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Cablegate: Dialogue On Economic Cooperation (Dec): Energy

VZCZCXRO6523
PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHC #2853/01 3061830
ZNR UUUUU ZZH
P 021808Z NOV 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 9312
INFO IRAQ COLLECTIVE PRIORITY

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

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