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C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002115 
 
SIPDIS 
 
C O R R E C T E D  C O P Y - ADDED TAG TCOR 
 
SIPDIS 
 
E.O. 12958: DECL: 06/20/2016 
TAGS: ECON TCOR ENRG EPET PGOV PREL PINR IZ
SUBJECT: SHAHRISTANI PUSHING FOR REFORM IN THE MINISTRY OF 
OIL 
 
REF: BAGHDAD 1552 
 
BAGHDAD 00002115  001.2 OF 003 
 
 
Classified By: Economic Minister Counselor Tom Delare, for reasons 1.4 
(b) and (d). 
 
¶1. (C) Summary: In a positive meeting June 16 with Econ staff 
members, Minister of Oil Husayn al-Shahristani focused on 
four areas of reform for his Ministry: hydrocarbon 
legislation, liberalization of fuel imports, improved 
contracting procedures, and rooting out corruption.  His 
goals, especially for oil production and increased domestic 
supply of refined products, are very ambitious, and he is 
eager to engage with the USG on security and anti-corruption 
issues. End Summary 
 
--------------- 
HYDROCARBON LAW 
--------------- 
 
¶2. (C) Shahristani realizes that Iraq will not get serious 
foreign investment until hydrocarbon legislation is passed 
that serves to protect private investment. He feels that the 
legislation should ensure that revenues go to the National 
Treasury to support the national budget as approved by 
Parliament. While exploration and production will remain 
under state control, the downstream--refining, import and 
sale of products, and distribution--should be privatized. 
 
¶3. (C) When asked about how the Ministry of Oil (MoO) will 
handle the proliferation of draft legislation that is being 
provided by private oil companies, international 
organizations, and previous government officials, Shahristani 
replied that he actually welcomes additional versions of 
hydrocarbon laws. He referred to a team within the Ministry 
established to review all of the proposals to determine 
approaches that best fit Iraq. (Note: A USG-contracted legal 
advisor has already been working with this committee, marking 
an improvement over the previous administration which 
regarded U.S. input as intrusive. End Note.). He acknowledged 
that dialogue with different regions-especially 
Kurdistan-will be necessary for successful legislation. He 
has also advised Parliament that all new contracts be issued 
through public tender, with both tenders and executed 
contracts being made available to the public via the Internet. 
 
--------------------- 
IMPORT LIBERALIZATION 
--------------------- 
 
¶4. (C) Minister Shahristani announced that he was, that 
afternoon, presenting draft fuel import liberalization 
legislation for discussion and ultimate approval by the 
Council of Ministers and Parliament. He seemed confident that 
the legislation would be accepted without a problem because 
he had already discussed it within the Cabinet-concluding, 
therefore, that introducing market liberalization by Council 
decree would be unnecessary. He stated that the law should be 
passed within a few months, though he didn't expect that a 
significant amount of imported product will be available to 
the domestic market through private importers until the end 
of the year. Shahristani elaborated that import licenses 
would be granted by the Ministry through the State Oil 
Marketing Organization (SOMO), currently the only entity 
permitted to import petroleum products. Potential importers 
would need to prove they possess adequate capital and means 
of transportation, as well as the ability to meet 
environmental and safety requirements. There would be no 
pricing regulations, so importers would compete in an open 
market. 
 
----------------- 
REFINING CAPACITY 
----------------- 
 
¶5. (C) The Minister expressed his goal of increasing 
production of refined product to a total of 1.05 million 
barrels per day (bpd) to meet domestic needs-a figure that 
includes expected demand growth. He described a medium-term 
refinery construction plan that should help the Government of 
Iraq (GOI) meet that goal within three to four years. This 
refinery plan will ensure that each of the five main regions 
in Iraq will have a refinery to provide for local needs-a 
strategy that we believe is not as economically sound as it 
is politically savvy. Existing refineries, such as that at 
Daura, will receive new units as older ones are 
decommissioned. Ten small plants will also be decommissioned 
as new facilities in areas such as the Central Euphrates and 
Nasiriyah are built. Shahristani explained that these capital 
investments are covered in the MoO's current budget. Of note 
 
BAGHDAD 00002115  002.2 OF 003 
 
 
is the new Kouya refinery to be built near Sulaymaniyah to 
take oil from new fields being developed in Kurdish 
territories. (Comment: The Minister has engaged in 
discussions with the Kurds on the Kouya project, 
demonstrating cooperation between the central and regional 
governments in development of hydrocarbon resources. End 
Comment) 
 
-------------------------- 
PRODUCTION AND FUEL PRICES 
-------------------------- 
 
¶6. (C) Shahristani pointed to a 20 thousand bpd increase in 
oil production since he became Minister, stating that exports 
the day before (June 15) had been 1.5 million bpd. He 
commented that all of that increase was due to pumping 
through the export pipeline to Ceyhan, and recognized the 
need to protect the pipeline. He has already engaged with the 
Ministry of Defense and Multi-National Forces-Iraq (MNF-I) to 
improve infrastructure security from Bayji to Kirkuk. 
 
