OIL RAPPROCHEMENT? KRG PUBLISHES TWO CONTRACTS

UNCLAS SECTION 01 OF 02 BAGHDAD 000157

SENSITIVE

DEPT FOR NEA/I, EEB/ESC

E.O. 12958: N/A

TAGS: EPET ENRG ECON EINV EAID PREL IZ

SUBJECT: OIL RAPPROCHEMENT? KRG PUBLISHES TWO CONTRACTS


1. (SBU) In the next step of a an apparent (and very ginger)
rapprochement between Baghdad and Erbil over Iraq's oil sector
management, the KRG published on January 17 the full texts of its
previously secret oil field development and production contracts
with oil companies DNO and Genel Energy, a move it previewed for the
Ambassador during his recent visit to Erbil (septel). This action
follows recent remarks from KRG Prime Minister Barham Saleh offering
to seek a resolution to the longstanding conflict with the GOI over
these and other unilateral KRG oil contracts. It also appears to
reciprocate an olive branch extended by Baghdad in November 2009,
when a Ministry of Oil delegation led by Deputy Minister Abdul
Kareem Luaibi traveled to Erbil to meet with newly elected KRG PM
Saleh. Neither GOI Oil Minister Shahristani nor KRG Oil Minister
Hawrami -- adversaries over the issue of these contracts --
participated in this series of meetings.

Comment
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2. (SBU) Publishing these two contracts is an important step, but
will not by itself resolve the continuing conflict between Baghdad
and Erbil over the management of oil investments. Only after
Baghdad accepts these contracts as legitimate will it likely agree
to make "profit oil" payments and "cost oil" payments to reimburse
the foreign oil firms for both accrued and future capital expenses.
Although Erbil does not recognize Baghdad's right to pass judgment
on the contracts' legitimacy, Erbil badly needs to reimburse the
capital expenses accrued by oil companies working in Iraqi
Kurdistan, perhaps setting the stage for a tradeoff.


3. (SBU) The sustainability of the KRG's current and future
production increases will depend on this reimbursement of both
operating expenses (which, evidently, the companies have already
been receiving) and capital expenditures (which the companies have
not been receiving) as well as payment of suitable profit.
According to the data published by Erbil, the companies are owed
$800 million in accrued capital expenses. Erbil's January 17
announcement also leaves the definition of suitable profit for
ensuing negotiations. Baghdad and Erbil have not agreed to the
amount, schedule, and process for payment of cost reimbursement and
profit. Future negotiations could be arduous, since each party has
very differing views and priorities, such as Baghdad's fundamental
commitment to service contracts and Erbil's equally strenuous
commitment to production-sharing contracts.


4. (SBU) Other contentious issues could also arise: for example:
(1) transferring to Baghdad the revenues from Erbil oil production
that has been used in KRG refineries or utilities; (2) the
disposition of signing bonuses from Erbil's contracts, particularly
given that all the signing bonuses from Baghdad's ten bid round
contracts will be paid to the central government, not to a
particular region or province; (3) the process through which the
contracts were awarded and through which future contracts will be
awarded (including openness, equitability, competitiveness, and
transparency); (4) the structure of and process for managing the
contractual relationship with the companies and the petroleum
operations conducted under the contracts; (5) the conformance of
contract terms and conditions with existing national laws and
regulations; and (6) Iraqi government liability under the contracts.



5. (SBU) Erbil has oil field development and production contracts
with other companies that could be even more controversial. A
process to review and legitimize (from Baghdad's perspective) these
contracts, and any future contracts, is still needed. There also is
no agreement on national hydrocarbons legislation (including
establishing an industry framework and reestablishing a national oil
company) and how Baghdad and Erbil will cooperate in the development
of Iraq's oil sector. If the two sides can agree on a mechanism to
review and legitimize these other KRG contracts, and a process for
concluding and administering any future oil contracts, this
agreement could open the door to expansion of oil and gas production
in the north. That would offer the chance of greater exports via
Turkey as well as possibly KRG gas being fed into the Nabucco
pipeline.

HILL