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C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002632 
 
SIPDIS 
 
E.O. 12958: DECL: 09/30/2019 
TAGS: EPET ENRG ECON PREL IZ
SUBJECT: MINISTER OF OIL OPTIMISTIC ABOUT IRAQ'S OIL FUTURE 
 
Classified By: DCMAT PHaslach for reasons 1.5 b,d 
 
¶1. (C) Summary: In a September 17 meeting with Deputy 
Secretary James Steinberg, GOI Minister of Oil Hussayn 
Shahristani expressed optimism about the upcoming second oil 
licensing round, as well as for Iraq's future willingness to 
sign a gas agreement with Europe.  In the wide ranging 
discussion, Shahristani also touched on a possible third 
licensing round, the fate of the first round fields that were 
not awarded, oil sector reform legislation, and natural gas 
development in Iraq.  End Summary. 
 
¶2. (C) GOI Minister of Oil Hussayn Shahristani, accompanied 
by Deputy Minister (Downstream) Mo'tasam Akram Hassan, met on 
September 17 with a U.S. delegation led by Deputy Secretary 
of State James Steinberg that included DCMAT Patricia 
Haslach, Economic Minister Counselor John Desrocher, Senior 
Advisor for Iraq and Regional Issues Elissa Slotkin, and 
Econoff (notetaker).  Shahristani was in good spirits 
throughout, and engaged openly in a wide range of topics 
raised by the Deputy Secretary. 
 
Bid Rounds 
---------- 
 
¶3. (C) Shahristani was upbeat about the trajectory of recent 
events in Iraq, noting approvingly that the USG and GOI have 
worked closely together in "largely expelling Al Qaeda in 
Iraq," though he admitted Mosul remained a hot spot.  He also 
took a moment to offer condolences on the eight personnel 
(TCN construction workers) that had been severely wounded the 
night before in a rocket attack on the Embassy.  Turning from 
security to oil, he said Iraqi oil production had recently 
exceeded 2.5 million barrels per day, with just over 2.0 
million barrels per day average exports.  He admitted he'd 
hoped that the first oil licensing round (held in June) would 
have yielded more contracts, but even the one field awarded 
will eventually increase Iraq's oil production to over 4.0 
million barrels per day.  (Note: The only field awarded in 
that bid round was the super-giant Rumaila oil field, one of 
the largest oil fields in the world.) Shahristani is 
optimistic that the second licensing round will produce more 
contracts, now that the Ministry and the International Oil 
Companies (IOCs) are "learning how to deal with one another." 
 By his estimation, thanks to the results of the first bid 
round and the expected results of the second, Iraqi oil 
production could exceed 6.0 million barrels per day in just 
six to seven years.  He said the GOI is considering a third 
licensing round that would offer only exploration blocks 
(whereas both the first and second rounds focused on known 
fields).  An announcement of this third round could come as 
soon as late 2009. 
 
The BP/CNPC Negotiation 
----------------------- 
 
¶4. (C) Asked what lessons he had learned from the first bid 
round, Shahristani did not raise the bid round mechanics (and 
its much scorned maximum remuneration fee structure), but 
focused instead on what the Ministry is learning from its 
negotiations with British Petroleum (BP, winner of the 
contract to work on the Rumaila field).  The deal with BP is 
almost completed, he said.  While there was "a need for some 
rewording" of the contract, "there will be no change to the 
economics."  Both BP and consortium partner CNPC are "happy 
with" the USD two dollar per barrel fee structure, and with 
the cooperation they are receiving from the South Oil Company 
Qthe cooperation they are receiving from the South Oil Company 
(SOC), Shahristani said.  Shahristani believes the BP 
contract will be signed by the end of September or mid 
October. 
 
¶5. (C) Shahristani had more details for his plan on the 
allocation of those fields that were not awarded in the first 
bid round.  He said the "mismatch" between what the IOCs were 
willing to offer and what the MOO was willing to accept was 
due to two factors:  (1) a lack of clarity over the taxation 
regime; and (2) "exaggerated" concern over the "security 
factor."  Now that these two factors have, in his view, been 
further clarified, he plans to again offer the top bidder for 
each field the opportunity to reduce its fees to the level 
sought during the bid round by the MOO.  (Note:  In many 
cases the discrepancy between the IOC offer and the MOO price 
was a factor of two or more. End note.)  Shahristani said he 
is "not sure if the IOCs can come down with their revised 
bids to (the level) we offered" but if they do so, the MOO 
will be "happy to sign" a deal.  If no such deal is reached, 
 
BAGHDAD 00002632  002 OF 003 
 
 
the MOO is prepared to invite the top three bidders to 
re-compete for the fields, using the same final contract 
terms as those that will ultimately be offered to BP. 
Shahristani pledged that the results of this re-bid would not 
disadvantage BP.  (Comment:  He did not make it clear how he 
could honor this pledge, if BP must be held to its very low 
fee while other IOCs could be granted higher fees in a re-bid 
process. End comment.) 
 
