VZCZCXRO1414
PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2057/01 2121615
ZNR UUUUU ZZH
P 311615Z JUL 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 4145
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/USDOE WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BAGHDAD 002057 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ENRG PGOV EINV PINR IZ
SUBJECT: IRAQI OIL: MIXED MESSAGES FROM SOUTH OIL ON THE 
BID ROUND AND INTERNATIONAL OIL FIRMS 
 
REF: BAGHDAD 1764 
 
¶1. (SBU) SUMMARY: In recent meetings, stakeholders from the 
GOI as well as international oil companies (IOC) and service 
providers (SP) offered divergent insight and opinions on the 
developments within the oil sector in Iraq.  In a meeting on 
July 20, South Oil Company (SOC) Director General Fayed Nima 
expressed his firm opposition to the bid round and the 
BP/CNPC agreement but welcomed the participation of IOCs and 
SPs in a technical assistance role.  Nima was fired from his 
position on July 30, which will remove one obstacle to the 
BP/CNPC deal moving forward.  In a separate meeting July 24, 
BP executives reported they had made progress towards a 
contract during their first negotiations with the Ministry of 
Oil since the June 30 bid results, although SOC did not 
participate in the talks.  The Ministry hopes to complete 
negotiations with BP/CNPC within a month; BP expects it will 
take at least two months, but is optimistic that the deal 
will go forward.  END SUMMARY. 
 
SOC on BP/CNPC bid for Rumaila: "Nothing to discuss" 
--------------------------------------------- ------ 
¶2. (SBU) EMIN met with SOC DG Fayed Nima at SOC offices in 
Basra on July 20.  With executives from BP and CNPC due in 
country that the same week for their first talks since 
winning the rights to develop the Rumaila field at the 
Ministry of Oil,s first bid round on June 30 (reftel), EMIN 
asked Nima whether he would engage in the negotiations. 
Nima, who has publicly aired his complaints about the bid 
round process, offered a long explanation of why SOC would 
not engage with BP/CNPC on the terms used in the bid round 
and declared that he had "nothing to discuss."  Nima claimed 
that the first bid round was unconstitutional because the MoO 
failed to follow proper procedures, including obtaining 
necessary approvals for the bid round and model contracts 
from the parliament and relevant ministries.  Nima was quick 
to point out however, that regarding Iraqi engagement with 
IOCs, SOC was "against the procedure, not the concept" and 
welcomed IOC participation in the development of fields not 
currently producing (i.e., Nima supports the planned second 
bid round).  He later added that he did not feel the next 
round needed as many bidders or should be as open to public 
scrutiny. 
¶3. (SBU) Nima also mentioned that establishment of the Iraqi 
National Oil Company (INOC) and its subsidiaries was 
important and that he supported the evolution of MoO into a 
regulatory body.  The February 2009 Iraq oil symposium, at 
which Nima participated, recommended restarting INOC as one 
of the top priorities to rebuild the Iraqi oil sector. 
(Note: the Council of Ministers on July 28 approved a draft 
version of the INOC Law, one of the package of four laws 
commonly referred to as the Hydrocarbons Laws.) 
¶4. (SBU) Asked about the local reaction to the BP/CNPC 
agreement, Nima claimed that neither SOC workers nor most 
Basra residents support the deal. 
 
Engaging Service Providers 
-------------------------- 
¶5. (SBU) Noting ongoing SOC discussions with service 
companies Baker-Hughes, Schlumberger, Halliburton and 
Weatherford, Nima expressed his support for the expertise 
that each firm could bring to the table in assisting SOC in 
its goal to increase production.  Nima was confident in 
stating that with technical service assistance, SOC could 
double production in two years if given the authority and 
funding from MoO.  (Note: The MoO signed a $42 million 
Qfunding from MoO.  (Note: The MoO signed a $42 million 
service contract with Halliburton to complete work with the 
Maysan Oil Company.  This is Halliburton's first contract in 
Iraq since the company completed its contracts with the USG 
in 2005.)  In addition to working closely with oil service 
firms, Nima expressed interest in engaging IOCs themselves on 
short-term technical service contracts (maximum ten years) to 
assist SOC on their existing fields.  But he drew a clear 
distinction between straight service contracts and the hybrid 
required under the terms of the first bid round, which 
requires the SOC and the IOC (i.e., BP/CNPC consortium for 
the Rumaila field) to jointly form a new operating company to 
work the field. 
¶6. (SBU) In a separate meeting, Basra Investment Commission 
Director Dr. Haider al Fadhel informed EMIN that Baker-Hughes 
had received use of an office building from SOC and planned 
to construct a "$50 Million dollar facility near Rumaila." 
This facility will act as a training site to qualify Iraqi 
MoO employees on modern Baker-Hughes equipment. 
Additionally, it will allow Baker-Hughes to provide the 
necessary support services for their equipment and teams 
working in country.  Baker-Hughes has previously informed 
Emboffs of the company's intent to build such a facility and 
that it represents a substantial increase in the level of 
 
BAGHDAD 00002057  002 OF 002 
 
 
engagement and commitment by the firm in Iraq. 
 
