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Cablegate: Hunt Oil Signs Agreement with Krg Under Krg Oil Law

VZCZCXRO4961
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3071/01 2550602
ZNR UUUUU ZZH
P 120602Z SEP 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 3336
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 003071

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET EINV ENRG IZ
SUBJECT: HUNT OIL SIGNS AGREEMENT WITH KRG UNDER KRG OIL LAW

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISRIBUTION. PROTECT
SOURCES.

This is a Kurdistan Regional Reconstruction Team (RRT) cable.

SUMMARY
-------

1. (SBU) The Kurdistan Regional Government (KRG) recently signed a
production sharing contract (PSC) with Hunt Oil Company that covers
oil exploration and production in "the Dohuk area." Comments by
Hunt officials indicate that the block is actually in the Ninewa
Governorate's northern administrative districts. The PSC marks the
first oil deal signed by the KRG, following enactment of the
Kurdistan Region's hydrocarbons law on August 6, 2007. Considerable
legal ambiguity surrounds the PSC with Hunt Oil, as the districts in
northern Ninewa to be explored by the company are classified as
"disputed territories" under the Iraqi constitution. A senior Hunt
Oil manager told RRT Erbil's Team Leader that northern Ninewa
province has significant potential for oil production, and that this
factor trumps the legal ambiguities and risks associated with the
company's PSC with the KRG. The oil potential of northern Iraq
continues to attract significant investor interest. Several other
international energy companies are expected to announce oil deals
with the KRG during coming weeks. Despite the KRG's aggressive
pursuit of foreign direct investment to develop the Kurdistan
Region's hydrocarbons production potential, KRG Prime Minister
Nechirvan reiterated the KRG's commitment to the federal hydrocarbon
revenue sharing agreement that allocates Iraq's oil wealth to all
Iraqis on a per capita basis. Meanwhile, senior central government
officials expressed their dismay that the KRG enacted a regional
hydrocarbons law, and that the KRG continues to pursue oil
investment from foreign companies in advance of enactment of
comprehensive national hydrocarbons legislation. [NOTE: The ability
of regional governments to sign contracts has been among the key
issues of contention during negotiation of the national hydrocarbon
law. The KRG has reluctantly agreed, at times. to refrain from
finalizing agreements in advance of a national law, but have
maintained that they would not wait indefinitely for national
legislation to be approved by the Council of Representatives. END
NOTE.]

KRG Contract with Hunt in Disputed Territory
--------------------------------------------

2. (SBU) On September 8, 2007, the KRG, Hunt Oil Company, and
Impulse Energy Corporation (IEC) jointly announced they had signed a
PSC covering petroleum exploration activities "in the Dohuk area of
the Kurdistan Region." Hunt Oil's General Manager for Europe,
Africa and the Middle East, David McDonald, told RRT Erbil's Team
Leader on September 5 that the envisioned "Dohuk area" of operations
under the PSC consists of the administrative districts of northern
Ninewa province. McDonald did not disclose the exact areas in
northern Ninewa to be initially targeted for exploration by Hunt Oil
but he mentioned Shekkan and Akra as areas they had visited. While
the land to be explored by Hunt Oil has been behind the Green Line
of KRG control for many years and is occupied by a majority Kurdish
population who considers itself part of Dohuk Governorate, the area
falls within the legal boundaries of Ninewa province. Northern
Ninewa is "disputed territory," according to the Iraqi federal
constitution, and the legal boundaries of the area are eventually to
be decided by a public referendum pursuant to Article 140 of the
federal constitution.

3. (SBU) During discussions with RRT Erbil's Team Leader, McDonald
seemed less than fully informed about the potential ramifications of
Article 140 on Hunt Oil's negotiations with the KRG. He did not
express concern about the potential controversy surrounding
signature of a PSC with the KRG that covers areas of operation
currently outside the KRG's legal control. He said, "This is a
significant opportunity that outweighs the legal ambiguity." Hunt
Oil CEO Ray Hunt also discounted the fact that the northern Ninewa
districts targeted under the PSC are not yet within the KRG's
legally defined borders. He expressed satisfaction on September 8
that his company was "actively participating in the establishment of
the petroleum industry in the Kurdistan Region of Iraq."

4. (U) Enactment of the KRG's new oil law may have spurred
completion of the PSC with Hunt Oil. The PSC was announced shortly
after publication of the English translation of the new oil and gas
law on the KRG's website. Before the law was enacted, only one PSC
had been signed for the Dohuk area - with DNO of Norway. That PSC
covered operations only within the legal boundaries of Dohuk
Governorate. Enactment of the KRG oil law and the subsequent
announcement of the deal with Hunt Oil may accelerate the signing of
PSCs with other international oil companies. Several are
reportedly on the verge of signing PSCs with the KRG during coming
weeks. Article 19 of the KRG law states that "the Federal
Government must not practice any new Petroleum Operations in the
disputed territories without the approval of [the KRG] until such
time as the referendum required by Article 140 of the Federal
Constitution is conducted." Article 20, however, allows the KRG to

BAGHDAD 00003071 002 OF 003


sign PSCs with foreign oil companies in disputed territories, based
on articles 112, 115 and 121(3) of the Federal Constitution.

