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PP RUEHBC RUEHDH RUEHKUK
DE RUEHGB #1764/01 1811948
ZNY CCCCC ZZH
P 301948Z JUN 09 ZDK
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 3750
RHEBAAA/USDOE WASHDC PRIORITY
INFO RUCNRAQ/IRAQ COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001764 
 
SIPDIS 
 
STATE ALSO FOR EEB AND NEA/I; DOE FOR GEORGE PERSON 
 
E.O. 12958: DECL: 06/30/2019 
TAGS: EPET ENRG PGOV EINV PINR IZ
SUBJECT: IRAQ,S FIRST OIL BID ROUND SPUTTERS 
 
REF: A. BASRAH 38 
     ¶B. BAGHDAD 1648 
     ¶C. BAGHDAD 1151 
     ¶D. BAGHDAD 194 
     ¶E. 08 BAGHDAD 3397 
     ¶F. 08 BAGHDAD 3241 
 
Classified By: Classified by Economic Counselor Michael Dodman, reasons 
 1.4 (b,d) 
 
¶1. (C) Summary:  The Ministry of Oil's June 30 bid round (ref 
B) resulted in a winner for only one of the eight fields on 
offer.  A consortium led by BP and including China's CNPC won 
the right to begin negotiations with the GOI for a 
twenty-year contract to work the massive Rumaila oil field in 
Basrah Province.  While all but one of the other fields 
received bids, none of the bidders was willing to accept the 
Oil Ministry's extremely low payment terms.  However, in an 
unscripted effort to salvage the day (and perhaps his 
reputation) Minister Shahristani invited some of the bidders 
who had rejected his terms to submit new bids, which the 
Iraqi cabinet will consider on July 1.  While disappointed 
with what they saw as the GOI's unrealistic terms, most IOCs 
indicated they still intend to bid in the second round later 
this year, which will offer rights to work fields that are 
not currently producing.  End summary. 
 
The Bid Outcome 
--------------- 
 
¶2. (U) The Ministry of Oil (MoO) required that bids contain 
two parameters: (1) the amount per barrel that the MoO will 
pay the contractor for production increases over baseline 
production (remuneration fee, RF); and (2) the production 
rate that will be reached and sustained over a seven-year 
period (Plateau Production Target, PPT).  The MoO also had a 
predetermined maximum remuneration fee that it did not 
disclose in advance.  On Rumaila, a consortium led by 
ExxonMobil offered an RF of $4.80/bbl and a PPT of 3.1 
million barrels per day (bbl/d).  BP and CNPC offered $3.99 
and 2.85 million bbl/d respectively.  The MoO's maximum 
remuneration fee was then revealed to be $2/bbl.  ExxonMobil 
withdrew from bidding, but to the surprise of assembled oil 
executives and Ministry officials, BP/CNPC accepted the 
$2/bbl RF after a lengthy delay. 
 
¶3. (U) Mansuriya gas field drew no bids.  Other bids were as 
follows: 
 
Bai Hassan: 
MoO parameters -- RF $4/bbl 
Conoco Phillips consortium bid -- RF $26.70/bbl; PPT 390,000 
bbl/d 
 
Missan: 
MoO parameters -- RF $2.3/bbl 
CNOOC consortium bid -- RF $21.40; PPT 450,000 bbl/d 
 
Kirkuk: 
MoO parameters -- RF $2/bbl 
Royal Dutch Shell consortium bid -- RF $7.89/bbl ;PPT 825,000 
bbl/d 
 
Zubair: 
MoO parameters -- RF $2/bbl 
Eni consortium bid: RF $4.80/bbl; PPT 1.125 million bbl/d 
CNPC consortium bid: RF $4.09/bbl; PPT 1.075 million bbl/d 
ExxonMobil consortium bid: RF $4.9/bbl; PPT 850,000 bbl/d 
ONGC consortium bid:  RF $9.9/bbl; PPT 525,000 bbl/d 
 
Akkaz gas field 
MoO parameters -- RF $8.50/bbl equivalent 
Edison Int consortium bid -- RF $38/bbl equivalent; PPT 425 
million standard cubic feet per day (mmscf/d) 
 
West Qurna: 
MoO parameters -- RF $1.90/bbl 
Total bid -- RF $7.5/bbl; PPT 900,000 bbl/d 
Lukoil consortium bid -- RF $6.49/bbl; PPT 1.5 million bbl/d 
Repsol consortium bid -- RF $19.30/bbl; PPT 650,000 bbl/d 
ExxonMobil consortium bid -- RF $4.00/bbl; PPT 2.325 million 
bbl/d 
CNPC consortium bid -- RF $2.60/bbl; PPT 1.9 million bbl/d 
 
Oil Companies Dismayed 
---------------------- 
 
¶3. (SBU) A BP executive expressed some nervousness about the 
award to BP, tacitly acknowledging that the move had been 
very aggressive.  He and other executives in attendance noted 
 
BAGHDAD 00001764  002 OF 003 
 
 
that the MoO's maximum remuneration fee provided an 
insufficient return on capital.  In their view, an IOC 
brought the technology to map the subsurface geology and 
determine the best methods of production, but it typically 
acted as a project manager, relying on a range of 
subcontractors to provide services.  Lack of information on 
the availability and competence of such subcontractors in 
Iraq complicated the task of calculating investment risk and 
the likelihood of meeting contract commitments.  The 
partnership with CNPC provided an advantage, since CNPC was 
more self sufficient and typically conducted a broader range 
of oil field activity than Western oil companies. BP 
executives, however, justified their decision to accept a 
remuneration rate only half their planned offer by stating 
that this would just be the start of a hard negotiating 
process with the MoO on actual terms. 
 
