True Oil Wars

Reference ID Created Released Classification Origin
07BAGHDAD2453 2007-07-25 05:57 2011-08-30 01:44 CONFIDENTIAL Embassy Baghdad

VZCZCXRO1627
OO RUEHBC RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2453/01 2060557
ZNY CCCCC ZZH
O 250557Z JUL 07
FM AMEMBASSY BAGHDAD
TO RUCNRAQ/IRAQ COLLECTIVE IMMEDIATE
INFO RUEHC/SECSTATE WASHDC IMMEDIATE 2415

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002453

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/23/2017
TAGS: ECON ENRG IZ PREL
SUBJECT: CODEL BURGESS MEETING WITH MINISTER OF OIL HUSAYN
AL-SHAHRISTANI

Classified By: ECONOMIC MINISTER CHARLES P. RIES FOR REASONS 1.5 (b) an
d (d)

¶1. (C). SUMMARY. On July 22, Congressmen Michael Burgess
(R-TX), Steve King (R-IA), Jim Jordan (R-OH), John Carter
(R-TX), Kevin Brady (R-TX), and David Davis (R-TN) met with
Minister of Oil Husayn al-Shahristani to discuss issues
related to the state of Iraq,s petroleum infrastructure,
plans to improve the infrastructure and revitalize petroleum
exploration and production. Minister Shahristani
acknowledged the important role of the petroleum industry in
Iraq,s economy and the need for passage of the
hydrocarbon-related laws as signaling Iraq,s emergence as a
dominant petroleum producing country. END SUMMARY.

¶2. (C). Minister Shahristani introduced the topic of the
status of Iraq,s petroleum industry by observing that the
industry provides 93% of the country,s budget; that of the
500 known potential petroleum-bearing geophysical structures,
only about 80 have been evaluated and expected to make up the
majority of the 115 billion barrel reserve; and that of these
80 structures, 10 are “super giants,” 10 are “giants,” and 10
are “very large” structures. He also stated that most of
these 80 structures are currently in production although
perhaps not being optimally produced at this time.
Shahristani also predicted that of the 500 known structures,
300 will eventually produce commercial quantities of oil.

¶3. (C). Shahristani observed that even though private oil
companies have not been willing to work in Iraq as a result
of the security situation, the state-owned oil companies have
been able to drill some new wells. He also noted that while
the level of oil production in the country has not risen as
he desired, the rising price oil has allowed Iraq to more or
less maintain a level income from exports.

¶4. (C). Shahristani noted successes in having new meters
installed in the southern export facilities, but also noted
that if problems occur, it is likely the fault of the
American company that required an extra year to complete the
project. He predicted no interruption in oil exports from
the southern facilities, unless problems arise between Iran
and the United States. He encouraged the United States and
Iran to continue their dialogue to solve issues that impact
Iraq.

¶5. (C). A member of the Congressional delegation, having
toured the Bayji oil refinery yesterday asked what
infrastructure improvements were needed to increase the
refinery,s production potential. Shahristani stated that
while foreign companies were not willing to work in Iraq due
to the current security situation, he has asked that they
supply needed equipment, for example for the hydrocracker.
He also stated that he is attempting to replace trained
workers, originally from the south of the country, who have
fled the sectarian violence of the area.

¶6. (C). When asked about the Ministry of Oil,s budget,
Shahristani stated that he had a budget of $2.2 billion. He
complained that the Ministry of Finance had delayed the
allocation of funds for the first quarter of the year and
those funds were not available until the end of March. In
any event, he noted that by the second quarter, he had been
able to spend 25% of his budget and expects to spend 85% of
his budget by the end of the year.

¶7. (C). Shahristani explained that the Council of Ministers
had approved and sent to the Council of Representatives a law
that would encourage investment in Iraq,s oil refineries; he
expected a third reading of this law to occur soon. He
expressed support for the Framework Hydrocarbon Law stating
that “all the right elements were present in the law” and
promised that he would be in the Council of Representatives
(CoR) to explain the law. He also stated that while he could
not predict what the lawmakers would do, he anticipated its
eventual passage. He noted that he had already prepared a
list of those fields to be drilled and produced first.

