMMARY: The Secretary's Coordinator of International Energy Affairs (S/CIEA) David Goldwyn opened the energy session followed by the Special Envoy for Eurasian Energy (S/EEE) Ambassador Richard Morningstar. S/CIEA raised the the status of pending energy legislation, the status of the first and second bid rounds, the status of the national energy strategy, utilization of gas, reforms in the electricty sector. S/EEE spoke about the importance of Iraqi gas production and the possibility of exporting gas to Europe. Regarding the first and second bid rounds, Iraqi Oil Minister Dr. Hussain al-Shahristani explained that companies had resubmitted bids for the West Qurna and Zubayr fields because tax issues were clarified. Shahristani said that if both of those fields were awarded, then Iraq's oil production could easily reach six million barrels per day. He noted that the oil infrastructure would also have to be upgraded to be able to handle that level of production. Shahristani said that the new laws governing the oil and gas sector would move forward after the election. Iraqi Minister of Electricity Kareem Wahid Hasan gave an overview of the electricity sector and how the sector needed investment, otherwise Iraq was in "big trouble." Some key topics like revenue sharing and transparency were not covered in the time allotted. These issues were discussed in separate meetings with the Minister of Oil and will be reported in SEPTEL. END SUMMARY -------------- FIRST AND SECOND BID ROUNDS -------------- ¶3. (SBU) Minister Shahristani said he was a bit disappointed with the outcome of the June 30 bid round, but was glad to see that Iraq's largest field, Rumaila, was awarded. He mentioned that the Cabinet approved the contract with the British Petroleum/China National Petroleum Company consortium on Friday October 16 and the contract would be formally signed upon his return from Washington. (Note: NEA/I understands from BP that a signing ceremony will take place the week of November 2. End Note). ¶4. (SBU) As for ongoing negotiations on fields in the first bid round, Shahristani said that companies were worried about taxation. He stated that the Government of Iraq (GOI) has clarified the 35 percent tax is only applicable to the maximum remuneration fee. Once that was known, some of the international oil companies (IOCs) recalculated their economic models and decided to "re-bid." He specifically mentioned that ExxonMobil/Shell and Lukoil/ConocoPhillips accepted the $1.90 per barrel for West Qurna Phase 1 and ENI/Occidental/Korea Gas accepted the $2.00 per barrel for Zubayr. Shahristani emphasized that the Ministry did not change the terms of the bidding, but only clarified the tax question. ¶5. (SBU) If the GOI were able to approve contracts for West Qurna Phase 1 and Zubayr, Iraq could easily achieve six million barrels per day within six years, according to Shahristani. He stipulated that this would require at least $100 billion in investment and would require upgrades in the current infrastructure. He predicted that 2010 and 2011 budgets will be problematic for Iraq, which is why Iraq will need assistance from the IMF and World Bank. He is hoping that the IMF and World Bank can help fund revamping the oil and gas infrastructure including new terminals in the Gulf and new pipelines to Syria and Turkey. ¶6. (SBU) Regarding the second bid round, Shahristani claimed that the fields of Majnoon, West Qurna Phase 2, and East Baghdad are very large fields and could increase production up to five million barrels per day from these three fields alone. (Note: Shahristani made no mention of the complexity of the East Baghdad field, STATE 00112853 002 OF 004 or that the reserves of the field are far greater than the recoverable reserves (REF A). Given these factors, it is unlikely that the East Baghdad field will in fact add significantly to Iraq's overall production in the short term. End Note). ¶7. (SBU) Shahristani noted that contracts will be slightly different since the fields on offer are not fully developed fields. Therefore, the nature of the contract is less complex. He stated that the Ministry provided a model contract to IOCs a few days ago and was not planning to enter into extensive negotiations. He expected was that the Council of Ministers to approve the deals before the January elections. -------------- STATUS OF THE LAWS AND DISPUTES WITH KRG -------------- ¶8. (SBU) Shahristani blamed political differences for delays in the passage of the Oil and Gas Law, and added that the Kurdistan Region's oil and gas contracts are complicating the issue. The Oil and Gas Law and three other pieces of legislation will have to be left for the next Iraqi government to resolve, he said. Nevertheless, Shahristani reported that IOCs are comfortable enough to sign deals with the GOI though he acknowledged the IOCs would still like to see a new law passed to replace previous legislation currently governing the oil and gas sector. ¶9. (SBU) S/CIEA Goldwyn asked if political challenges from the Council of Representatives will significantly delay the ambitious production rates that Shahristani outlined. Shahristani responded that the parliamentarians are happy with the path the Ministry is taking with risk service contracts. He noted that some parliamentarians have a political agenda and seek to prevent the Oil Ministry from signing any contracts. To counter the CoR's desire to approve contracts, Shahristani stated that the Iraqi Constitution clearly states that the CoR only approves international treaties and not commercial agreements. He continued that the CoR did not question the renegotiation of the contract for the Ahdab oil field. He concluded that the CoR lost its right to try and stop the first bid round deals from being approved. ¶10. (SBU) S/EEE