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Cablegate: Ministers Shahristani and Kareem Discuss Iraq

VZCZCXRO3708
PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHC #5571/01 3131917
ZNR UUUUU ZZH
P 091912Z NOV 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 9500
INFO IRAQ COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 STATE 115571

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EPET EINV PGOV IZ
SUBJECT: MINISTERS SHAHRISTANI AND KAREEM DISCUSS IRAQ
ENERGY ISSUES IN WASHINGTON

1. (SBU) SUMMARY: On the margins of the Dialogue on Economic
Cooperation (DEC) and the U.S.-Iraq Business and Investment
Conference (BIC), the Iraqi Minister of Oil, Dr. Hussain
al-Shahristani, and the Iraqi Minister of Electricity, Dr.
Kareem Wahid al-Hasan, met with USG officials. Minister
Shahristani met with the Secretary's Coordinator on
International Energy Affairs (S/CIEA), David Goldwyn, and the
Special Envoy for Eurasian Energy (S/EEE), Ambassador Richard
Morningstar. Minister Shahristani also met U.S. Department
of the Interior (DOI) officials to review the DOI technical
assistance program with the Ministry of Oil. Minister Kareem
met with Secretary of Energy Steven Chu, and asked the
Secretary for assistance in securing financing for projects
to expand electricity generation. END SUMMARY

----------------------------
MinOil with S/CIEA and S/EEE
----------------------------

2. (SBU) In Shahristani's meetings with Goldwyn and
Morningstar the day after the DEC, Goldwyn asked about the
status of the national energy strategy. Minister Shahristani
stated that once the Ministry of Oil (MoO) awarded oil and
gas fields, the Government of Iraq (GOI) would know how much
oil and gas would be produced, would determine if such
production was enough to satisfy demand, and would determine
if there was any excess gas for export.

3. (SBU) Regarding electricity tariffs, Shahristani felt it
would be a while before it would be realistic to implement a
reduction in electricity subsidies. He noted that a
reduction in fuel subsidies would only be possible when fuel
supplies were sufficient to meet domestic consumption needs.
He then redirected the conversation to payments from
state-owned entities (SOEs). He said SOEs needed to start
paying for power and fuel rather than have the Ministry of
Finance do paper transactions that did not result in
financial transactions. For example, he expected the
Ministry of Electricity would pay the Ministry of Oil for any
gas provided for electricity generation.

4. (SBU) Morningstar asked about the potential of two
Kurdish-controlled gas fields to export to Turkey. (NEA/I
Note: Chamchamal and Kormor are the two fields. End Note.)
Shahristani admitted that his last exchange with Kurdish
officials was almost one year ago. He explained that the
federal government's position remained the same: the State
Oil Marketing Organization would responsible for all export
sales, all revenues would be collected and deposited into the
national treasury, and revenues would be distributed to
regional and provincial governments through the annual
budget. According to Shahristani, the Kurdistan Regional
Government (KRG) did not dispute these points.

5. (SBU) Shahristani explained that the main points of
contention with the KRG were related to the KRG's awarding of
contracts (i.e., direct negotiations rather than bid
rounds), the type of contract the KRG was using, and the
approval process of the contract. He stated that the federal
government had the legal right to review the contracts and
potentially renegotiate with the companies as the Ministry of
Oil had done with the China National Petroleum Company for
the Ahdab field. The KRG was being unreasonable because it
wanted Baghdad to pay the contracts, but did not want Baghdad
to see the details (thereby asking Baghdad to blindly accept
the terms of the contracts). Shahristani added that as long
as the KRG refused to budge on this point, then it was up to
Erbil to pay the contracts. He reiterated what he said at
the DEC that there was "nothing we can do" on the Kurdish
issues with respect to oil and gas until after the elections.
However, he did say that Iraq would be open to USG
assistance on technical issues surrounding potential revenue
sharing arrangements.

6. (SBU) Goldwyn asked whether first round contracts allowed
for payments of oil in kind and what impact such a provision
would have on the requirements of the Development Fund for
Iraq (DFI). Shahristani said with a smile that he hoped the
DFI would not exist in a year but. In any case, he
continued, any payment in kind would be priced at the
appropriate benchmark, and accounted for and paid in cash in
the equivalent amount.

