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Cablegate: Oil Ministry Responds Regarding in-Kind Payments

VZCZCXRO0702
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1328/01 1201304
ZNR UUUUU ZZH
R 291304Z APR 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 7088
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHC/OPEC COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 001328

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA-I, EEB

E.O. 12958: N/A
TAGS: ECON EPET ENRG
SUBJECT: OIL MINISTRY RESPONDS REGARDING IN-KIND PAYMENTS
FOR TECHNICAL SERVICE AGREEMENTS

REF: A. A) STATE 36481
B. B) BAGHDAD 1021
C. C) STATE 41382

1. (SBU) SUMMARY: The Ministry of Oil sent us the proposed
text of the payment terms of its technical service contracts,
explaining the proposed transaction is structured as an
accounting offset, in hopes of securing USG approval of its
proposed payment scheme. Post requests guidance on the draft
text. END SUMMARY.

2. (SBU) We shared the text of ref A with the Director
General of Contracting at the Ministry of Oil, and followed
up with discussions on April 16 with his deputy, Abdul Mahdy
al-Ameedi, regarding USG concerns about the proposed payment
mechanism for the technical service contracts for oil field
development. Mahdy's initial reaction was "we know that we
are under an occupation, but what law prevents the GOI from
establishing this type of contract, which is quite common in
the industry?" The contracts involve large transfers that
the Ministry of Finance would not be able to support, and, he
added, the well-known failings of the Iraq procurement system
represent another obstacle which alone should warrant
acceptance of the Iraqi work-around. We suggested that the
proposed contract language be presented for USG
consideration, and another meeting held if needed to discuss
possible solutions.

3. (SBU) On April 27, the DG, Natik al-Bayati, wrote a
lengthy message to allay USG concerns regarding the proposed
in-kind payments to international oil companies (IOCs) for
technical service contracts. Bayati explained that all of
the IOCs have contracts with the State Oil Marketing
Organization (SOMO) for monthly purchases of crude oil and
that the MOO would deduct the dollar amount of an IOC's TSA
invoice to the MOO from SOMO's crude purchase invoice to the
IOC. The IOC would thus purchase crude oil in the ordinary
course of business but reduce the amount it pays SOMO for a
given quantity of oil by the amount the MOO owed the IOC for
services recently rendered and invoiced under the TSA. This
procedure, Bayati explained, is all that is meant by
"in-kind" payments.

4. (SBU) Bayati further explained that SOMO could calculate
Iraq's payment to the United Nations Compensation Commission
(UNCC) using 5 percent of SOMO's gross revenues for crude
sales, i.e., before the reductions from the amounts paid by
the IOCs for their crude to recognize their services rendered
under the TSAs. Bayati also advised that all the documents
and invoices could be audited by internal and international
auditors, such as Ernst and Young, consistent with practices
under UN Security Council Resolution 1483. Bayati noted the
MOO would keep the Finance Ministry well informed, and copied
the proposed contract language for our review.

5. (SBU) ACTION REQUESTED: We have forwarded the
correspondence from Bayati to the Department for guidance
regarding whether the above clarifications and assurances
adequately address Washington agencies' concerns about
in-kind payments for services under the TSAs. In our view,
the relevant contractual language should address those
concerns, albeit perhaps with some textual modifications.
Post would greatly appreciate a review by Washington agencies
of the contract language as soon as possible, as we plan to
meet with Minister of Oil Shahristani next week.

6. (SBU) The relevant draft contractual language provides the
following:

BEGIN CONTRACT TEXT

9.1 For the performance and completion of the Services in
accordance with the Contract, SOC shall pay or cause to be
paid to contractor, at the times and in the manner specified
in this Article, the remuneration defined in Annex B-Rates
and Prices.

9.2 Unless it is specified otherwise in the contract,
Contractor shall submit to SOC and SOMO each calendar month
(quarterly) a duly documented invoice covering the fees for
the portion of the Services performed or completed and for
reimbursable items procured during the preceding calendar
month (quarter), SOC may deduct from any payments to be made
to contractor any undisputed amounts contractor may owe to
SOC under the contract.

9.3 The value of any invoice will be deducted from the value
of SOMO's commercial invoice under any existing crude sales

BAGHDAD 00001328 002 OF 002


contract with (Contractor). Such deduction shall be made by
SOMO from the invoice relating to the next shipment of crude
oil lifted by (Contractor) after receipt by SOMO of the said
Invoice. This arrangement shall be subject to (Contractor)
and SOMO having confirmed their agreement by letter,
substantially in the form of Annex (...)

9.4 In the event SOC disputes an amount invoiced, SOC shall
notify contractor thereof within thirty (30) Days of the
receipt of such invoice specifying the reason thereof. SOC
shall pay or cause to be paid the entire amount of the
invoice including the disputed portion within such thirty
(30) days period from the said notification. The parties
shall use all reasonable endeavors to expeditiously settle
such dispute, Contractor shall pay back SOC the amount due to
SOC, if any, which amount shall bear interest at LIBOR US
Dollar ( 0) from the date of payment of the invoice.

9.5 Any overdue payment by either party to the other
hereunder shall bear interest at a rate specified at the
published LIBOR one-month rate on the due date.

END CONTRACT TEXT
CROCKER

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