VZCZCXRO1884
RR RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHBC #0056/01 2891236
ZNY CCCCC ZZH
R 161236Z OCT 09
FM REO BASRAH
TO RUEHC/SECSTATE WASHDC 0929
INFO RUEHGB/AMEMBASSY BAGHDAD 0507
RUCNRAQ/IRAQ COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0001
RUEHBC/REO BASRAH 0967

C O N F I D E N T I A L SECTION 01 OF 03 BASRAH 000056 
 
SIPDIS 
 
E.O. 12958: DECL:  10/16/2019 
TAGS: ECON EPET EINV IZ CH
SUBJECT: BASRA: BP CONFIDENT ABOUT RUMAILA OIL DEAL, PARTNERSHIP WITH 
CNPC 
 
REF: BAGHDAD 2389, BAGHDAD 2686 
 
BASRAH 00000056  001.2 OF 003 
 
 
CLASSIFIED BY: John Naland, PRT Team Leader, PRT Basra, US State 
Department. 
REASON: 1.4 (b), (e) 
¶1.  (U) This is a Basra PRT reporting cable. 
 
¶2.  (C) Summary. In an October 1 meeting with PRT Econoffs, BP 
Iraq Chief Operating Officer David Campbell (strictly protect) 
expressed confidence that BP and its China National Petroleum 
Corporation (CNPC) partner would soon finalize a contract with 
the Ministry of Oil (MOO) to increase production at the Basra 
Province Rumaila field.  (Note: On October 8, the MOO initialed 
this contract, which will now be referred to the cabinet for 
final approval.  End note.)  He said that the deal could gain 
cabinet approval within a few weeks, before the January 2010 
elections, and possibly even before the December second oil/gas 
round.  Campbell insisted that BP/CNPC can make money on the 
deal, despite what analysts widely consider to be an 
unprofitable, $2 per barrel production fee, on the strength of 
sharply increased production.  He said that the contract 
structure had an advantage in that fees are fixed irrespective 
of the world price for oil.  He also said that BP would have 
full management control.  Campbell had high praise for CNPC, and 
said that BP sought a partnership with them to share investment 
risk and to take advantage of CNPC's current experience in Iraq. 
 Campbell said that CNPC had gained "undeserved" negative 
publicity in its management of the nearby Ahdab field in Wasit 
Province.  He admitted that while BP/CNPC can make a profit on 
the Rumaila field, its acceptance of this low production fee was 
also "an attempt to get a foot in door" in Iraq, and to 
re-establish its historic presence in this region.  Campbell 
said that BP is still working on a "corporate social 
responsibility" strategy and how to deal with the local 
populace, and to ensure that expectations are kept in check. 
End summary. 
 
-------------------------- 
Background on BP/CNPC deal 
-------------------------- 
 
¶3. (SBU) The BP-led service contract for Rumaila was the only 
deal that emerged from the MOO's first oil/gas June auction. 
While most oil firms at the auction balked at Iraq's stiff 
payment terms, BP and CNPC accepted the MOO's $2 per barrel 
remuneration fee to win the Rumaila contract.  The MOO will 
offer 15 other oil or gas field groups in a second bidding round 
in December.  The BP-led consortium plans to increase Rumaila's 
production, Iraq's largest producing oil field, from around 1 
million barrels  per day (mb/d) - almost half of Iraq's total 
output of 2.5 mb/d) - to 2.85 mb/d within the first six years of 
the $27 billion, 20-year contract.  BP-CNPC-GOI shares will be 
held at 38%, 37%, and 25%, respectively.  BP/CNPC is working 
with the current Rumaila operator, Iraq's state-owned South Oil 
Company (SOC) to set up a dedicated operating company, relying 
heavily on Iraqi manpower, with a small team of BP and CNPC 
managerial and technical staff. 
 
-------------------------------------- 
Insists that Rumaila can be profitable 
-------------------------------------- 
 
¶4. (SBU) Campbell insisted that BP/CNPC can make money, largely 
due to sharply increased production.  "Margin is admittedly 
small, but we can make a profit."  He said that Rumaila, 
presently the fifth largest field in world in terms of 
production, when up and running at 2.85 mb/d will become the 
number two producing field in the world, after the Ghawar field 
in Saudi Arabia, which produces around 5.1 mb/d. 
 
¶5. (C) Campbell said that while a production sharing agreement 
(whereby the GOI would have awarded the execution of exploration 
and production activities to BP/CNPC, and BP/CNPC would have 
received a percentage of production, instead of the fixed fee 
per barrel it will be receiving) was preferable, BP views the 
per-barrel fee contract structure as having an advantage of its 
own in that fees are fixed irrespective of the world price for 
oil.  He said that this lessens downside risk, and "it is good 
to have some of this type of revenue in a company's portfolio." 
On the perennial concern of allegedly high rates of oil theft at 
SOC, he said that BP is concerned about this, but he did not 
discuss the issue further. 
 
