VZCZCXRO6523
PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHC #2853/01 3061830
ZNR UUUUU ZZH
P 021808Z NOV 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 9312
INFO IRAQ COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 04 STATE 112853 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: IZ EPET ENRG EINV ECON
SUBJECT: DIALOGUE ON ECONOMIC COOPERATION (DEC): ENERGY 
SESSION 
 
REF: 2005 BAGHDAD 1656 
 
¶1. (SBU) This cable reports on the October 19, 2009, DEC 
Energy Sessions.  The discussions on Public Financial 
Management, Financial Services, Investment and Trade, 
and Industry and Private Sector Development will be 
reported separately.  Interlocutors are recorded in 
paragraph 16. 
 
¶2. (SBU) SUMMARY: The Secretary's Coordinator of 
International Energy Affairs (S/CIEA) David Goldwyn 
opened the energy session followed by the Special 
Envoy for Eurasian Energy (S/EEE) Ambassador 
Richard Morningstar.  S/CIEA raised the the status of 
pending energy legislation, the status of the first and 
second bid rounds, the status of the national energy 
strategy, utilization of gas, reforms in the electricty 
sector.  S/EEE spoke about the importance of Iraqi 
gas production and the possibility of exporting gas 
to Europe.  Regarding the first and second bid 
rounds, Iraqi Oil Minister Dr. Hussain al-Shahristani 
explained that companies had resubmitted bids for the 
West Qurna and Zubayr fields because tax issues were 
clarified.  Shahristani said that if both of those fields 
were awarded, then Iraq's oil production could easily 
reach six million barrels per day.  He noted that the 
oil infrastructure would also have to be upgraded to be 
able to handle that level of production.  Shahristani 
said that the new laws governing the oil and gas sector 
would move forward after the election.  Iraqi Minister 
of Electricity Kareem Wahid Hasan gave an overview 
of the electricity sector and how the sector needed 
investment, otherwise Iraq was in "big trouble."  Some 
key topics like revenue sharing and transparency were 
not covered in the time allotted.  These issues were 
discussed in separate meetings with the Minister of 
Oil and will be reported in SEPTEL.  END SUMMARY 
 
---------- 
FIRST AND SECOND BID ROUNDS 
---------- 
 
¶3. (SBU) Minister Shahristani said he was a bit 
disappointed with the outcome of the June 30 bid 
round, but was glad to see that Iraq's largest field, 
Rumaila, was awarded.  He mentioned that the 
Cabinet approved the contract with the 
British Petroleum/China National Petroleum Company 
consortium on Friday October 16 and the contract would be 
formally signed upon his return from Washington. (Note: 
NEA/I understands from BP that a signing ceremony will 
take place the week of November 2. End Note). 
 
¶4. (SBU) As for ongoing negotiations on fields in the first 
bid round, Shahristani said that companies were worried 
about taxation.  He stated that the Government of Iraq 
(GOI) has clarified the 35 percent tax is only applicable 
to the maximum remuneration fee.  Once that was known, 
some of the international oil companies (IOCs) 
recalculated their economic models and decided to 
"re-bid."  He specifically mentioned that ExxonMobil/Shell 
and Lukoil/ConocoPhillips accepted the $1.90 per barrel 
for West Qurna Phase 1 and ENI/Occidental/Korea Gas 
accepted the $2.00 per barrel for Zubayr.  Shahristani 
emphasized that the Ministry did not change the terms 
of the bidding, but only clarified the tax question. 
 
¶5. (SBU) If the GOI were able to approve contracts for 
West Qurna Phase 1 and Zubayr, Iraq could easily 
achieve six million barrels per day within six years, 
according to Shahristani.  He stipulated that this would 
require at least $100 billion in investment and would 
require upgrades in the current infrastructure.  He 
predicted that 2010 and 2011 budgets will be problematic 
for Iraq, which is why Iraq will need assistance from the 
IMF and World Bank.  He is hoping that the IMF and 
World Bank can help fund revamping the oil and gas 
infrastructure including new terminals in the Gulf and 
new pipelines to Syria and Turkey. 
 