¶4. (SBU) When we expressed surprise that relatively few 
national oil companies, which have ready access to credit, 
had submitted bids, the BP executive noted, "there's deep 
pockets and there's commercial suicide!"  He also observed 
that ExxonMobil had "come here to win," with serious bids on 
three fields and, in his opinion, unrealistically high 
plateau production targets.  Other oil company executives 
noted the unrealistic plateau production targets contained in 
numerous bids, with ExxonMobil's offer on West Qurna being 
nearly ten times current production.  While the fields had 
the potential, they could not reach the target production 
within the strict time lines mandated. 
 
 
Team China Attempts to Win the Black Gold in the Iraq Limbo 
Contest: 
How Low Can You Go? 
------------------- 
 
¶5. (C) Chinese companies entered bids on seven of the eight 
fields on offer as either the operator or as part of a 
consortium.  Chinese companies did not bid on Mansuriya, but 
neither did any other company.  On all three of the fields 
with multiple bids, a consortium containing CNPC - which is 
already working the Ahdab oil field in Wasit province - was 
the lowest bidder.  A consortium with CNPC in it bid on five 
fields.  (Comment:  Despite the strong effort and the low 
bids, the Chinese still balked at the MoO MRFs and walked 
away only as junior partner in the BP/CNPC Rumaila 
consortium.  Several IOCs speculated that CNPC was the 
driving force behind BP accepting the MoO MRF for the Rumaila 
fields.  End Comment) 
 
MoO Bureaucrats Shocked 
----------------------- 
 
¶6. (C) The staff of the Petroleum Contracts and Licensing 
Directorate (PCLD) ostensibly in charge of the contracts and 
the bidding process expressed surprise at the MRFs that were 
revealed only after the bids were opened.  One PCLD official 
told EconOff he believed that the MRF on Rumaila should have 
been $3.5.  None of the PCLD officials at the event said they 
knew the final MRFs in advance - although they had clearly 
done some of the advance work on the MRF calculations, which 
in the end went to Minister Shahristani for a final decision 
- and several gasped when several MRFs were revealed. Some 
PCLD members said the bid round would be a failure if the MoO 
awarded less than four fields, others said less than three 
fields.  In the end, more than one PCLD staff member told 
EconOff they just wanted to go home and sleep. 
 
The Silver Lining? 
------------------ 
 
¶7. (C) In a conversation with EMIN, Prime Ministerial AQ"W(R~icQBP.QQ 
5 
very high production plateau, were announced, there was 
stunned silence when the $2 MRF was revealed.  Giggles were 
heard when subsequent MRFs were opened; the delegation from 
Indonesia's Pertamina actually started pointing and laughing 
as an image of the MRFs were displayed on a screen.  For his 
part, Minister Shahristani grimaced on several occasions as 
he opened the bid envelopes and saw how far apart most bids 
were from his MRFs. 
 
¶9. (C) While Shahristani clearly miscalculated in determining 
the MRFs, it is too soon to call the first bid round a 
complete failure.  First because the cabinet on July 1 could 
find the way to move forward with the last-minute bids. 
Second because Shahristani could learn from his mistakes and 
make improvements that will make the next bid round - or an 
intervening round, if he decides to offer some of these same 
fields again - more successful.  IOC representatives braved 
sandstorms and the threat of increased violence to be in 
Baghdad even through many had voiced their concerns about 
this bid round; their long-term interest in Iraq is clear, 
but only with better economic terms.  Minister Shahristani 
braved repeated denunciations from across the political 
spectrum and within his ministry, yet stuck with his vision 
of the bid round as the best means to help Iraq's economy. 
The MoO staff worked a national holiday after months of 
preparation for this event.  All parties were clearly 
disappointed with the result 
s of their efforts.  But all appear determined to try to keep 
moving the process forward. 
HILL 
 
BAGHDAD 00001764  003 OF 003 
 
 
offers hope that negotiations will begin on more of the 
fields, it could prompt complaints from BP, and will 
certainly raise the sort of suspicions about back-room deals 
that Shahristani was aiming to avoid. 
 
 
Comment 
------- 
 
¶8. (C) The bid round got off to an impressive start.  The MOO 
and PCLD had clearly done their homework, producing an event 
designed to highlight the minister's promise of transparency. 
 That changed the moment the MRF for the first field was 
opened.  While there had been a buzz in the room when the 
ExxonMobil and BP bids for Rumaila, which both featured a 
very high production plateau, were announced, there was 
stunned silence when the $2 MRF was revealed.  Giggles were 
heard when subsequent MRFs were opened; the delegation from 
Indonesia's Pertamina actually started pointing and laughing 
as an image of the MRFs were displayed on a screen.  For his 
part, Minister Shahristani grimaced on several occasions as 
he opened the bid envelopes and saw how far apart most bids 
were from his MRFs. 
 
¶9. (C) While Shahristani clearly miscalculated in determining 
the MRFs, it is too soon to call the first bid round a 
complete failure.  First because the cabinet on July 1 could 
find the way to move forward with the last-minute bids. 
Second because Shahristani could learn from his mistakes and 
make improvements that will make the next bid round - or an 
intervening round, if he decides to offer some of these same 
fields again - more successful.  IOC representatives braved 
sandstorms and the threat of increased violence to be in 
Baghdad even through many had voiced their concerns about 
this bid round; their long-term interest in Iraq is clear, 
but only with better economic terms.  Minister Shahristani 
braved repeated denunciations from across the political 
spectrum and within his ministry, yet stuck with his vision 
of the bid round as the best means to help Iraq's economy. 
The MoO staff worked a national holiday after months of 
preparation for this event.  All parties were clearly 
disappointed with the result 
s of their efforts.  But all appear determined to try to keep 
moving the process forward. 
HILL