Hunt Oil knew KRG oil deal in disputed territory

Dallas-based Hunt Oil Co., whose owner was an adviser to President George. W. Bush and a top fundraiser, knowingly signed a production sharing contract (PSC) with Iraq's Kurdistan Regional Government (KRG) for a swath of land that lies outside the KRG's territory and remains a flashpoint of ethnic disputes, according to a U.S. State Department cable.

The cable, dated Sept. 12, 2007 and made public by Wikileaks, also detailed official warnings from the U.S. government that the contract, regardless of lease location, is legally risky due to unresolved land and oil disputes between Baghdad and the KRG – and that such a contract could further amplify conflicts between the central and regional governments.

"Considerable legal ambiguity surrounds the PSC with Hunt Oil, as the districts in northern Ninewa to be explored by the company are classified as 'disputed territories' under the Iraqi constitution," the cable stated. "A senior Hunt Oil manager told (a U.S. official) that northern Ninewa province has significant potential for oil production, and that this factor trumps the legal ambiguities and risks associated with the company's PSC with the KRG."

The Hunt contract for the Ain Sifni block, signed Sept. 8, 2007, one of seven deals that includes territory officially outside the KRG, was a crucial political and economic benchmark in the KRG oil strategy. The participation of an American company in the KRG's oil development bolstered Kurdish claims of oil autonomy, hardened the region's negotiating position against Baghdad, and played a role in de-railing hydrocarbon legislation that would have given badly needed legal clarity to the structure of Iraq's oil sector.

"Their concerns about the nebulous political environment and possible eventual dissolution of their PSCs have been overridden by the prospect of huge profits - from getting first access to the choicest oil exploration fields in northern Iraq, and from establishing productive relationships with key KRG and central government officials," the cable said. "It remains doubtful that the KRG was legally entitled to enter into a binding contract with Hunt Oil that covers oil exploration and eventual hydrocarbons production in an area (i.e. northern Ninewa province) that the KRG does not legally control. Legal considerations aside, the KRG's actions complicates (sic.) enactment of a national hydrocarbons law."

The KRG has signed more than 40 contracts, including recently with oil companies Hess Corp. and Marathon Oil Corp. Baghdad has declared those deals illegal, claiming that the central government has sole authority to sign oil contracts.

Such legal ambiguities might have been resolved by a suite of oil laws, which first surfaced in early 2007. That legislation, however, stalled in Parliament as leaders failed to agree on several points – including a definitive process for authorizing and signing contracts.

The political stalemate over the KRG's oil deals began to break at the beginning of this year. Under a tenuous agreement, the KRG is now exporting crude and receiving 50 percent of those export revenues to pay the costs of the foreign companies. That deal will need to be renegotiated when cost recovery is complete, however, since Baghdad says it will not pay profits to the companies.

The conflict over oil deals is part of a larger dispute over federalism in Iraq. In their tug-of-war over the distribution of the state's power, the central and regional governments have both claimed authority over the development of the oil sector.

By signing the Hunt deal just months after the draft oil legislation appeared, the KRG made a hard-line statement against Baghdad's authority, which helped sour negotiations over the oil law and intensify the larger dispute over federalism.

The U.S. government, at least officially, has long maintained that the political fallout of such deals outweighed any economic opportunity. On numerous occasions since at least 2007, it has criticized the KRG deals when queried by the press or potential investors.

The Sept. 2007 Wikileaks cable detailed the U.S. government's advice to Hunt oil, which was delivered as a mounting insurgency worked to exploit tears in the fabric of the Iraqi state: "(U.S. government) policy has discouraged companies from signing oil deals with the KRG until Iraq enacts its national hydrocarbon framework law, as such regional contracts could act as an impediment to negotiations toward a comprehensive national settlement that equitably distributes Iraq's oil wealth."

Despite acknowledging the potential of the deal to undermine the reconciliation of an urgent national dispute, the U.S. did not move to block Hunt from investing. And despite such warnings, Hunt Oil has been a gung-ho investor. The company's website even refers to Kurdistan as an independent country.

"Hunt currently has continuing operations in 13 countries around the world," the site says, listing "Kurdistan" rather than "Iraq" – and displaying the Kurdish rather than Iraqi flag – in an apparent nod to Kurdish nationalism.