7. (SBU) S/CIEA Goldwyn told the Minister that the USG would
help the GOI with four things:


STATE 00115571 002 OF 002


- financing models in the power sector (Trade and Development
Agency)
- financing models for pipelines and terminals (Trade and
Development Agency)
- an increase in U.S. Department of the Interior assistance
to the Ministry of Oil
- the implementation of the Extractive Industries
Transparency Initiative (State)

-------------------------------------------
MinOil with U.S. Department of the Interior
-------------------------------------------

8. (SBU) Shahristani met with DOI officials, including the
Deputy Assistant Secretary for Land and Minerals Management
(DASLM), Ned Farquhar, and the Deputy Director of the
Minerals Management Service (MMS), Walter Cruickshank, on the
margins of the BIC. Shahristani seemed aware but not highly
knowledgeable about the specifics of the program that DOI has
with the Ministry of Oil (MOO).

9. (SBU) After listening to a description of the DOI program,
Shahristani asked DOI to provide technical assistance to
review the adequacy of bid determinations (part of planned
MMS on-the job training for MOO in early 2010); to conduct as
much training as possible in Baghdad to minimize the absence
of MOO employees; and to provide MMS staff short-term to help
with the implementation of MMS's technical assistance. The
DASLM stated that he would consult with MMS to provide staff,
but noted that DOI personnel would be sent to Iraq on a
limited basis for assistance and training. He explained that
DOI, like the MOO, needed to minimize the absence of its
employees; the trainers were DOI employees.

10. (SBU) The Deputy Director of MMS noted that whatever
revenue sharing mechanism was adopted by the Council of
Representatives, MMS could work with the Ministries of Oil
and Finance on collection, disbursement, and auditing of oil
and gas revenues. Shahristani appreciated this input and
stated that the GOI would need MMS assistance on those issues
as well.

--------------------------------------------- --
Department of Energy Hosts Electricity Minister
--------------------------------------------- --

11. (SBU) During DOE Secretary Chu's meeting with Electricity
Minister Kareem, Kareem highlighted recent progress, but
emphasized the need for greater assistance. He mentioned
that Iraq's most urgent priority was to expand generating
capacity to provide 24 hours of reliable grid power. Kareem
implored Secretary Chu to assist the GOI in securing
financing to expand electricity generation, including by
pressuring the Export-Import Bank (Ex-Im) to approve an
exemption allowing it to work with the GOI. Secretary Chu
agreed to look into the GOI's status with Ex-Im and whether
DOE avenues exist to encourage greater engagement on project
financing in the electricity sector.

12. (SBU) Kareem noted the GOI needed about $3 to $5 billion
in soft loans, aid, or investments to finance electricity
sector projects, including funding future payments for Iraq's
December 2008 deal with GE. The Minister explained that he
had approached the U.S. Embassy and the Department of Defense
to propose USG funding for electricity projects as an
investment in security. However, he was told that the
congressional appropriations process made this unfeasible.

13. (SBU) Secretary Chu and Minister Kareem agreed that
Iraq's large quantities of flared gas (produced in
conjunction with oil) should be used for Iraq's domestic
electricity sector. With respect to non-associated gas
fields, Kareem was disappointed with the number of companies
that participated in the first bid round to develop the two
non-associated gas fields on tender (NEA/I Note: About 22 of
35 pre-qualified companies participated in the first bid
round, which is respectable. No company submitted a bid on
developing the Mansuriya gas field. One consortium, led by
the Italian firm Edison, submitted a bid on the Akkas gas
field, but did not win the tender. End Note.)

14. (SBU) Kareem stated that, despite substantial increases
in power generation, the Ministry of Electricity was unable
to meet Iraq's rapidly growing demand for electric power.
The growth in demand was driven primarily by high subsidies
and an improving standard of living, Kareem explained.
Despite recent tariff increases, Iraqis still enjoyed 80
percent subsidies on electric power from the national grid.
Secretary Chu conceded the political difficulty of increasing
tariffs, but argued that steps in that direction were
nevertheless necessary.
CLINTON

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