VZCZCXRO1087
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHLO #3186/01 3541727
ZNR UUUUU ZZH
R 191727Z DEC 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC 0749
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 LONDON 003186 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET EINV ECON IZ UK
SUBJECT: IRAQ PETROLEUM CONFERENCE 2008:  DIALOGUE, 
CAUTIOUS OPTIMISM ON OPPORTUNITIES IN IRAQ'S OIL SECTOR 
 
¶1.  (SBU) Summary.  Iraq Petroleum 2008, held in London 
December 1-2, 2009, was a good opportunity for Iraqi 
officials, representatives from international companies, and 
participants from other governments to discuss the current 
situation in Iraq's petroleum sector, focusing particularly 
on investment opportunities.  Presenters included a number of 
veterans of Iraq's oil sector, as well as outside experts 
from the petroleum industry and elsewhere.  The speakers 
covered the strategic outlook for Iraq's petroleum sector, 
upstream and downstream investment prospects, the role of the 
international oil companies (IOCs) in Iraq's development, and 
the political, financial, and legal aspects of the petroleum 
sector.  All speakers and participants agreed that IOC 
involvement is vital to building up Iraq's oil and gas 
sectors, and there was broad consensus that the GOI needs to 
find the right balance of state control and IOC risk/reward 
in future contracts to maximize the potential of Iraq's 
resources.  The recent precipitous drop in world oil prices 
added urgency to calls for developing Iraq's petroleum 
sector.  There was wide agreement that the time is right for 
progress on national hydrocarbons legislation and development 
of the oil and gas sectors, while acknowledging the 
difficulty of the tasks ahead.  End summary. 
 
Iraq's Petroleum Sector:  Present and Future 
-------------------------------------------- 
 
¶2.  (U) Many speakers noted that Iraq's petroleum sector is 
significantly underdeveloped, due largely to years of neglect 
and mismanagement through three wars and the sanctions 
period, as well as the departure of many qualified 
technocrats in 2003.  Similarly, many mentioned declining 
production in the South as a significant impediment to Iraq's 
economic growth.  Often in the same breath, however, many 
speakers pointed to the enormous potential of Iraq's 
petroleum sector, pointing to its 115 billion barrels of 
proven crude oil reserves - more according to Iraqi estimates 
- and 1.5 trillion cubic feet of natural gas reserves.  One 
speaker said, "The market will take anything Iraq can 
produce."  Another speaker observed that Iraq is uniquely 
placed as potentially the largest incremental crude oil 
producer in the world and should exploit that to the 
country's benefit.  Advisor to the Prime Minister and former 
Oil Minister Thamir Ghadbhan and others pointed to the need 
for a national energy strategy, which would help Iraq 
comprehensively and rationally deal with its substantial 
resources.  The GOI continues to tout six million barrels per 
day (MBPD) as the 10-year crude oil production target. 
 
¶3.  (U) The upstream and downstream development and 
investment opportunities in Iraq are significant, conference 
participants agreed.  Not only are there opportunities for 
currently-producing oil and gas fields, some of which are 
super giants, but there is also significant exploration 
potential throughout Iraq.  Speakers pointed to the 
recently-begun tender process for some of Iraq's oil and gas 
fields, as well as plans to offer more fields and exploration 
blocks in future tenders.  Mustafa al-Jarrah of the Iraqi 
Ministry of Industry and Minerals noted that there are 
significant opportunities in petrochemicals too.  Many noted, 
however, that the keys for additional development and 
investment are the legal and regulatory framework that the 
GOI chooses to implement, as well as the structure of the 
contracts offered by the GOI. 
 
Iraq and the IOCs 
----------------- 
 
¶4.  (U) Much of the conference focused, in particular, on how 
much IOC and national oil company (NOC) involvement is needed 
in Iraq.  Speakers and participants outlined the long history 
between Iraq and the IOCs, from pre-nationalization to 
post-2003 technical assistance, making it explicitly clear 
that Iraq's oil and gas resources belong to Iraq, and that 
Iraqis have no desire to be controlled by outsiders.  That 
said, there was unanimous agreement that the IOCs offer 
technical expertise, technological advances, and financial 
resources that the Iraqis simply don't have in their domestic 
petroleum sector.  Falah al-Khawaja, a former Director 
General at the State company for Oil Projects, argued that 
the global petroleum sector is very different now than it was 
in the 1970s, and that Iraq can now deal with major IOCs and 
NOCs from a position of strength.  As such, the GOI needs to 
figure out the extent of its engagement with the IOCs, and 
how to present that engagement to the Iraqi people to avoid 
the impression that Iraq's oil sector is run by outsiders. 
Kjetil Tonstand of Statoil-Hydro argued that Iraq must 
determine how it will attract the right IOCs to develop 
Iraq's petroleum sector.  Dr. Abdul Hadi al-Hassani, Vice 
Chairman of Parliament's Oil and Gas Committee, was a 
particularly strong advocate for greater leadership - 
 
LONDON 00003186  002 OF 003 
 
 
particularly from the Iraqi Council of Representatives - in 
soliciting popular support, as well as an improved banking 
system, and more domestic and international transparency in 
the oil and gas sectors. 
 
