This record is a partial extract of the original cable. The full text of the original cable is not available.

S E C R E T SECTION 01 OF 02 KUWAIT 001381 
 
SIPDIS 
 
NOFORN 
 
E.O. 12958: DECL: 04/11/2013 
TAGS: EPET PREL EFIN KU IZ UNCC
SUBJECT: TFIZ01: TRYING TO RESOLVE THE UNCC/RECONSTRUCTION 
FUNDING CHALLENGE 
 
REF: KUWAIT 1213 
 
Classified By: Ambassador Richard H. Jones for reason 1.5 (D) 
 
¶1. (C) SUMMARY:  Decisions will be made soon about 
distributions of Iraqi oil revenues that may have significant 
political as well as economic ramifications.  Our GOK 
contacts accept in principle the idea of reducing the 
percentage of Iraqi oil revenues paid into the UN 
Compensation Commission (UNCC) fund, but any attempt to 
change the mechanisms for adjudication and payment of claims, 
or a deep cut in the revenue flow, will alienate our Kuwaiti 
coalition partners.  Therefore it is of vital importance that 
we work closely with the GOK as we develop our thinking. 
Moreover, it will be better for both of us if any new 
proposals are seen as Kuwaiti proposals.  This message is 
intended to provide food for thought as Washington policy 
makers develop U.S. positions on these issues.  It argues 
that a more stable flow of oil exports from Iraq will allow 
for cuts in the percentages for the Oil for Food program and 
the UN Compensation Committee without a concomitant fall in 
revenues for those programs, while at the same time providing 
sufficient funds for reconstruction and humanitarian needs. 
END SUMMARY. 
 
¶2. (C) The GOK fully understands and supports the need to 
quickly rebuild Iraq, realizing that a prosperous and stable 
state on its Northern border is vital to its own prosperity 
and stability.  However, GOK officials are also adamant that 
any new Iraqi government must fully comply with all UN 
Security Council resolutions.  Thus, they are wary of any 
plan to drastically reduce UNCC payments in a way detrimental 
to adequate compensation for very real damages inflicted by 
Iraq's 1990-1991 invasion and occupation of Kuwait.  Kuwait 
has been the USG's most indispensable partner in the fight 
against Saddam's regime, and therefore the USG should now 
work closely with the GOK to ensure its views are taken into 
account.  Indeed, GOK officials have told us that they would 
like any proposals regarding changes in the distribution of 
Iraq's oil revenue to come from Kuwait.  We believe that such 
a step would have important positive domestic, bilateral, and 
regional implications.  Domestically the GOK will be able to 
demonstrate that it stood up for Kuwaiti rights; bilaterally, 
Kuwait can demonstrate its concern for Iraqi reconstruction; 
and regionally, the GOK will be able to say that it is not a 
passive bystander but an active architect of regional policy 
initiatives.  All of these factors also serve U.S. interests. 
 
LOOKING AT THE NUMBERS 
---------------------- 
 
¶3. (S/NF)    The current formula divides revenues 72 percent 
to the Oil for Food (OFF) program, 25 percent for UNCC funds, 
and 3 percent for UNIKOM and other miscellaneous expenses. 
The problem is how to carve out funds for reconstruction from 
this mix without compromising UNCC payments. First, it should 
be noted that Iraq sold around 400,000 barrels of oil per day 
(bpd) to neighbors like Jordan and Syria at heavily 
discounted prices.  Further, illicit oil trade (also over 
400,000 bpd for most of the past years) can be expected to 
cease.  Given relatively light damage to key Iraqi oil 
installations, this suggests an additional 800,000 bpd of oil 
and oil products will be available for export through the OFF 
program almost immediately.  (One estimate we've seen is that 
restoring such trade at international market prices alone 
would have generated an extra $1.1 billion in 2001 and an 
extra $1.5 billion in 2002.) 
 
¶4. (S/NF) Beyond restoring this illicit and discounted Iraqi 
oil to the revenue stream, we should recall that over the 
years Saddam continually manipulated the flow of Iraqi oil 
for his political purposes.  Again, given the relatively 
light damage to Iraqi oil facilities, it is entirely possible 
that Iraq could relatively quickly return to its pre-invasion 
production capacity of 3.1 million barrels per day (mmbd). 
With an estimated 300,000 bpd consumed domestically, Iraq 
could have 2.8 mmbd of oil to sell at international prices. 
 