Such gestures are potentially inflammatory, since the shape of the Iraqi state is a subject of contentious debate. Despite a process called for in the 2005 Constitution, there has been no resolution to the "disputed territories" just outside of the current KRG boundary, including the northern oil capital of Kirkuk and parts of Ninewa province, including Mosul. Those areas suffer from the legacy of Saddam Hussein's regime, which perpetrated campaigns of ethnic cleansing and forced relocation to change the area's demographics. Arabs, Kurds, and Turkomen now make competing claims on the land.

The KRG currently consists of Dohuk, Erbil and Suleimaniya provinces, according to boundaries drawn both by Iraq and the U.N. Just outside those lines, however, much of the disputed territories also fall behind a more expansive boundary of de facto KRG authority, where a largely Kurdish population looks either to the KRG itself for leadership, or else to local officials with support of the KRG's main parties.

The U.S. Embassy in Baghdad has conducted satellite operations in such areas via provincial and regional reconstruction teams (PRTs and RRTs, respectively), which act as Washington's eyes and ears on the ground. According to the cable, written a day after the Hunt PSC was signed, "Hunt Oil's General Manager for Europe, Africa and the Middle East, David McDonald, told RRT Erbil's Team Leader on September 5 that the envisioned 'Dohuk area' of operations under the PSC consists of the administrative districts of northern Ninewa province" – that is, within the KRG's de facto control, but outside of its official, legal territory.

"While the land to be explored by Hunt Oil has been behind the Green Line of KRG control for many years and is occupied by a majority Kurdish population who considers itself part of Dohuk Governorate, the area falls within the legal boundaries of Ninewa province," the cable stated. "Northern Ninewa is 'disputed territory,' according to the Iraqi federal constitution."

But Arab and Turkomen Iraqi leaders see a Kurdish extension beyond the so-called "Green Line" as a land grab that would create a larger KRG autonomous zone and eventually lead to a push for Kurdish independence. In their view, the Hunt deal was especially provocative because it was premised on the KRG's claims of legal authority over disputed territory whose status is supposed to be settled through a long-delayed process outlined in Article 140 of the Iraqi Constitution.

"McDonald seemed less than fully informed about the potential ramifications of Article 140 on Hunt Oil's negotiations with the KRG," the cable reported.

"This is a significant opportunity that outweighs the legal ambiguity," McDonald told the U.S. officials, according to the cable.

"Hunt Oil CEO Ray Hunt also discounted the fact that the northern Ninewa districts targeted under the PSC are not yet within the KRG's legally defined borders," the cable stated. "He expressed satisfaction on September 8 that his company was 'actively participating in the establishment of the petroleum industry in the Kurdistan Region of Iraq.'"

The Hunt Oil deal was a major political coup for the KRG: Hunt was a company run by a major fundraiser for the sitting U.S. president and his party, and at the time, it was also the largest private foreign oil company to sign a deal in Iraq. Moreover, the KRG had just enacted its own regional oil law, on Aug. 6, 2007. The entrance of a high-profile U.S. company was read as a vote of confidence in the KRG's assertion of its own, independent legal regime.

The cable says the KRG oil law may have given Hunt Oil the legal cover it needed to sign the deal: "Enactment of the KRG oil law and the subsequent announcement of the deal with Hunt Oil may accelerate the signing of PSCs with other international oil companies."

The KRG oil law gave the region primacy on oil deals in the disputed territories while restricting the central government. Article 19 of the law forbids Baghdad from "any new petroleum operations in the disputed territories" without KRG approval, until the constitutionally mandated referendum over the territories is carried out. Article 20, however, "allows the KRG to sign PSCs with foreign oil companies in disputed territories."

Hunt's deal was the third contract the KRG awarded for a field outside its official territory, following Houston-based Prime Natural Resources' 2003 deal with Kurdish authorities for the Shakal block, and the Khor Mor gas field contract with the United Arab Emirates' Dana Gas. Four deals at least partially outside the KRG territory have been signed since: Canada's Shamaran Petroleum Corp. (Pulkhana block/Aug. 2009); Australia's Oil Search (Taza block/Aug. 2009); Norbest, an affiliate of Russian-British firm TNK-BP (Hawler blocks/Nov. 2007); and Canada's Longford Energy (Chia Surkh block/July 2009).