SERP moving forward 
------------------- 
¶7. (SBU) Regarding the status of the Southern Export 
Redundancy Project (SERP) that will replace Iraq,s offshore 
fueling points and the feeder pipelines, Nima expressed GOI 
gratitude for USG efforts to move the project forward.  He 
reported that the project is on schedule, with no major 
issues, and that the MoO is providing necessary funding.  He 
also reported that planning for the GOI's parallel project 
for onshore facilities is moving forward, but was not yet 
funded.  In total, the two projects will cost approximately 
$5 billion and increase Iraq's southern export capacity from 
approximately 1.8 mmbpd to 4.5 mmbpd.  The MoO estimates that 
it can complete both halves of the project within five years. 
 
 
BP Executives report progress 
----------------------------- 
¶8. (SBU) EMIN and members of the embassy oil team met with BP 
executives on July 24, following two days of BP and CNPC 
negotiations at the MoO.  The BP team was led by Michael 
Townshend, President of BP,s Middle East and Pakistan 
division who is leading the Iraq investment for BP and 
intends to move to Baghdad later this year to open and run 
BP,s Iraq operations (BP intends to establish offices in 
both Baghdad and Basra).  Townshend and his team reported 
progress during their talks.  Of note:  Oil Minister 
Shahristani was personally involved throughout two days of 
talks, and frequently intervened in the discussion to 
overrule subordinates who raised objections to BP and CNPC 
requests.  Shahristani said he wants to see contract 
negotiations complete by the end of August; Townsend believes 
this is unrealistic, but thought that a deal could be done as 
soon as late September.  While optimistic about eventual 
success, the BP team said that many issues need to be 
resolved, most of which center on governance and the 
structure of the joint entity that BP/CNPC will establish 
with SOC.  Townsend was not troubled by SOC,s failure to 
participate in the negotiations.  The next round of talks 
will take place in Baghdad in early August.  Townsend 
promised to remain in close contact with the embassy 
throughout the process, and specifically requested embassy 
insights on Iraq-Kuwait border issues, both land and maritime 
(Note: The Rumaila field straddles the land border; access to 
Umm Qasr port will be essential for BP/CNPC to import 
equipment needed to ramp up production.  End Note) 
 
Nima goes 
--------- 
¶9. (SBU) On July 30, to the surprise of few, the Oil Ministry 
fired Fayed Nima from his position as DG at SOC.  His 
replacement is Diya Jafar Al-Mosawi, previously head of SOC 
operations.   Mosawi will be the SOC,s third DG this year. 
 
Comment 
------- 
¶10. (SBU) Nima's departure and the choice of his replacement 
surely were approved by PM Maliki himself.  We have no 
immediate information on Mosawi, but expect that he will 
engage in the negotiations with BP/CNPC.  Even if he does not 
personally support the bid round process, as many MoO 
technocrats do not, he is likely to be less vocal in his 
opposition than Nima was. 
 
¶11. (SBU) Regarding Nima,s objections to the legality of the 
bid round:  questioning of the constitutionality of the first 
bid round on producing fields but not the second bid round is 
disingenuous.  Law 97 of 1967 states that all contracts for 
the development of Iraqi oil fields must be accompanied by 
approving legislation from parliament.  The MoO contends that 
Qapproving legislation from parliament.  The MoO contends that 
the first bid round contracts are not field development 
contracts since the international oil companies will be 
conducting services for the regional oil companies.  Most 
legal experts consider this defense tenuous at best when 
applied to the lesser and non-developed second bid round 
fields.  On a constitutional basis, the second bid round 
contracts will be more suspect than the first.  Nima's 
disagreement with the first bid round contracts probably 
represents more of a "pride" reaction than a legal judgment; 
many in the MoO believe that they can rebuild Iraq's oil 
sector with minimal help from international oil companies. 
FORD