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Cablegate: Basrah Black Gold Rush Begins: Oil Companies Face "Doing

VZCZCXRO6933
RR RUEHDA RUEHDE RUEHDH RUEHKUK
DE RUEHBC #0064/01 3630817
ZNR UUUUU ZZH
R 290817Z DEC 09
FM REO BASRAH
TO RUEHC/SECSTATE WASHDC 0949
INFO RUEHGB/AMEMBASSY BAGHDAD 0527
RUCNRAQ/IRAQ COLLECTIVE
RUEHBC/REO BASRAH 0987

UNCLAS SECTION 01 OF 03 BASRAH 000064

SENSITIVE
SIPDIS

DEPT PASS TO TREASURY AND TRANSPORTATION

E.O. 12958: N/A
TAGS: EPET ECON EINV PGOV SENV EAID IZ EWWT KCOR BTIO
OPEC, BEXP
SUBJECT: BASRAH BLACK GOLD RUSH BEGINS: OIL COMPANIES FACE "DOING
BUSINESS" PROBLEMS WITH PRT ASSISTANCE

REF: A. BAGHDAD 3257
B. BASRAH 63
C. BAGHDAD 3196
D. BASRAH 59
E. BASRAH 36
F. STATE 115235

BASRAH 00000064 001.2 OF 003


1. (U) This is a Basrah PRT reporting cable.

Summary
-------

2. (SBU) With the conclusion of Iraq's second oil bid round,
successful bidders and oil-service firms are now increasing
their presence in Basrah. Four super giant fields recently
awarded at auction lie in Basrah Province - Rumaila, West Qurna
(phase I and II), Az Zubair, and Majnoon - and could see tens of
billions of dollars in investment in the coming years. While
most still need final GOI approval, this has not stopped
international oil companies (IOCs) from gearing up for the
expected work ahead. IOCs' concerns have shifted from solely
security to more "everyday" issues of office/housing shortages,
visa and immigration problems, limited air transport options,
possible bottlenecks at the Port of Umm Qasr, banking system
inadequacies, and difficulties obtaining land. Other major
challenges include cleaning up environmental hazards at the oil
fields, training thousands of workers, and beginning corporate
social responsibility (CSR) partnerships. The Basrah Provincial
Reconstruction Team (PRT) has been working with these companies
to navigate these and other complex commercial, bureaucratic,
and cultural hurdles. Many challenges lie ahead, but climate
for business in Basrah has come a long way in just the last
several months. End summary.

Oil/service companies converging on Basrah
------------------------------------------

3. (SBU) A who's who of IOCs have reinforced their presence in
Basrah in recent weeks including ExxonMobil, BP, China National
Petroleum Corporation (CNPC), Royal Dutch Shell, Eni, and
Occidental Petroleum (Oxy). Service firms such as Halliburton,
Schlumberger, Foster Wheeler, and Dubai-based Terra Seis, and
security and consulting firms are arriving or strengthening
their presence. With the second oil bid round complete (refs A,
C), companies' plans are beginning to take shape. The BP-CNPC
partnership has already begun work at the nearby super giant
Rumaila field. Other awarded projects are still awaiting final
GOI Council of Ministers (cabinet) approval or initialing of the
contracts so they can be submitted to the cabinet for final
approval. However, these issues are not preventing any of them
from surveying fields, seeking land for compounds, ordering
equipment, exploring available legal help, checking on interim
housing options, and exploring CSR ideas.

Security and other risks remain . . .
--------------------------------------

4. (SBU) While not discounting the always-present security
threat, local observers note a remarkable shift from just a few
months ago. Traditional security concerns are slowly being
eclipsed by everyday "doing business" problems. Companies
appear to possess a guarded confidence about the future.
Regarding the security issue, IOC reps are quick to point out
that such threats are in the nature of the global oil business.
They often point out that they face as challenging or worse
security problems in many other oil-producing countries such as
Venezuela, Nigeria, Russia, and Saudi Arabia.

