VZCZCXRO0702
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1328/01 1201304
ZNR UUUUU ZZH
R 291304Z APR 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 7088
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHC/OPEC COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 001328 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA-I, EEB 
 
E.O. 12958: N/A 
TAGS: ECON EPET ENRG
SUBJECT: OIL MINISTRY RESPONDS REGARDING IN-KIND PAYMENTS 
FOR TECHNICAL SERVICE AGREEMENTS 
 
REF: A. A) STATE 36481 
     ¶B. B) BAGHDAD 1021 
     ¶C. C) STATE 41382 
 
¶1. (SBU)  SUMMARY: The Ministry of Oil sent us the proposed 
text of the payment terms of its technical service contracts, 
explaining the proposed transaction is structured as an 
accounting offset, in hopes of securing USG approval of its 
proposed payment scheme.  Post requests guidance on the draft 
text.  END SUMMARY. 
 
¶2.  (SBU) We shared the text of ref A with the Director 
General of Contracting at the Ministry of Oil, and followed 
up with discussions on April 16 with his deputy, Abdul Mahdy 
al-Ameedi, regarding USG concerns about the proposed payment 
mechanism for the technical service contracts for oil field 
development.  Mahdy's initial reaction was "we know that we 
are under an occupation, but what law prevents the GOI from 
establishing this type of contract, which is quite common in 
the industry?"  The contracts involve large transfers that 
the Ministry of Finance would not be able to support, and, he 
added, the well-known failings of the Iraq procurement system 
represent another obstacle which alone should warrant 
acceptance of the Iraqi work-around.  We suggested that the 
proposed contract language be presented for USG 
consideration, and another meeting held if needed to discuss 
possible solutions. 
 
¶3.  (SBU)  On April 27, the DG, Natik al-Bayati, wrote a 
lengthy message to allay USG concerns regarding the proposed 
in-kind payments to international oil companies (IOCs) for 
technical service contracts.  Bayati explained that all of 
the IOCs have contracts with the State Oil Marketing 
Organization (SOMO) for monthly purchases of crude oil and 
that the MOO would deduct the dollar amount of an IOC's TSA 
invoice to the MOO from SOMO's crude purchase invoice to the 
IOC.  The IOC would thus purchase crude oil in the ordinary 
course of business but reduce the amount it pays SOMO for a 
given quantity of oil by the amount the MOO owed the IOC for 
services recently rendered and invoiced under the TSA.  This 
procedure, Bayati explained, is all that is meant by 
"in-kind" payments. 
 
¶4. (SBU) Bayati further explained that SOMO could calculate 
Iraq's payment to the United Nations Compensation Commission 
(UNCC) using 5 percent of SOMO's gross revenues for crude 
sales, i.e., before the reductions from the amounts paid by 
the IOCs for their crude to recognize their services rendered 
under the TSAs.  Bayati also advised that all the documents 
and invoices could be audited by internal and international 
auditors, such as Ernst and Young, consistent with practices 
under UN Security Council Resolution 1483.  Bayati noted the 
MOO would keep the Finance Ministry well informed, and copied 
the proposed contract language for our review. 
 
¶5. (SBU) ACTION REQUESTED: We have forwarded the 
correspondence from Bayati to the Department for guidance 
regarding whether the above clarifications and assurances 
adequately address Washington agencies' concerns about 
in-kind payments for services under the TSAs.  In our view, 
the relevant contractual language should address those 
concerns, albeit perhaps with some textual modifications. 
Post would greatly appreciate a review by Washington agencies 
of the contract language as soon as possible, as we plan to 
meet with Minister of Oil Shahristani next week. 
 
¶6. (SBU) The relevant draft contractual language provides the 
following: 
 
BEGIN CONTRACT TEXT 
 
9.1 For the performance and completion of the Services in 
accordance with the Contract, SOC shall pay or cause to be 
paid to contractor, at the times and in the manner specified 
in this Article, the remuneration defined in Annex B-Rates 
and Prices. 
 
9.2 Unless it is specified otherwise in the contract, 
Contractor shall submit to SOC and SOMO each calendar month 
(quarterly) a duly documented invoice covering the fees for 
the portion of the Services performed or completed and for 
reimbursable items procured during the preceding calendar 
month (quarter), SOC may deduct from any payments to be made 
to contractor any undisputed amounts contractor may owe to 
SOC under the contract. 
 
9.3 The value of any invoice will be deducted from the value 
of SOMO's commercial invoice under any existing crude sales 
 
BAGHDAD 00001328  002 OF 002 
 
 
contract with (Contractor).  Such deduction shall be made by 
SOMO from the invoice relating to the next shipment of crude 
oil lifted by (Contractor) after receipt by SOMO of the said 
Invoice.  This arrangement shall be subject to (Contractor) 
and SOMO having confirmed their agreement by letter, 
substantially in the form of Annex (...) 
 
9.4 In the event SOC disputes an amount invoiced, SOC shall 
notify contractor thereof within thirty (30) Days of the 
receipt of such invoice specifying the reason thereof.  SOC 
shall pay or cause to be paid the entire amount of the 
invoice including the disputed portion within such thirty 
(30) days period from the said notification.  The parties 
shall use all reasonable endeavors to expeditiously settle 
such dispute, Contractor shall pay back SOC the amount due to 
SOC, if any, which amount shall bear interest at LIBOR US 
Dollar ( 0) from the date of payment of the invoice. 
 
9.5 Any overdue payment by either party to the other 
hereunder shall bear interest at a rate specified at the 
published LIBOR one-month rate on the due date. 
 
END CONTRACT TEXT 
CROCKER