¶6. (C) Shahristani highlighted a key modification to the 
proposed Rumaila contract that has been arranged as a result 
of negotiations with BP:  the formation of a joint company to 
administer the field.  Previously the contract stipulated 
that a "field operating division" (FOD) would be formed by 
the state-run SOC and would manage the field.  As the 
principal investor, BP objected to its lack of control.  The 
new structure eliminates the FOD and replaces it with a joint 
management structure in which "the investor practically has a 
veto on (capital expenditure) investment decisions."  This 
same management structure will be offered to all re-bidders 
for first bid round fields.  Shahristani expects that the 
arrangements for second bid round fields will be "easier" 
because most are green-field projects, rather than 
well-defined fields already under Iraqi development. 
(Comment:  We hope he intends to use similar logic to justify 
greater flexibility in the financial terms offered for second 
bid round fields as well.  More attractive financial terms in 
the second round could allow for a greater success rate and 
much improved economics for the IOCs, while allowing 
Shahristani to avoid negative comparisons with the 
unacceptably low fees offered during the first bid round. End 
comment.) 
 
Hydrocarbons Legislation 
------------------------ 
 
¶7. (C) Shahristani noted that draft hydrocarbons sector 
reform legislation has been stalled in the Council of 
Representatives (CoR, Iraq,s Parliament) for two years, and 
he is not optimistic about its chances for passage before the 
January 2010 national elections.  However, he pointed to 
recent progress with the national oil company law (which 
passed the Council of Ministers in August) and reiterated his 
belief that a revenue sharing law would be the easiest of the 
four bills to pass on its own.  He said the GOI is prepared 
to move forward on such a law by itself, while the KRG is 
holding out for passage of all four pieces of hydrocarbons 
legislation as a package.  (Comment:  KRG officials tell us 
that they are prepared to move forward with just the revenue 
sharing law alone.  Thamir Ghadbhan, the GOI Prime 
Ministerial Advisor, however, is holding out for all four 
laws, concerned that the KRG would pocket the revenue 
sharing, abandon efforts on remaining reform legislation, and 
continue to unilaterally sign oil exploration and production 
contracts that Baghdad considers illegitimate.  End Comment.) 
 Shahristani said it would be "very good" if the USG could 
persuade the KRG to consider movement on a stand-alone 
revenue sharing law. He felt passage of such a law would be 
"a good signal" and could even provide momentum for passage 
of the remaining reform laws. 
 
Natural Gas 
----------- 
 
¶8. (C) Asked about Iraq's plans for natural gas, Shahristani 
noted that most current gas production is from natural gas 
associated with oil production in the south.  Much of that 
Qassociated with oil production in the south.  Much of that 
gas is currently flared, but the GOI is in discussions with 
Shell to capture and process that gas for export as LNG.  He 
also alluded to possible uses including electricity 
generation and developing a domestic petrochemical industry. 
There is also natural gas potential in the North and West of 
Iraq, Shahristani noted, but the gas from those projects 
would be used in domestic electricity generation.  The IOCs 
have shown no interest in participating in a project with 
Iraqi domestic consumption as its anchor customer, he said, 
so the GOI plans to develop some gas fields (including the 
two gas fields not awarded in the first bid round) by itself. 
 He estimated this process would take "two to three years" 
and that "most of that gas will be needed locally to supply 
Iraq's ambitious (electricity) generation program." 
Shahristani said Syria is very interested in Iraqi gas, but 
would be supplied with only about 50 MMscf per day of gas 
(which he characterized as "not much.") 
 
¶9. (C) After developing the first and second round oil 
 
BAGHDAD 00002632  003 OF 003 
 
 
fields, Shahristani said, there will be "plenty of gas to 
export," and Iraq is "very keen" to be a natural gas supplier 
to Europe.  He said that to be seen as a dependable supplier 
to Europe is politically important for Iraq.  It would be 
difficult to make a commitment now, he said, but "if the 
current mindset continues" (that is, if Maliki is 
re-elected), Iraq would likely commit to supply natural gas 
to Europe, even if that were not the most lucrative export 
option.  Exports would "most likely be a balancing act" 
between such pipeline exports to Europe and the LNG exports. 
Shahristani agreed that such a plan could include exports via 
the Nabucco gas pipeline, but called Prime Minister Maliki's 
promises to supply 15 Billion cubic meters per year by 2017 
"very high."  (Note:  In prior press statements, Shahristani 
said that the availability of gas exports to Europe would 
depend on Iraq's gas demand domestically, but in any case 
would come no sooner than 2015.  End note.) 
 
U.S.-Iraq Investment Conference 
------------------------------- 
 
¶10. (U) Shahristani regretted he could not attend the 
upcoming investment conference in Washington, owing to other 
pressing duties including the upcoming bid round and the 
upcoming national elections.  In any case, he said, the 
conference is intended to highlight what opportunities Iraq 
has to offer investors, and he is confident the IOCs are 
already well aware of those opportunities in the oil and gas 
sector.  The conference, in his view, would have little new 
information to offer the Exxons of the world, but might 
influence other companies in other sectors to consider Iraq. 
He said that other senior officials from the Ministry of Oil 
would attend the conference.  (Comment.  Post intends to 
press PM Maliki to send Sharistani to the conference.) 
 
¶11. (U) The delegation cleared this cable. 
HILL