5. (SBU) Companies reps are also well aware of the significant
political, legal, and economic risks that could hamper their
ambitious plans. These risks include uncertainty surrounding
the elections and a new GOI, the demand by some members of the
Council of Representatives (parliament) that the parliament
approve the contracts, possible export infrastructure capacity
limits, a global drop in demand, and a potential OPEC quota.

But the biggest challenges now are "doing business" problems
--------------------------------------------- ---------------

6. (SBU) Oil and oil-service companies uniformly cite to PRTOffs
a list of "doing business" concerns in Basrah. They contend
that bureaucratic and infrastructure-related problems could
hamper their ambitious plans. The Halliburton Iraq president
might have said it best, "It is really Halliburton [to whom] all
the oil majors are turning to extract, process, and deliver the
oil. We are on the line to provide these services, and we need
help with our imports, flights, visas, permits, and importing
stuff like heavy vehicles, seismic equipment, tubing, and

BASRAH 00000064 002.2 OF 003


housing equipment." He said, "While South Oil Company (SOC),
the Ministry of Oil, and Basrah Investment Commission (BIC) may
welcome us with open arms, they are not talking to other [GOI]
agencies like Customs, Ministry of Interior, etc." He said that
Halliburton is set to invest some $250 million during the next
two years in Basrah. It will invest $56 million alone for a
planned 500-person oil field compound.

7. (SBU) The following is a list of common "doing business"
problems cited by oil companies:

-- SHORTAGE OF ACCOMODATIONS, OFFICE SPACE: Oil firms complain
of a squeeze for secure accommodations and office space, at
least until some of them complete planned housing/office
compounds. Most visitors stay at one of two very basic "hotels"
(containerized units) within the Consolidated Operating Base
(COB) at the Basrah Air Base. The COB is also home to the PRT
and 34th Infantry Division. Some oil companies also have very
limited office space on the COB. Hotel managers report that
these are increasingly fully booked and office space is
insufficient. Some oil firms are staying at the new three-star
Mnawi Basha hotel downtown, but other companies report that
their corporate boards still do not allow employees to stay in
downtown Basrah.

-- VISAS, AIRPORT IN-PROCESSING PROBLEMS: Company reps widely
complain about long delays obtaining Iraqi visas and long
in-processing times at the airport. Sometimes visas - usually
single-entry - can take several weeks to get. This delay
severely affects those who need to frequently visit Iraq.

-- DELAYS AT THE PORT OF UMM QASR: While improved in recent
months, many IOC reps still complain of the port's slow
processing time and corruption. BP Iraq president said, "I'm
less worried about physical or even legal certainty here, and
more concerned about our supply chain."

-- LIMITED AIR TRANSPORT OPTIONS: Presently, of the major
regional airlines only Royal Jordanian and Iraqi Airways provide
weekly connecting flights to Amman, Baghdad, and Dubai. Several
charters and small carriers also fly to regional cities, but oil
company reps assess the present volume to be inadequate for
future demand. The Basrah International Airport (BIA) manager
recently told PRT EconOff that these and other carriers are
already discussing new and more frequent flights. It is unclear
when and whether these services will meet the expected increase
in demand.

-- ANTIQUATED BANKING SYSTEM: Some firms, including Halliburton
and Schlumberger, have reported that the Iraqi banking system's
payment, Letter of Credit, check issuance, and other services
are "totally inadequate." Firms have reported difficulty
finding an Iraqi bank capable of efficiently handling
transactions for the anticipated millions of dollars of
equipment, computers, and salaries.

-- OBTAINING LAND: Many firms are seeking land for sizable
housing/office compounds. While the BIC helps with general
information and investment licenses, this is not sufficient, as
the central government approval is usually required on land
transactions.