¶5. (S/NF)  2.8 mmbd at a projected price of $22.50 a barrel 
(assuming a likely fall in prices to historical averages 
after the end of the war) yields nearly $23 billion a year. 
In 2002, according to numbers we've seen, Iraq sold about 2.0 
mmbd at a similar price, which would have yielded total 
revenue of just under $16.5 billion.  $16.5 billion in 2002 
divided according to the previous formula yields $11.88 
billion for OFF, $4.125 billion for UNCC, and $0.495 billion 
for UNIKOM/Misc.  (Caveat: Note that these and all following 
figures are post estimates; even if the actual amounts differ 
slightly, the same principle should hold.)   If the same 
formula is applied to our estimate of $23 billion for 
post-war oil revenues, we could expect $16.56 billion for 
OFF, $5.75 billion for UNCC, and $0.69 billion for 
UNIKOM/Misc. 
6.(S/NF)  However, if one assumes that the actual dollar 
contributions to OFF, UNCC and UNIKOM in 2002 were adequate 
to meet current needs for those programs, then the 
distribution formula could be altered significantly, and 
still leave enough revenues for their needs.  For example 
(see table), on these assumptions, a distribution of 52 
percent for OFF, 18 percent for UNCC and 2 percent for 
UNIKOM/Misc. should provide ample funding for these programs 
and still leave 28 percent (or over $6.2 billion) for 
reconstruction. 
 
               Current     Current    New         New 
               Distr.      Revenue    Distr.      Revenue 
               Formula     Distr.     Formula    Distr. 
               (percent)   ($bn)      (percent)   ($bn) 
 
OFF              72         11.88        52        11.96 
UNCC             25          4.125       18         4.14 
UNIKOM            3          0.495        2         0.69 
RECONSTRUCTION    0          0           28         6.21 
 
Total Revenues  100         16.5        100        23.0 
 
7.(C) As can be seen, Kuwait could actually propose a seven 
percentage point cut in the UNCC contribution and still 
expect to see a slight gain in UNCC revenues.  More 
importantly, this formula allows 28 percent of Iraqi oil 
revenues to flow to reconstruction costs ($6.21 billion). 
Although Iraq's long-term needs are enormous, we doubt that 
the country could absorb higher levels of reconstruction 
investment efficiently. 
 
GENERATING MORE RECONSTRUCTION REVENUES 
--------------------------------------- 
 
8.(C) One of the most important areas for early 
reconstruction and investment efforts must be agriculture. 
Iraq has a history of being a bread-basket for the region, 
but decades of mismanagement have devastated the sector. 
Reversing the damage caused by draining marshes, and 
rebuilding irrigation systems damaged by years of neglect, 
may take years, but early gains are possible.  (One key step 
will be quickly resolving questions of land ownership.) 
Reviving agriculture will have many benefits, including 
providing jobs for the Iraqi people, but one of the most 
important will be reducing reliance on imported food and 
therefore freeing up OFF funds to be shifted to 
reconstruction. 
 
DEBT RELIEF 
----------- 
 
9.(C)  The Government of Kuwait has also expressed to us its 
support for a debt relief program, but with an important 
caveat; the program should concentrate on debts incurred 
during the period UN sanctions were in place.  Their argument 
is that loans incurred during that period reduced the effects 
of sanctions and helped keep Saddam in power.  We believe 
that such a debt relief proposal could be a useful complement 
to any package to change the UNCC contribution formulas.  It 
could also be used as a foil to fend off any aggressive raids 
on the UNCC by the French, Germans, etc. 
 
WHAT ELSE CAN WE DO 
------------------- 
 
10.(C) Beyond generating funds for governmental 
reconstruction efforts, it is vital that the private sector 
is brought in to do its part.  Reftel contained post 
suggestions on rapidly building trade and investment 
promotion plans to revive private sector interest in Iraq, a 
country we and the Kuwaitis have been locked out of for 
nearly 13 years.  Beyond this, septel will suggest specific 
mechanisms to encourage Iraq's closest and wealthiest 
neighbors, the six states of the Gulf Cooperation Council, to 
play their part in the reconstruction effort. 
JONES