¶8. (C). A member of the delegation asked about Chinese
exploration and production contracts. Shahristani answered
by explaining that there was one contract in existence with
the Chinese, which was legitimate and was signed by the
previous regime to develop a small field just south of
Baghdad (Adhab) and would produce no more than 100,000
barrels per day of heavy crude. He explained that under the
current draft of the framework Hydrocarbon law, such
contracts must be reviewed and meet the conditions of the new
law. He also stated that this contract would have to be
amended and that the production from this field was not for
export, but rather to supply crude oil to a refinery planned
to be constructed in the area by the Chinese.

BAGHDAD 00002453 002 OF 002

¶9. (C). A member of the delegation asked if the Iraqi
people understood that they could become rich from the
development of their petroleum resources, if only they would
cooperate with each other. Shahristani responded that the
people will not understand the details of the various
hydrocarbon-related laws, but will follow the impressions
created by others and the media. He proceeded to explain
that several local media stations are supported by members of
Saddam,s regime, living mostly in Jordan now, and by the
Saudis and Emirates. He characterized as more damaging, the
influence of Al-Jazeera. He stated that, in his opinion,
Saudi Arabia feels threatened by the prospect of a
significant Iraqi contribution to the international oil
market; Iraq was not a threat to the Saudis as long as
exports remained no greater than 2 to 3 million barrels.

¶10. (C). When asked about exports in the north, Shahristani
noted that the exports brought in about $400,000 per day and
that the Bayji refinery has limited production capacity.
(Note: In the absence of more explanation that was not
provided to the delegation, this statement appears at odds
with the fact that the export pipeline to Turkey operates
only intermittently. Also, the Bayji refinery capacity is
limited primarily by unreliable electricity supply and
limited heavy fuel oil storage capability. End Note.)
Shahristani also noted that northern exports were at the
mercy of the security situation. He stated that the
Strategic Infrastructure Brigades (SIBs) were established by
a “leader of the insurgency” and that he informed the
multi-national forces of this fact. He also stated that
contrary to the opinion of the multi-national force
commanders, the SIBs cannot be retrained to an effective
status. Shahristani stated his expectation that a new effort
to contract with local tribal leaders for security of the
pipelines will be more effective and lead to a resumption of
northern exports in one to two months.

¶11. (C). Addressing Congressional benchmarks, Shahristani
said that he expected the Framework Hydrocarbon and Revenue
Management Laws to proceed in tandem to the CoR and will be
debated together. He assessed that the refinery investment
law, already in the CoR, will be passed soon. He stated that
the Kurdish Regional Government (KRG) has reservations about
the Revenue Management Law, but that KRG representatives will
be in Baghdad in a week, and that he expected the law will go
to the CoR within the next 2 to 3 weeks. He also stated
that, while no one has objection to the Revenue Management
Law in principle, Sunni factions were attacking it for
political reasons. Shahristani stated that there was also
strong Sunni opposition to the Framework Hydrocarbon Law, but
that he agreed with Ambassador Crocker that some Sunni
support for the law was needed.

¶12. (C). Shahristani was asked what he was doing to secure
the petroleum infrastructure in the event coalition forces
left Iraq. He responded that a withdrawal would not impact
the southern pipelines and other facilities since Coalition
Forces are not now protecting those facilities. As for the
northern facilities, he stated that the Bayji refinery could
be shut down, but that would have consequences equally
adverse for the insurgency.

¶13. (C). Shahristani reiterated that he was working hard to
meet the benchmarks, that half of the benchmarks were met and
that the other half could be met if government,s efforts
were supported by the Sunnis, Saudi Arabia, and other Gulf
states. He requested that the USG pressure these other
entities to stop supporting the groups opposing Iraq,s
efforts to meet the remaining benchmarks.

¶14. (C). Minister Shahristani concluded the meeting with an
expression of determination that Iraq will export to the
world oil market “its fair share of resources.” He stated
that he wanted the American public to know that this conflict
was not about oil, but about Islamic fundamentalism. He also
stated that Al-Qaeda was a long-term problem for the world.

¶15. (C). CODEL Burgess did not have an opportunity to clear
this cable.

Reference ID Created Released Classification Origin
07BAGHDAD3071 2007-09-12 06:02 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Baghdad

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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