¶7. (C) Despite lower than projected production during the 
early part of 2006, Shahristani is confident that current 
production levels will ensure that Iraq meets-even slightly 
exceeds-IMF Standy-by Agreement (SBA) expectations. He also 
confirmed that the GOI would implement SBA-required fuel 
price hikes for both March and June by June 30. He even said 
the planned price hikes would be higher than stipulated by 
the IMF. (Note: Price increases were actually implemented on 
June 19 for diesel, kerosene and LPG, with new fuel prices 
reported at: LPG: ID 1000 per 12 Kg cylinder; Diesel: ID 125 
per liter; Kerosene: ID 75 per liter; Gasoline: ID 175 per 
liter for 80 octane, ID 250 per liter for 86-87 octane, and 
ID 350 per liter for 91  octane; and Residual Heavy Fuel Oil: 
ID 200,000 per metric ton. At a subsequent meeting on June 
20, the Minister stated gasoline prices had not yet 
increased, but would sometime before the end of the month. 
New subsidy reform public service announcements were not 
ready to air prior to these increases. End Note) 
 
¶8. (C) The Minister articulated a goal of increasing oil 
production to 4.3 million bpd by the end of his term in 2010, 
insisting that the figure was possible through exploitation 
of existing fields and facilities and with minimal help from 
outside partners. He expects production of 6.7 million bpd by 
2012, for which, he admits, new fields will need to be 
developed. In order to explore and produce these fields, 
Shahristani acknowledged that hydrocarbon legislation and 
participation of international oil companies will be 
necessary. (Comment: Shahristani's goals are extremely 
optimistic, as many observers believe that considerable new 
development, infrastructure, and equipment will be necessary 
to meet even the stated 2010 target. With new fields taking 
4-5 years to develop, barring new fields coming online, IRMO 
estimates that 750 thousand additional bpd is a more 
realistic figure for increased production for a total of 3.15 
mbpd vice 4.3 mbpd by 2010. End Comment). 
 
--------------------------------------------- ---------- 
SHAHRISTANI PUSHING FOR IMPROVED CONTRACTING PROCEDURES 
--------------------------------------------- ---------- 
 
¶9. (C) The Minister admitted "everyone knows there has been a 
lot of corruption in the Ministry of Oil."  Recently, the 
Minister cancelled about 20 fuel purchase contracts due to 
suspected corruption, including contracts for importing fuel 
from Kuwait because he was suspicious they "weren,t clean." 
Shahristani said he plans to push at the Cabinet level for 
sending corruption cases to court.  He also said he will 
remove people involved in corrupt contracting. 
 
¶10. (C) Shahristani expressed his displeasure with American 
contractors KBR and Parsons, and their inability to complete 
the projects for which they have been retained.  He gave one 
example of a Parsons contract to meter loading at the ABOT 
export terminal, which has been languishing for two years. 
He said KBR and Parsons keep making excuses for why work is 
not finished, and despite their appreciation for USG funding 
of these projects, the Iraqis would have preferred finding 
alternate means of financing had they known how little 
oversight would be exercised over these projects. 
Shahristani made this same point to the Ambassador in his 
initial meeting as Minister with Emboffs on May 28 (reftel 
Baghdad 1552).  When asked how the USG could mitigate the 
situation, he said we should hold our contractors accountable 
for performance delays since we are paying them.  To 
emphasize his point, the Minister said he has fired employees 
in his Ministry due to corruption or inability to meet 
performance schedules. 
 
BAGHDAD 00002115  003.2 OF 003 
 
 
 
--------------------------------- 
ROOTING OUT CORRUPTION IN THE MoO 
--------------------------------- 
 
¶11. (C) Sharihstani recounted to us his June 15 introductory 
conversation with Secretary of Energy Samuel Bodman, in which 
he told the Secretary that he needs help rooting out 
corruption in his Ministry.  Shahristani said he plans to 
meet with his senior MoO staff to compile a list of 
priorities for discussion when the Secretary visits Iraq.  We 
will follow up with the Minister to gather these points 
before Secretary Bodman's visit. 
 
¶12. (C) Econ Counselor informed Shahristani that the Embassy 
has an interagency Anti-Corruption Working Group (ACWG) that 
can help the Minister identify corruption at the MoO. He 
offered for the group to work with his Inspector General 
(IG), Dr. Ali Alaq, on identifying specific cases of 
corruption in the Ministry.  Shahristani said he has a close 
working relationship with his IG, who briefs him every 
morning.  The Minister stated that he told his IG's staff 
that they are independent, and free to interview any 
employees and request any material they deem necessary to 
investigate cases. He has also empowered them to perform spot 
inspections in the field (distribution depots, retail 
outlets, etc).  He also told them that if anyone refuses the 
IGs access, the IGs should report back to the Minister. 
Additionally, the IG prepares a daily report on how much oil 
has been loaded that day in addition to the two operational 
reports from SOMO and the South Oil Company. 
 
------- 
COMMENT 
------- 
 
¶13. Shahristani seemed confident in his new role, detailing 
actions he is pursuing in priority areas such as fuel import 
liberalization and fuel price increases, as well as improving 
oil production and refining. He also seemed serious about 
addressing corruption within the Ministry of Oil, though he 
appeared more focused on specific intelligence on corrupt 
Ministry personnel rather than the impact of sectoral reforms 
that would undermine financial incentives leading to 
corruption. Though he is supportive of fuel price and import 
reform, his appreciation for the importance of such measures 
seems more financially motivated (to meet IMF requirements or 
increase revenues).  Shahristani was not nearly as specific 
in a way forward on passing hydrocarbon legislation as he was 
with achieving production and refining improvements. He 
glossed over of how the Ministry's internal committee will 
reconcile the multitude of model and draft laws is cause for 
some concern. The Minister was overly optimistic in his 
projections for increased oil production by the end of his 
term in office, casting some doubt on other declarations, 
such as his expectations for increased transparency within 
his Ministry. More generally, the tone of the meeting was 
encouraging considering initial misgivings about 
Shahristani's level of receptivity to U.S. involvement. He 
was timely, professional, and responsive--conducting the 
meeting like a Chief Executive Officer aware of the 
challenges facing his organization, but prepared with a 
strategy for addressing these challenges. He downplayed 
dependence on U.S. resources, asserting the ability of the 
Ministry to undertake proposed initiatives--except in the 
area of security. 
SPECKHARD