¶5.  (U) Many of the IOC representatives expressed some 
indifference toward the conference, believing that it covered 
already well-trod ground.  They were also unimpressed by the 
then-upcoming December 5-7 Energy Expo in Baghdad.  There 
continues to be frustration among IOC representatives about 
how the GOI is handling its oil and gas contracts.  IOC 
representatives argue that the contract structure brings a 
lot of risk with relatively little upside, and it remains to 
be seen how closely the GOI will hew to the announced 
schedule of the first contracting round. 
 
Bring Back INOC 
--------------- 
 
¶6.  (U) Many speakers and participants lamented the current 
structure of Iraq's petroleum industry, which they see as too 
political and centrally-controlled by the Oil Ministry.  One 
solution that received nearly unanimous backing was the 
reconstitution and increased role of the Iraqi National Oil 
Company (INOC).  Many Iraqis in attendance spoke highly of 
INOC and its history of managing Iraq's oil sector, pointing 
to the nearly four mbpd in production reached at the end of 
the 1970s.  The repeated argument was that INOC would mange 
the petroleum sector better than the Oil Ministry, and that 
the operating companies should come under INOC's umbrella. 
Dr. al-Hassani argued that the GOI must fund INOC properly to 
bring it to parity with IOCs.  Fadhil Chalabi, former acting 
Secretary-General of OPEC and now with the Centre for Global 
Energy Studies, cautioned that INOC must remain apolitical 
and be run on a commercial basis, akin to other commercial 
state-owned oil companies like Statoil-Hydro or Petrobras. 
 
The (Unpopular) Heads of Agreement with Shell 
--------------------------------------------- 
 
¶7.  (U) Participants express nearly unanimous concern about 
the recently-signed Heads of Agreement (HoA) on southern gas 
between the GOI and Royal Dutch Shell.  Though the Iraqis 
present were content with the joint venture arrangement, 
others cited problems including a lack of transparency; the 
fact that  HoA precludes the GOI from talking to other IOCs 
about gas in the coming year, thereby creating a monopoly; 
the HoA's review of export options when domestic concerns 
were a priority; and the fact that the HoA dictates that the 
joint venture must sell Iraqi gas domestically at 
international market rates. 
 
Political, Financial, and Legal Ramifications 
--------------------------------------------- 
 
¶8.  (U) While noting the many political obstacles to the 
development of Iraq's petroleum sector, many of the Iraqis 
present indicated that the current political and economic 
situation may produce the right incentives for compromise on 
necessary hydrocarbons legislation.  There was a great deal 
of optimism among many at the conference for Oil Minister 
Shahristani's late November visit to Erbil to discuss adding 
Kurdistan Regional Government (KRG)-produced crude oil to the 
Iraq-Turkey export pipeline.  While many called the visit a 
breakthrough, Ghadbhan noted that the nature of the KRG's 
contracts and revenue sharing had not yet been discussed. 
Additionally, former Oil Minister Ibrahim Bahr al-Uloum was 
one of many who noted that there is currently a positive 
environment for agreement on hydrocarbon legislation.  Some, 
including Dr. Al-Hassani, even mentioned passing a 
hydrocarbons framework law by spring 2009. 
 
¶9.  (U) Given the recent precipitous drop in world oil 
prices, many speakers noted the significant shift in the 
GOI's fiscal outlook.  The GOI is likely to run a real 
deficit of USD 15-25 billion in 2009, and will have 
difficulty funding necessary capital investment projects 
beyond 2009, if oil prices remain around current levels, 
participants agreed.  Dr. Colin Rowat of the University of 
Birmingham argued that this presents the GOI with an 
opportunity to assess current and capital expenditures based 
on rate of return, rather than simply providing money when it 
is requested, as was its general practice during the oil 
price boom.  Ghadbhan noted that declining government revenue 
has only added on the pressure on the Oil Ministry to 
increase production. 
 
¶10.  (U) As many speakers reiterated, the Oil Ministry's 
efforts to increase production take place amidst legal and 
regulatory ambiguity over who controls the development, 
management, and revenues of Iraq's petroleum sector.  All 
 
LONDON 00003186  003 OF 003 
 
 
legal experts harkened back to Articles 111 and 112 of the 
2005 Constitution and the legal ambiguity surrounding them. 
Dr. Carole Nakhle of the Surrey Energy Economics Centre and 
¶J. Jay Park of Macleod Dixon LLP discussed some of the GOI's 
legal options, including the structure of contracts and the 
constitutional issues involved.  Nakhle urged the GOI to come 
up with a legal framework similar to that adopted for the 
North Sea, which would allow the government to maintain 
control over the resources but would also give companies 
maximum flexibility to develop Iraq's oil and gas fields. 
Interestingly, Dr. Al-Hassani pointed out that upstream (and 
some downstream) activities could be decentralized to the 
regions/provinces, although the legal questions still have to 
be answered. 
 
Comment 
------- 
 
¶11. (SBU) The conference demonstrated that the Iraqis are 
thinking seriously about the issues that face them, but it is 
unclear how much traction these ideas have among Oil Ministry 
leadership.  It was somewhat encouraging to hear Iraqi 
participants speak so highly of IOC involvement and focus on 
development and involving the domestic Iraqi private sector 
in the petroleum sector, although they were unable to provide 
many specifics ways to solve their problems.  Even in the 
face of some optimism that contract tenders have been offered 
and that the apparent thaw in GOI-KRG relations can bring 
about national hydrocarbons legislation, the mood at the 
conference was somewhat subdued, with many participants 
acknowledging that the GOI continues to face many of the same 
issues it has for quite some time. 
 
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