Potential Bonanza Trumps Legal Ambiguity
----------------------------------------

5. (SBU) While McDonald said Hunt Oil must conduct further
assessments about the speed and scope of their operational
activities in northern Ninewa, with decisions regarding the focus of
initial seismic tests to begin "by the end of October," he was
optimistic about the oil potential of the region. McDonald said
portions of the topography in all three districts of northern Ninewa
bode well for oil exploration. He said, "It's like shooting fish in
a barrel." A Hunt Oil company spokesman in Dallas said the company
will begin geological survey and seismic work by the end of 2007,
with plans to be in a position to drill an exploration well in
2008.

KRG Boldly Enacts Regional Hydrocarbons Law...
---------------------------------------------

6. (U) The KRG deal with Hunt Oil marks the first PSC signed with a
foreign oil company following KRG enactment of the Oil and Gas Law
of the Kurdistan Region on August 6, 2007. Speaking of the KRG's
rationale in passing a controversial regional hydrocarbons law while
a draft national oil and gas law remains intensely debated, KRG
Prime Minister Nechirvan Barzani told reporters on August 7,
"Successive governments in Iraq have deliberately left our oil in
the ground as an effort to keep our people [ethnic Kurds] poor and
to deny our aspirations for a better way of life. Today, with the
passage of this new Kurdistan Law in a federal Iraq, we know that
those days are gone."
7. (U) While espousing the benefits of foreign direct investment in
the Kurdistan Region's oil producing areas, Nechirvan acknowledged
federal constitution provisions that require any oil revenues
generated under the KRG's hydrocarbons law to be shared equally with
all Iraqis. He confirmed the KRG intends to limit itself to its
constitutionally mandated share of national oil revenues, regardless
of whether the oil is sourced inside or outside the Kurdistan
Region. He said, "We will receive 17 percent of all revenues from
all oil production in all of Iraq."
8. (U) KRG Minister of Natural Resources Ashti Hawrami echoed those
comments. Hawrami said on September 9, "We believe that the [KRG's]
production-sharing agreements are the best way to move swiftly
forward and help not just the Kurds but all Iraqis." He envisions
that the Kurdistan Region will produce one million barrels of oil
per day within five years. To achieve this goal, the KRG intends to
sign PSCs with other large international oil companies. On
September 9, Hawrami told Dow Jones, "I think we'll be having an
announcement with a blue-chip company soon."

While Criticizing Central Government Paralysis
--------------------------------------------- -

9. (SBU) Following passage of the KRG hydrocarbons law, KRG
officials recommitted themselves to the February 2007 national
hydrocarbons framework agreement. Nechirvan told RRT Erbil's Team
Leader on August 28 that he hoped the new KRG law "would spur
movment in Baghdad" to enact a national hydrocarbons law. During
that meeting, however, Nechirvan expressed disappointment with
political developments in Baghdad and pessimism about "whether the
Sunnis and the Shi'a want to live together." He said the KRG does
not want Iraq's central government to "hold up development of
regional resources for another ten years."

Arab Leaders Critical of KRG Oil Law
------------------------------------
10. (U) Senior central government officials in Baghdad condemned the
oil deals signed by the KRG in advance of enactment of national
hydrocarbons legislation. Abdul Hadi al Hasani, Deputy Chairman of
the national parliament's Energy Committee, said recently that such
contracts may be overturned by the federal government, though he
conceded that such a move could discourage potential foreign
investments in Iraq's oil sector. Sami al Askari, a parliamentarian
and senior advisor to Prime Minister al Maliki, told reporters on
September 7 that a federal oil and gas council to be formed under
the national hydrocarbons law could decide whether to rescind the
KRG's handful of oil contracts with foreign investors. In a
concession to the reality that foreign direct investment in Iraq's
oil infrastructure remains both valuable and scarce, the
parliamentarians said the private firms that signed deals with the
KRG should not be blocked from winning future oil contracts in
Iraq.

COMMENT
11. (SBU) USG policy has discouraged companies from signing oil
deals with the KRG until Iraq enacts its national hydrocarbon
framework law, as such regional contracts could act as an impediment
to negotiations toward a comprehensive national settlement that
equitably distributes Iraq's oil wealth. Such contracts also remain
subject to significant legal ambiguity. This has not deterred Hunt
Oil and the other handful of companies that have signed PSCs with

BAGHDAD 00003071 003 OF 003


the KRG. Their concerns about the nebulous political environment
and possible eventual dissolution of their PSCs have been overridden
by the prospect of huge profits - from getting first access to the
choicest oil exploration fields in northern Iraq, and from
establishing productive relationships with key KRG and central
government officials. The potential pitfalls are especially acute
in cases (e.g. Hunt Oil and its junior partner IEC) where investors
will commence operations in disputed territories. It remains
doubtful that the KRG was legally entitled to enter into a binding
contract with Hunt Oil that covers oil exploration and eventual
hydrocarbons production in an area (i.e. northern Ninewa province)
that the KRG does not legally control. Legal considerations aside,
the KRG's actions complicates enactment of a national hydrocarbons
law.
BUTENIS

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