. . . and cleaning up environmental hazards
-------------------------------------------

8. (SBU) Several oil firms have shared a sobering assessment of
what they say will be another major challenge: cleaning up the
oil fields that have been neglected for decades. In the course
of initial survey work, companies are confronting a "shocking
situation" of oil leaks and pools, flared gas, and abandoned
rigs. According to U.K.-based Mott McDonald engineers, oil
companies will be obliged to clean this up, not only because of
their own corporate environmental standards, but because they
expect that Iraq and the world will be sensitive to charges that
IOCs will "exploit Iraq" and leave environmental hazards in
their wake (ref E).

Training a lost generation of workers
-------------------------------------

9. (SBU) One visiting oil manager said that observing current
oil operations and labor and operational practices is like
"watching a movie from the 1950s." The Terra Seis company
manager said that SOC has not done a seismic survey in at least
30 years. Companies are also beginning to grapple with the task
of training and certifying potentially thousands of current and
future welders, electricians, carpenters, managers, and

BASRAH 00000064 003.2 OF 003


executives up to international standards. (Note: Oil firms will
largely incorporate existing SOC workers into joint ventures and
thus have no explicit plans to hire large numbers of new
workers. They could eventually hire many more due to demand.
End note.)

Companies also looking to win hearts and minds
--------------------------------------------- -

10. (SBU) All of these firms are exploring how and where they
can focus their CSR efforts. According to company reps, CSR is
a top headquarters priority. Working with local stakeholders
will have a significant impact on their overall success, and
they realize that Iraqis are suspicious of their motives.
Several IOCs have sought PRTOffs' and USAID representatives'
ideas on CSR, including partnering with local NGOs, vocational
schools, and Basrah University.

Basrah business climate shows signs of improvement
--------------------------------------------- -----

11. (SBU) Despite complaints about the Basrah business climate,
local officials and the private sector show increased
competence. Several oil company reps are unexpectedly pleased
by what they say is an improved reception from the Governor,
Provincial Council, and the BIC (with whom the PRT works
closely) for their "professionalism and assistance." The new
SOC Director General (ref D) openly welcomes U.S. and other
firms' investment in Basrah. The Terra Seis country manager
expressed "pleasant surprise" at how welcoming SOC was to its
plan to build an oilfield compound. He signed an MOU at their
initial meeting, "something which would not have been possible
six months ago." Basrah University, with a dynamic new
president, is poised to create entirely new partnerships with
oil firms (ref B). The November 2009 Business and Investment
Conference in Washington and the PRT's own steady outreach with
the local business community and government may have contributed
to this apparent improvement (ref F).

PRT Basrah at your service
--------------------------

12. (SBU) Many IOCs seek PRT assistance in navigating these
myriad commercial, bureaucratic, and cultural hurdles. PRTOffs
regularly assist in dealing with the local government and
businesses, securing appointments, and providing suggestions on
potential CSR projects. The PRT works in conjunction with the
Embassy Baghdad Economics section, the Foreign Commercial
Service, the Transportation Attache's team, the Basrah-based
34th Infantry Division Civil Affairs team, and the Port of Umm
Qasr-based Joint Inter-agency Task Force (JIATF). (Note: While
we favor U.S. oil and oil-service firms, for those fields or
services not represented by U.S. firms, we assist as part of our
overall strategy to see Iraq succeed. End note.)

Comment: Despite the risk, a new optimism is palpable
--------------------------------------------- --------

13. (SBU) The PRT detects a growing if guarded optimism among
the Basrah business community, government, and most importantly,
the populace. Most Basrawis are tired of war and just want to
make some money. Despite the ever-present threat of violence,
oil companies appear increasingly ready to do business in
Basrah. And while the next set of challenges to
business-as-usual can at times appear daunting, there is
progress. Eighteen months ago Basrah was besieged with militia
warfare. Today, business firms and the local government are
engaged in heated arguments over land leases and business visas.
These are the sorts of conflicts that reflect normalization.
End comment.
NALAND

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