VZCZCXRO1879
OO RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1021/01 0940629
ZNR UUUUU ZZH
O 030629Z APR 08
FM AMEMBASSY BAGHDAD
TO RUCNRAQ/IRAQ COLLECTIVE IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 6617
RUCNDT/USMISSION USUN NEW YORK IMMEDIATE 0691

UNCLAS SECTION 01 OF 02 BAGHDAD 001021 
 
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SENSITIVE 
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STATE FOR U/S JEFFERY; TREASURY FOR D/S KIMMIT AND U/S 
MCCORMICK; NSC FOR GENERAL LUTE, ENERGY FOR DAS HEGBURG 
 
E.O. 12958: N/A 
TAGS: ECON EPET EFIN IZ
SUBJECT: WHAT IS THE U.S. VIEW OF THE PROPOSED IN-KIND 
ELEMENTS OF IRAQI OIL TECHNICAL SERVICE AGREEMENTS WITH OIL 
MAJORS 
 
REF: BAGHDAD 647 
 
¶1. (SBU) This is an action request.  See paragraph 7. 
 
¶2. (SBU) Minister of Oil Husseyn Shahristani spoke to EMIN 
by phone April 1.  Asked about progress on the negotiation 
of the oilfield technical service agreements (TSAs) under 
negotiation with major international oil companies (IOCs), 
Shahristani said that the MoO and the companies have 
completed draft contracts with the only open issue that of 
payment-in-kind and the related process of giving notice of 
such in-kind liftings to the Development Fund for Iraq. 
The Minister said he is "not sure" what our attitude is on 
the payment-in-kind proposition, which is important, he 
says, to the IOCs.  He recalled that, when in Baghdad in 
February, U/S Jeffery undertook to consult on the issue in 
Washington.  What was our view, he asked? 
 
¶3. (SBU) Shahristani admitted that within the GOI, the 
Ministry of Finance has reservations, partly based on its 
direct contacts with the DFI and the IMF.  (The MoO itself 
has not had any contact with the DFI.)  For his part, 
Shahristani said that he had no problem with complete 
transparency for crude liftings against TSA obligations, 
and would be fine with a requirement that calls for the 
parallel notification to the DFI by IOCs to establish an 
audit trail.  He noted that the entire issue would likely 
come to the Council of Ministers for resolution soon. 
Minister of Finance Jabr says he would not sign off alone 
on payment in kind, dismissing what he termed, "barter 
arrangements" more appropriate for a bankrupt country. 
Asserting that Trade Bank of Iraq letters of credit should 
be satisfactory for payments to the IOCs, he added that 
past counter-trade agreements in Iraq had been plagued with 
corruption.  Nevertheless, Jabr said that he would go along 
with a consensus on the issue endorsed by the Council of 
Ministers (COM). 
 
¶4. (SBU) Some of the international oil companies have 
explained this aspect of a TSA would be important to them 
as it would substantially reduce credit risk, especially 
now that the GOI wants to enlarge the scope of the TSA to 
cover the purchase on behalf of the MoO of capital goods 
and tech services from third parties.  In its presentation 
to the COM (reftel) the MoO projected that over two years 
some USD 2.5 billion would be cycled through this vehicle 
for oilfield development. 
 
¶5. (SBU) As described reftel, Embassy believes that early 
conclusion of these TSAs is in the U.S. interest for 
several reasons.  Most importantly, there are indications 
of diminishing production from Iraq's once prolific 
southern fields that will affect short term revenue streams 
available to the GOI for reconstruction and building 
political stability at a critical juncture.  Bringing the 
expertise of the IOCs to bear on the problem, particularly 
their expertise in modern enhanced recovery techniques, 
could help arrest production declines caused by primitive 
reservoir engineering and years of production.  IOC 
procurement channels can deliver world-class equipment and 
services expeditiously in an environment 
where oil exploration and production equipment is in short 
supply.  Second, such agreements could help build political 
acceptability of an IOC role in the Iraqi oil sector.  And 
third, by demonstrating that Baghdad is moving towards 
engagement with the private sector, the early conclusion of 
TSAs would be likely to motivate the KRG to come back to 
 
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the table to conclude a national level hydrocarbon law.  It 
is of course a national hydrocarbon law that would lead to 
private foreign investment in hydrocarbon development under 
production sharing agreements and would transform the Iraqi 
oil sector. 
 
¶6.  (SBU) We therefore see the conclusion of TSAs as an 
important means to several high priority goals: higher near 
term production and breaking shibboleths and obstacles 
preventing conclusion of the hydrocarbons framework law. 
Also, not only will the IOCs benefit from managing these 
agreements, they will provide a considerable commercial 
opportunity for oil and gas equipment firms domiciled in 
the United States. 
 
¶7. (SBU) ACTION REQUEST: Embassy requests a coordinated USG 
view on whether we would support allowing the IOCs to be 
paid through crude oil liftings for their work under the 
TSAs, and if so, what safeguards we should suggest to 
 
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BAGHDAD 00001021  002 OF 002 
 
 
secure the DFI's and international community's interests and 
to ensure Iraq's compliance with its obligations concerning 
the United Nations Compensation Commission(UNCC). 
(One major oil company has suggested to us that perhaps a 
counterparty, e.g., JP Morgan, could maintain an open 
account in both directions and could handle the DFI notice 
issues.)  These safeguards are important, as they will help 
address the Finance Minister's arguments that payment in 
kind will be fertile ground for corrupt practices.  Embassy 
also requests legal views as to the implications of an 
in-kind deal for Iraq's obligations under UNSC resolutions, 
in particular with respect to the UNCC, as well as to any 
UNSC oversight arrangements that might be required for an 
in-kind deal with IOCs. 
CROCKER