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