VZCZCXRO4390
RR RUEHBC RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #1151/01 1211349
ZNY CCCCC ZZH
R 011349Z MAY 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 2902
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEBAAA/USDOE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001151 
 
SIPDIS 
 
DOE FOR GEORGE PERSON 
 
E.O. 12958: DECL: 05/01/2019 
TAGS: EPET ENRG PGOV EINV PINR IZ
SUBJECT: MINISTRY OF OIL UPDATE ON BID ROUNDS, OIL 
PRODUCTION, AND SHELL FLARED GAS DEAL 
 
Classified By: DOE Energy Attache Edgar Parks, reasons 1.4(b,d) 
 
¶1. (C) Summary: Two Ministry of Oil (MoO) Directors General 
provided details of internal MoO deliberations regarding 
progress on the two bid rounds and the MoO's crude oil 
production in separate April 23 meetings with DOE Energy 
officers, followed up by another meeting between Energy 
Attache and one DG on April 28.  During an April 21 internal 
MoO meeting, Oil Minister Shahristani rejected his 
subordinates' recommendation to abandon the first bid round 
(inviting tenders on six producing oil fields and two gas 
fields) and took no decision on the corporate income tax rate 
to be levied on the winning companies.  Average daily oil 
production continues to decline.  The April 28 meeting also 
focused on the remaining issues to be resolved in forming a 
joint venture between Shell and South Gas Company to process 
associated gas currently being flared from Iraq's southern 
oil fields.  End summary. 
 
Staff Meeting Issues 
-------------------- 
 
¶2. (C) The DGs said during the April 23 meeting that Oil 
Minister Shahristani held an inconclusive meeting two days 
previous with key Directors General and other staff to decide 
remaining issues and finalize MoO's first bid round's model 
contract.  Shahristani rejected a proposal to scrap the first 
bid round due to certain remaining unresolved issues and 
focus instead on developing the fields contained in the 
second bid round.  Moreover, Shahristani is virtually alone 
(of MoO's upper management) in believing that the first bid 
round contracts will not require COR approval.  During the 
subsequent April 28 meeting, the DG said the Petroleum 
Contracting and Licensing Directorate had issued a letter the 
day prior detailing the resolution of the remaining model 
contract issues.  Nonetheless, our contact did not believe 
the issues had actually been resolved within MoO. 
 
¶3. (C) MoO has determined that it will receive $2.6 billion 
from signature bonuses from the winning bids on the eight 
Fields in the first bid round.  The winning international oil 
companies (IOCs) must also provide a cumulative $1.5 billion 
in performance bonds.  The MoO has not yet decided whether 
the IOCs' income tax rate will be 15% or 35% of net income. 
During MoO's April 21 internal staff meeting Shahristani and 
others raised concerns about the work and competence of the 
contractor, Gaffney, Kline, and Associates, the consultant 
assisting MOO in implementing the bid rounds, but no decision 
was taken on replacing the firm.  (The next internal staff 
meeting is May 4.) 
 
Production Problems 
------------------- 
 
¶4. (C) The MoO officials also said the MoO's Southern Fields 
Committee has taken no action to implement the "crash 
program" to produce additional oil (initiated in December 
under DPM Salih) until it receives written authorization from 
the PM, or the Cabinet through Minister Shahrishtani.  The 
new Deputy Minister for Upstream (DM), Abdul Kareem Luaibi, 
heads the Fields Committee.  The PM-chaired Energy Policy 
Committee formed after the late February Oil Policy Symposium 
has not had its initial meeting yet.  Meanwhile, the MoO's 
upstream companies, Maysan and the South and North Oil 
Companies, issued their respective 1st quarter 2009 reports 
showing a current production of 1.65 million barrels per day 
(b/d) in Basrah, some 600,000 b/d under the 2009 Plan 
established in late 2007 of 2.25 million b/d. 
 
¶5. (C) One of the officials said on April 23 that the trend 
of average daily oil production continues to decline, with a 
Qof average daily oil production continues to decline, with a 
loss of 100-150,000 b/d from the southern fields now compared 
to the end of 2008.  Of Iraq's 1,470 current oil wells 
(including some used for water injection), 523 are producing 
oil, and about 950 need to be repaired, recompleted, or 
replaced.  The MoO's Studies Directorate believes that, by 
re-perforating and recompleting between 300 to 500 (of the 
950 non-working wells), Iraq could produce an additional 
300,000 to 500,000 b/d of crude oil this year under the 
"crash program." 
 
The Shell Flared Gas Deal 
------------------------- 
 
¶6. (C) On April 21, a DG said Shell has written MoO about 
whether the contract for the Natural Gas Project currently 
under negotiation with Shell legally required COR approval in 
light of Law 97 of 1967.  The MoO Legal Directorate DG told 
Emboff earlier that Law 97 (applicable to upstream 
 
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activities) is not relevant to Shell's downstream gas 
project.  Shell estimates it will install $12 billion in new 
plant facilities for this Project. 
 
¶7. (SBU) On April 28, the MOO DG identified several important 
issues under current contract discussions with Shell 
regarding the Southern Gas (Flare Reduction) Project.  The 
issues include: 
 
-- The parties' successful negotiation of: the Shareholder 
Agreement (with each side's capital contributions and rights 
spelled out, including ownership or lease of real estate and 
installed plant throughout the 25-year term of the project's 
contract, as well as thereafter); 
-- Gas Purchase Agreement with South Gas Company (regarding 
Shell's payment for natural gas consumed); 
-- Gas Products Agreement (for Shell's processing of gas into 
products (e.g., LPG, etc) for MOO's disposition/sale); 
-- Supply Agreement (in which Shell or the MoO provides gas 
to Ministry of Electricity for power generation); and 
-- Agreement on an economic model to be used for the Project. 
 
HILL