¶6. (SBU) Regarding the second bid round, Shahristani 
claimed that the fields of Majnoon, West Qurna Phase 2, 
and East Baghdad are very large fields and could 
increase production up to five million barrels per day 
from these three fields alone.  (Note: Shahristani made 
no mention of the complexity of the East Baghdad field, 
 
STATE 00112853  002 OF 004 
 
 
or that the reserves of the field are far greater than the 
recoverable reserves (REF A).  Given these factors, it 
is unlikely that the East Baghdad field will in fact add 
significantly to Iraq's overall production in the short 
term. End Note). 
 
¶7. (SBU) Shahristani noted that contracts will be 
slightly different since the fields on offer are not 
fully developed fields.  Therefore, the nature of 
the contract is less complex.  He stated that the 
Ministry provided a model contract to IOCs a few 
days ago and was not planning to enter into extensive 
negotiations.  He expected was that the Council of 
Ministers to approve the deals before the January 
elections. 
 
---------- 
STATUS OF THE LAWS AND DISPUTES WITH KRG 
---------- 
 
¶8. (SBU) Shahristani blamed political differences for 
delays in the passage of the Oil and Gas Law, and added 
that the Kurdistan Region's oil and gas contracts are 
complicating the issue.  The Oil and Gas Law and three 
other pieces of legislation will have to be left for the 
next Iraqi government to resolve, he said.  Nevertheless, 
Shahristani reported that IOCs are comfortable enough to 
sign deals with the GOI though he acknowledged the 
IOCs would still like to see a new law passed to replace 
previous legislation currently governing the oil and 
gas sector. 
 
¶9. (SBU) S/CIEA Goldwyn asked if political challenges 
from the Council of Representatives will significantly 
delay the ambitious production rates that Shahristani 
outlined.  Shahristani responded that the parliamentarians 
are happy with the path the Ministry is taking with risk 
service contracts.  He noted that some parliamentarians 
have a political agenda and seek to prevent the Oil 
Ministry from signing any contracts.  To counter the 
CoR's desire to approve contracts, Shahristani stated 
that the Iraqi Constitution clearly states that the CoR 
only approves international treaties and not commercial 
agreements.  He continued that the CoR did not question 
the renegotiation of the contract for the Ahdab oil 
field.  He concluded that the CoR lost its right to try and 
stop the first bid round deals from being approved. 
 
¶10. (SBU) S/EEE Ambassador Morningstar asked the 
Shahristani for his prognosis for agreements with the 
Kurdistan Regional Government (KRG).  Shahristani said 
that the federal government had been very accommodating 
with the KRG.  However, he noted that the KRG signed 
more contracts after the original agreement in February 
¶2007.  The fact that the KRG signed the majority of its 
almost 30 oil contracts after the February 2007 
compromise was unacceptable.  He reiterated that the 
federal government is willing to take care of Norwegian 
firm Det Norske Oljeselskalp's (DNO) payments if the KRG 
provides the federal government the contract to review. 
He mentioned that the KRG's Minister of Natural 
Resources, Ashti Hawrami, felt it unwise to turn over the 
contract to the GOI.  Shahristani feels if the KRG will not 
do that, then the KRG can pay DNO out of the KRG's 17 
percent share of the national budget.  Regardless of who 
pays, all oil produced in the KRG must be handed over 
to the federal government (through the State Oil Marketing 
Organization).  As the Minister put it, the Kurds "cannot 
have their cake and eat it too." 
 
---------- 
BORDER FIELDS AND UNITIZATION 
---------- 
 
¶11. (SBU) S/CIEA Goldwyn asked Shahristani to speak on 
unitization talks with neighboring countries.  Shahristani 
said that the Oil Ministry has engaged its counterparts 
in Iran and Kuwait on oil and gas field unitization and 
that Iraq and its two neighbors agree on principles on 
how to develop joint fields, but that there is no final 
agreement.  EEB Deputy Assistant Secretary Doug 
Hengel explained the issue surrounding our Iran 
Sanctions Act, and said that the GOI needed to be aware 
of how any unitization agreement is worded to avoid US 
sanctions.  Shahristani seemed unaware that sanctions 
could be applied to non-American companies. 
 