Ambassador Morningstar asked the Shahristani for his prognosis for agreements with the Kurdistan Regional Government (KRG). Shahristani said that the federal government had been very accommodating with the KRG. However, he noted that the KRG signed more contracts after the original agreement in February ¶2007. The fact that the KRG signed the majority of its almost 30 oil contracts after the February 2007 compromise was unacceptable. He reiterated that the federal government is willing to take care of Norwegian firm Det Norske Oljeselskalp's (DNO) payments if the KRG provides the federal government the contract to review. He mentioned that the KRG's Minister of Natural Resources, Ashti Hawrami, felt it unwise to turn over the contract to the GOI. Shahristani feels if the KRG will not do that, then the KRG can pay DNO out of the KRG's 17 percent share of the national budget. Regardless of who pays, all oil produced in the KRG must be handed over to the federal government (through the State Oil Marketing Organization). As the Minister put it, the Kurds "cannot have their cake and eat it too." -------------- BORDER FIELDS AND UNITIZATION -------------- ¶11. (SBU) S/CIEA Goldwyn asked Shahristani to speak on unitization talks with neighboring countries. Shahristani said that the Oil Ministry has engaged its counterparts in Iran and Kuwait on oil and gas field unitization and that Iraq and its two neighbors agree on principles on how to develop joint fields, but that there is no final agreement. EEB Deputy Assistant Secretary Doug Hengel explained the issue surrounding our Iran Sanctions Act, and said that the GOI needed to be aware of how any unitization agreement is worded to avoid US sanctions. Shahristani seemed unaware that sanctions could be applied to non-American companies. -------------- ELECTRICITY SECTOR -------------- STATE 00112853 003 OF 004 ¶12. (SBU) Electricity Minister Kareem Wahid Hassan stated that Iraq's electricity sector will finally become a nationwide system when several 400 kilovolt transmission lines connect the country. Kareem said that he hopes to connect Iraq with the Kuwaiti grid and with the Levant. He declared that Iraq would even be able to export electricity to Europe. He mentioned that this was all based upon a master plan that was devised in 2006 (Comment: But neither this plan nor the Ministry of Oil's plan has been coordinated with the other, which will cause problems with both ministries since they rely on the other and further reinforces the need for a national energy strategy. End Note). ¶13. (SBU) Kareem described the impact of the current drought on Iraq's hydroelectric generation explaining that only 49 billion cubic meters of water were projected to be available this year compared to 79 billion in 2008. As a result, he is looking to use thermal generators and gas turbines to make up for the shortfall. He noted that GE and Siemens will provide Iraq simple cycle turbines in the first stage and thermal generators in the second stage of the plan increasing overall supply by three to four thousand megawatts. ¶14. (SBU) Kareem said his ministry planned to finance this project using treasury bills. He projected that the Ministry needed two to three billion dollars next year for the next GE payment and installation of the turbines. Kareem announced that he was talking to banks including OPIC and EXIM to help with financing projects. EXIM has explained to him that no financing with EXIM is possible while Iraq remains under Chapter VII. Kareem is looking at ways to get financing whether or not Iraq remains under Chapter VII. ¶15. (SBU) One way of getting the necessary financing would be to draft an "electricity law" that would encourage investors to bring much needed capital to the sector. He said that on November 18, 2009 there would be a conference to discuss the proposed law. However, he bluntly added that if he could not get financing through treasury bills or if foreign investment did not come, then Iraq would be in "big trouble." Finance Minister Jabr chided Kareem for being too negative, but Kareem continued to highlight the point that the sector was in serious need of funds. S/CIEA suggested that the GOI consider build-own-operate contracts to attract investment. Kareem stated that he would appreciate USG support and that he would like to see US companies to give European and Asian companies "competition." ¶16. (SBU) DEC Participants: Government of Iraq: -------------- - Finance Minister Bakr Jabr Solagh Al-Zubaidy (co-chair) - Finance Ministry Senior Adviser Azez Jaffar Hassan - Oil Minister Hussain Al-Shahristani - Electricity Minister Kareem Hasan - Minister of Trade Safaaldeen Al-Safi - National Investment Commission Chariman Sami Al-Araji - Central Bank of Iraq Governor Sinan Al-Shabibi - Trade Bank of Iraq President Hussein Al-Uzri - Council of Representatives Adviser Dr. Ismail Haruty United States -------------- - Under Secretary of State for Economic and Energy Affairs Robert Hormats (co-chair) - Secretary's Coordinator for Energy International David Goldwyn, DOS - Secretary's Envoy for Eurasian Energy Richard Morningstar, DOS - Acting Assistant Secretary for Economic and Energy Affairs Anna Borg, DOS - Deputy Assistant Secretary for Energy, Sanctions, and Commodities Doug Hengel, DOS STATE 00112853 004 OF 004 - Deputy Director of the Minerals Management Service Walter Cruickshank, Department of the Interior - Principal Deputy Assistant Secretary for Policy and International Affairs Jonathan Elkind, Department of Energy - Embassy Baghdad Coordinator for Assistance Transition Ambassador Patricia Haslach - Embassy Baghdad Economic Minister-Counselor John Deroscher ¶17. POC: Please direct questions or concerns about this cable to Matt Amitrano, AmitranoME (at) state.sgov.gov CLINTON