VZCZCXRO0637
PP RUEHBC RUEHDE RUEHIHL RUEHMOS
DE RUEHKUK #0087/01 1021048
ZNY CCCCC ZZH
P R 121048Z APR 06
FM REO KIRKUK
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0571
RUEHC/SECSTATE WASHDC PRIORITY 0609
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHKUK/REO KIRKUK 0637

C O N F I D E N T I A L SECTION 01 OF 02 KIRKUK 000087 
 
SIPDIS 
 
SIPDIS 
 
BAGHDAD FOR POL, ECON, NCT, FCS, USAID, 
IRMO FOR BATES AND CAPLES 
 
E.O. 12958: DECL:  4/12/2016 
TAGS: PGOV EPET ENRG ECON KCOR PREL PINR IZ NO CA
SUBJECT: IRAQI OIL CO. TALKS CONSTITUTION, CORRUPTION, COMPROMISE 
 
REF: KIRKUK 82 
 
KIRKUK 00000087  001.2 OF 002 
 
 
CLASSIFIED BY: Scott Dean, Acting Regional Coordinator, REO 
Kirkuk, DoS. 
REASON: 1.4 (b), (d) 
 
 
 
¶1. (C) Summary: Iraqi businessman and CEO of KAR Group Baz Karim 
said that the Iraqi national government and the Kurdistan 
Regional Government were handling new oil contracts in 
accordance with the new constitution, even though it was not yet 
in effect.  Karim also said the two sides had recently agreed to 
commence construction to exploit the Khurmala Dome, despite 
continuing controversy over who managed it.  Karim said the 
sides had reached a compromise that allowed Khurmala to retain 
and refine its own gas to feed a new power plant currently under 
construction in the region.  End Summary. 
 
¶2. (C) KAR Group CEO Baz Karim met April 3 with USAID 
Representative Brad Camp and IPAO to discuss KAR projects in the 
Iraqi oil industry.  Karim introduced KAR as a construction and 
civil engineering company working in Iraq on oil and on fiber 
optics.  Ongoing projects included developing the Khurmala Dome 
and oil and gas fields in Hamrin and Subba & Luhais.  Three 
outstanding bids remained for development: the Kormor oil and 
gas field and refineries in Koia and Al-Nahrian (REFTEL). 
 
Constitution "In Effect" for Oil Deals 
-------------------------------------- 
 
¶3. (C) According to Karim, the national Ministry of Oil and the 
Kurdistan Regional Government (KRG) in Sulaymaniyah were 
handling new oil projects in the Kurdistan Region in accordance 
with the new constitution as if it were already in effect. 
Karim said that Baghdad now understood the reality that the 
average Iraqi believed the constitution would remain unchanged, 
and further, that the KRG was handling new projects as if it 
were in place.  He said that although the Khurmala Project had 
been awarded before the constitution took effect the work would 
be done after it was in force. 
 
¶4. (C) Karim said that all parties had to be realists and that 
there needed to be a system for sharing resources.  He noted, 
however, that the Kurds were not ready to share resources. 
Karim said that there remained a gray area in the constitution 
over who was entitled to revenues when a site was discovered and 
only subsequently developed.  For over 100 years the Northern 
Oil Company had identified and developed sites in the region, 
collectively producing 1.2 million bbl/d until 2003. 
 
Compromise Reached on Khurmala Dome 
------------------------------------- 
 
¶5. (SBU) According to Karim, construction to exploit the 
Khurmala Dome, located 80 km northwest of Kirkuk City, was 60% 
complete and should finish by the end of the year.  Karim 
predicted the dome would produce 100,000 bbl/d of crude and 30 
million standard cubic feet per 
day (MMSCFD) of associated gas within one year - a figure that 
would rise to 100 MMSCFD in three to five years.  KAR was 
responsible for procurement and engineering for the site. 
 
¶6. (C) KAR recently submitted a second bid on the dome, in 
partnership with a U.S. company, Anadarko, specifically to 
manage the construction of the site.  Karim said KAR had already 
purchased $70 million in equipment, including the hydraulic 
compressor, turbo solar generator, pipes, etc.  According to 
Karim, the proposal accords KAR 20 years' management of the 
project and an increased production share.  Karim said the 
partnership fulfilled the KRG's desire to give a project to a U. 
¶S. company, since other projects had already gone to the 
Norwegians and the Canadians. 
 
¶7. (C) Karim said a decision on construction had been deadlocked 
because both the Ministry of Oil and the KRG wanted to tender 
and control the project.  Karim said in the end Baghdad issued 
the call for tenders, ahead of a decision on which government 
had jurisdiction over the project.  Baghdad wanted the job 
completed as soon as possible, even if who ran it had to be 
determined later. 
 
An Issue of Refinement - Another Compromise Reached 
--------------------------------------------- ------ 
 
¶8. (C) Karim said that, in a new compromise, the Ministry of Oil 
had promised that all of Khurmala's associated gas would go to 
the new power plant currently under construction near Khurmala. 
Further, a gas conditioning plant would be built in the KRG and 
an additional 70 MMSCFD of gas would come from Kirkuk.  Karim 
 
KIRKUK 00000087  002.2 OF 002 
 
 
said that gas from the Khurmala Dome had been intended to meet 
all the needs of the Khurmala plant; however, the 30 MMSCFD of 
gas the dome initially produced would fall short of the 100-120 
MMSCFD needed. 
 
¶9. (C) Gas from both the dome and the crude was intended to go 
to Northern Gas in Kirkuk for refining.  Conflict arose when the 
KRG was told the expected 100 MMSCFD of gas would not be 
realized for three to five years, when the ratio of crude to gas 
had shifted.  According to Karim, over the years, the amount of 
gas will increase as the crude oil decreases. 
 
Corruption Less of an Issue for Oil Sector 
------------------------------------------ 
 
¶10. (SBU) Karim said that corruption remained the biggest 
challenge for doing business in Iraq.  However, he claimed that 
it affected the oil industry less than other sectors.  As a high 
tech industry that was difficult to enter, there was less 
competition within Iraq and therefore, less opportunity for 
negotiation. 
 
Comments 
-------- 
 
¶11. (C) The high-stakes nature of the oil industry and the 
current abundance of corruption in the Kurdistan Region makes 
Karim's assessment that the oil industry is somewhat immune from 
corruption difficult to believe.  The KRG's in both Erbil and 
Sulaymaniyah are acting and talking as if the constitution were 
already in place, and are interpreting all points to their 
favor.  If energy sources become scarce, the Kurdish holdout for 
greater national investment in large-scale refineries in the 
KRG, with simultaneous autonomous development of their 
resources, stands a greater chance of success.  End comment. 
ORESTE