---------- 
ELECTRICITY SECTOR 
---------- 
 
 
STATE 00112853  003 OF 004 
 
 
¶12. (SBU) Electricity Minister Kareem Wahid Hassan 
stated that Iraq's electricity sector will finally become 
a nationwide system when several 400 kilovolt 
transmission lines connect the country.  Kareem said 
that he hopes to connect Iraq with the Kuwaiti grid and 
with the Levant.  He declared that Iraq would even be 
able to export electricity to Europe.  He mentioned 
that this was all based upon a master plan that was 
devised in 2006 (Comment: But neither this plan nor 
the Ministry of Oil's plan has been coordinated with 
the other, which will cause problems with both 
ministries since they rely on the other and further 
reinforces the need for a national energy strategy. 
End Note). 
 
¶13. (SBU) Kareem described the impact of the current 
drought on Iraq's hydroelectric generation explaining that 
only 49 billion cubic meters of water were projected to be 
available this year compared to 79 billion in 2008.  As a 
result, he is looking to use thermal generators and gas 
turbines to make up for the shortfall.  He noted that GE 
and Siemens will provide Iraq simple cycle turbines in 
the first stage and thermal generators in the second 
stage of the plan increasing overall supply by three to 
four thousand megawatts. 
 
¶14. (SBU) Kareem said his ministry planned to finance 
this project using treasury bills.  He projected that the 
Ministry needed two to three billion dollars next year for 
the next GE payment and installation of the turbines. 
Kareem announced that he was talking to banks including 
OPIC and EXIM to help with financing projects.  EXIM has 
explained to him that no financing with EXIM is possible 
while Iraq remains under Chapter VII.  Kareem is looking at 
ways to get financing whether or not Iraq remains under 
Chapter VII. 
 
¶15. (SBU) One way of getting the necessary financing 
would be to draft an "electricity law" that would encourage 
investors to bring much needed capital to the sector.  He 
said that on November 18, 2009 there would be a conference 
to discuss the proposed law.  However, he bluntly added 
that if he could not get financing through treasury bills 
or if foreign investment did not come, then Iraq would be 
in "big trouble."  Finance Minister Jabr chided Kareem for 
being too negative, but Kareem continued to highlight the 
point that the sector was in serious need of funds.  S/CIEA 
suggested that the GOI consider build-own-operate contracts 
to attract investment.  Kareem stated that he would appreciate 
USG support and that he would like to see US companies to 
give European and Asian companies "competition." 
 
¶16. (SBU)  DEC Participants: 
 
Government of Iraq: 
------------------ 
- Finance Minister Bakr Jabr Solagh Al-Zubaidy (co-chair) 
 
- Finance Ministry Senior Adviser Azez Jaffar Hassan 
 
- Oil Minister Hussain Al-Shahristani 
 
- Electricity Minister Kareem Hasan 
 
- Minister of Trade Safaaldeen Al-Safi 
 
- National Investment Commission Chariman Sami Al-Araji 
 
- Central Bank of Iraq Governor Sinan Al-Shabibi 
 
- Trade Bank of Iraq President Hussein Al-Uzri 
 
- Council of Representatives Adviser Dr. Ismail Haruty 
 
United States 
------------- 
- Under Secretary of State for Economic and Energy Affairs 
Robert Hormats (co-chair) 
 
- Secretary's Coordinator for Energy International David 
Goldwyn, DOS 
 
- Secretary's Envoy for Eurasian Energy Richard 
Morningstar, DOS 
 
- Acting Assistant Secretary for Economic and Energy Affairs 
Anna Borg, DOS 
 
- Deputy Assistant Secretary for Energy, Sanctions, and 
Commodities Doug Hengel, DOS 
 
 
STATE 00112853  004 OF 004 
 
 
- Deputy Director of the Minerals Management Service 
Walter Cruickshank, Department of the Interior 
 
- Principal Deputy Assistant Secretary for Policy and 
International Affairs Jonathan Elkind, Department of Energy 
 
- Embassy Baghdad Coordinator for Assistance Transition 
Ambassador Patricia Haslach 
 
- Embassy Baghdad Economic Minister-Counselor John 
Deroscher 
 
¶17.  POC:  Please direct questions or concerns about this 
cable to Matt Amitrano, AmitranoME (at) state.sgov.gov 
CLINTON