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OO RUEHC RUCNRAQ RUEHC RHEBAAA RUEAIIA RUEKJCS
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DE RUEHGB #0157/01 0221128
ZNR UUUUU ZZH
O 221128Z JAN 10
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6224
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHC/OPEC COLLECTIVE
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RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 02 BAGHDAD 000157 
 
SENSITIVE 
 
DEPT FOR NEA/I, EEB/ESC 
 
E.O. 12958: N/A 
 
TAGS: EPET ENRG ECON EINV EAID PREL IZ
 
SUBJECT: OIL RAPPROCHEMENT?  KRG PUBLISHES TWO CONTRACTS 
 
¶1. (SBU) In the next step of a an apparent (and very ginger) 
rapprochement between Baghdad and Erbil over Iraq's oil sector 
management, the KRG published on January 17 the full texts of its 
previously secret oil field development and production contracts 
with oil companies DNO and Genel Energy, a move it previewed for the 
Ambassador during his recent visit to Erbil (septel).  This action 
follows recent remarks from KRG Prime Minister Barham Saleh offering 
to seek a resolution to the longstanding conflict with the GOI over 
these and other unilateral KRG oil contracts.  It also appears to 
reciprocate an olive branch extended by Baghdad in November 2009, 
when a Ministry of Oil delegation led by Deputy Minister Abdul 
Kareem Luaibi traveled to Erbil to meet with newly elected KRG PM 
Saleh.  Neither GOI Oil Minister Shahristani nor KRG Oil Minister 
Hawrami -- adversaries over the issue of these contracts -- 
participated in this series of meetings. 
 
Comment 
------- 
 
¶2. (SBU) Publishing these two contracts is an important step, but 
will not by itself resolve the continuing conflict between Baghdad 
and Erbil over the management of oil investments.   Only after 
Baghdad accepts these contracts as legitimate will it likely agree 
to make "profit oil" payments and "cost oil" payments to reimburse 
the foreign oil firms for both accrued and future capital expenses. 
 Although Erbil does not recognize Baghdad's right to pass judgment 
on the contracts' legitimacy, Erbil badly needs to reimburse the 
capital expenses accrued by oil companies working in Iraqi 
Kurdistan, perhaps setting the stage for a tradeoff. 
 
¶3. (SBU) The sustainability of the KRG's current and future 
production increases will depend on this reimbursement of both 
operating expenses (which, evidently, the companies have already 
been receiving) and capital expenditures (which the companies have 
not been receiving) as well as payment of suitable profit. 
According to the data published by Erbil, the companies are owed 
$800 million in accrued capital expenses.  Erbil's January 17 
announcement also leaves the definition of suitable profit for 
ensuing negotiations.  Baghdad and Erbil have not agreed to the 
amount, schedule, and process for payment of cost reimbursement and 
profit.  Future negotiations could be arduous, since each party has 
very differing views and priorities, such as Baghdad's fundamental 
commitment to service contracts and Erbil's equally strenuous 
commitment to production-sharing contracts. 
 
¶4. (SBU)  Other contentious issues could also arise: for example: 
(1) transferring to Baghdad the revenues from Erbil oil production 
that has been used in KRG refineries or utilities; (2) the 
disposition of signing bonuses from Erbil's contracts, particularly 
given that all the signing bonuses from Baghdad's ten bid round 
contracts will be paid to the central government, not to a 
particular region or province; (3) the process through which the 
contracts were awarded and through which future contracts will be 
awarded (including openness, equitability, competitiveness, and 
transparency); (4) the structure of and process for managing the 
contractual relationship with the companies and the petroleum 
operations conducted under the contracts; (5) the conformance of 
contract terms and conditions with existing national laws and 
regulations; and (6) Iraqi government liability under the contracts. 
 
 
¶5. (SBU) Erbil has oil field development and production contracts 
with other companies that could be even more controversial.  A 
process to review and legitimize (from Baghdad's perspective) these 
contracts, and any future contracts, is still needed.  There also is 
no agreement on national hydrocarbons legislation (including 
establishing an industry framework and reestablishing a national oil 
company) and how Baghdad and Erbil will cooperate in the development 
of Iraq's oil sector.  If the two sides can agree on a mechanism to 
review and legitimize these other KRG contracts, and a process for 
concluding and administering any future oil contracts, this 
agreement could open the door to expansion of oil and gas production 
in the north.  That would offer the chance of greater exports via 
Turkey as well as possibly KRG gas being fed into the Nabucco 
pipeline. 
 
HILL