------------------------ 
Praises for CNPC partner 
------------------------ 
 
¶6. (C) Campbell expressed satisfaction with BP's prospective 
partnership with the Chinese oil giant.  He said that BP's 
original objectives for teaming with CNPC were to share some of 
the investment risk and to take advantage of CNPC's experience 
in Iraq.  (Note: CNPC currently operates the Ahdab oil field in 
nearby Wasit Province.  End note.)  Campbell also said that BP 
views CNPC as a potential strategic partner for other projects 
 
BASRAH 00000056  002.2 OF 003 
 
 
in Iraq and elsewhere in the world.  He said that BP views 
CNPC's operational experience in Iraq, and particularly its 
capital equipment vertical supply chain as a key advantage, the 
latter which BP plans to use (and in which he said BP has no 
such ability in Iraq).  "Supply chain management is critical: I 
am less worried about any problems related to production, SOC 
workers, or the GOI bureaucracy than I am about getting 
equipment to fields on time," and in this area he said that CNPC 
will help.  Campbell also said that CNPC has an altogether 
different view of risk than BP and many western firms do, and 
provides a "refreshing outlook" on all areas of doing business 
in Iraq.  He said that senior BP executives had visited CNPC's 
China operations, and were favorably impressed, including with 
its Daquing oil field operations that produces about 1 mb/d, the 
sixth largest field in the world. 
 
¶7. (C) Campbell was adamant about what he said was an 
"undeserved" negative reputation that CNPC has gained as a 
result of its Ahdab field operation in nearby Wasit Province. 
Campbell said he and his BP colleagues had closely researched 
CNPC's work there (as part of its due diligence) and concluded 
that the negative reputation appeared to originate entirely from 
an "unwarranted and unfair" September New York Times article. 
He said that CNPC contends that it complied "100 percent" with 
every aspect of the CNPC-GOI agreement, including complete 
cooperation with the provincial council, governor and other 
groups.  He said that while the article was unfair, a certain 
"Asian viewpoint" and way of doing business in Iraq might at 
times cause some miscommunication with Iraqis, and in these 
areas BP might help CNPC. 
 
---------------------------------- 
Ownership and management structure 
---------------------------------- 
 
¶8. (SBU) Campbell confirmed recent press reports that BP 
recently gave CNPC a larger equity share.  The new stakes cuts 
BP's share to 38% from an initial 50%, raised CNPC's share to 
37% from 25%, and maintains the GOI's portion at 25%.  Campbell 
confirmed media reports that the GOI will pay nothing upfront. 
He also said that BP will have full management control, with "no 
GOI interference."  He said that the concept of the Field 
Operating Division (FOD), conceived by the MOO to keep the most 
prized fields of Iraq in the hands of Iraq's national operating 
companies, has been dropped, and that a "Rumalia Operations 
Organization," run by BP, will operate the field, to include 
exploration, development and production.  At the same time, he 
admitted that a complete definition of roles and 
responsibilities between and among the three entities isn't 
entirely defined yet, beyond BP being the primary entity. 
 
--------------------------------------------- ------- 
BP "wants to show the world that this deal can work" 
--------------------------------------------- ------- 
 
¶9. (SBU) Campbell admitted that BP faces real risks, citing what 
he acknowledged was a low production fee, as well as the always 
present legal and political risks in Iraq.  "It will not be 
easy, but these kinds of risks are in the nature of the oil 
business, and sometimes the public does not understand this." 
At the same time, he contended that the deal was potentially 
vast and lucrative, at $27 billion over 20 years.  Campbell 
acknowledged that BP's own CEO had publicly admitted that 
accepting the $2 per barrel fee was part of the overall goal of 
"getting a foot in the door [of Iraq]."  He said that BP "needs 
to re-establish" its presence in this region, given that this is 
where the company got its start.  (Note: British Petroleum began 
its operations in 1908 in present day Iran.  End note.)  He said 
that nowadays, BP's activities and reserves are almost 
exclusively located in Alaska and the North Sea, and "we need to 
be in more regions of the world."  But he again stated that BP 
can make money under these tight financial conditions, and the 
deal stands up on its own without these non-financial 
considerations. 
 
---------------- 
Hearts and minds 
---------------- 
 
¶10. (SBU) Campbell said that BP is still working on its 
"corporate social responsibility" strategy and dealing with the 
local populace and government, and sought our opinion about 
strategies and ideas.  We agreed that a limited scope and 
managing what might be too high expectations are important. 
Campbell said that BP planned to have an open dialogue with the 
provincial government, local sheikhs, worker groups, and other 
stakeholders.  He also confirmed that BP/CNPC does not 
anticipate significant employment increases, and that this fact 
will have to be understood by the local populace.  Instead, BP 
and CNPC will "sprinkle" a few of its senior management and 
 
BASRAH 00000056  003.2 OF 003 
 
 
technical staff within the ranks of SOC, and that most work will 
come from the existing 20,000-odd SOC employee base. 
 
¶11. (C) Campbell said that BP plans to have a small headquarters 
in Basra, and will construct a compound for offices and 
accommodations.  He said that BP is will also acquire a turbo 
prop to plane reach nearby oil fields from Basra airport, and is 
negotiating with Kuwait-based Arab Wings to secure charter 
rights to transport personnel into and out of Basra. 
NALAND