The KRG power move sent reverberations throughout Washington. Ray Hunt from 2002 until 2009 served on the President's Foreign Intelligence Advisory Board (since renamed the President's Intelligence Advisory Board) – a span of time which included the signing of the Kurdish oil deal, which Hunt attended to personally. He's also a member of the National Petroleum Council, an industry advisory board to the U.S. secretary of energy.

Soon after the deal, members of Congress and others questioned the ties between a foreign intelligence adviser and top fundraiser for President Bush and his party (including the $35 million George W. Bush presidential library at Southern Methodist University in Texas) and a deal that ostensibly worked against U.S. interests of a political resolution in Iraq.

Congressional hearings blamed the State Department for not doing enough to prevent or discourage the deal, and called on the White House to take action.

Hunt initially denied he or his team discussed the deal with U.S. officials prior to signing, let alone received the pro forma warning, including in a rare interview with the Wall Street Journal.

However, a Hunt official contradicted Ray Hunt's claims in a State Department communication transmitted Sept. 6, 2007, a day after Hunt's meeting with the RRT and prior to the signing of the PSC, which was obtained and reported by Iraq Oil Report on Oct. 12, 2007.

"Hunt is expecting to sign an exploration contract with the KRG,” the Sept. 6 communication stated. “Unlike the large players, Hunt is not looking at the entire Iraqi market. (David McDonald) also thought that it may take years to pass a national law."

After publication of that communication, Hunt officials then confirmed the meeting. McDonald, in a statement, called it a "due diligence meeting for risk analysis and opportunity assessment in the Kurdistan region of Iraq. ...We did not seek advice as to whether or not Hunt should proceed with an exploration contract, and we were never advised not to do so."

Click here for the Wilikeaks cable (pasted below)

VZCZCXRO4961
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3071/01 2550602
ZNR UUUUU ZZH
P 120602Z SEP 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 3336
INFO RUCNRAQ/IRAQ COLLECTIVE
UNCLAS SECTION 01 OF 03 BAGHDAD 003071

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EPET EINV ENRG IZ
SUBJECT: HUNT OIL SIGNS AGREEMENT WITH KRG UNDER KRG OIL LAW

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISRIBUTION. PROTECT
SOURCES.

This is a Kurdistan Regional Reconstruction Team (RRT) cable.

SUMMARY
-------

¶1. (SBU) The Kurdistan Regional Government (KRG) recently signed a
production sharing contract (PSC) with Hunt Oil Company that covers
oil exploration and production in "the Dohuk area." Comments by
Hunt officials indicate that the block is actually in the Ninewa
Governorate's northern administrative districts. The PSC marks the
first oil deal signed by the KRG, following enactment of the
Kurdistan Region's hydrocarbons law on August 6, 2007. Considerable
legal ambiguity surrounds the PSC with Hunt Oil, as the districts in
northern Ninewa to be explored by the company are classified as
"disputed territories" under the Iraqi constitution. A senior Hunt
Oil manager told RRT Erbil's Team Leader that northern Ninewa
province has significant potential for oil production, and that this
factor trumps the legal ambiguities and risks associated with the
company's PSC with the KRG. The oil potential of northern Iraq
continues to attract significant investor interest. Several other
international energy companies are expected to announce oil deals
with the KRG during coming weeks. Despite the KRG's aggressive
pursuit of foreign direct investment to develop the Kurdistan
Region's hydrocarbons production potential, KRG Prime Minister
Nechirvan reiterated the KRG's commitment to the federal hydrocarbon
revenue sharing agreement that allocates Iraq's oil wealth to all
Iraqis on a per capita basis. Meanwhile, senior central government
officials expressed their dismay that the KRG enacted a regional
hydrocarbons law, and that the KRG continues to pursue oil
investment from foreign companies in advance of enactment of
comprehensive national hydrocarbons legislation. [NOTE: The ability
of regional governments to sign contracts has been among the key
issues of contention during negotiation of the national hydrocarbon
law. The KRG has reluctantly agreed, at times. to refrain from
finalizing agreements in advance of a national law, but have
maintained that they would not wait indefinitely for national
legislation to be approved by the Council of Representatives. END
NOTE.]

KRG Contract with Hunt in Disputed Territory
--------------------------------------------

¶2. (SBU) On September 8, 2007, the KRG, Hunt Oil Company, and
Impulse Energy Corporation (IEC) jointly announced they had signed a
PSC covering petroleum exploration activities "in the Dohuk area of
the Kurdistan Region." Hunt Oil's General Manager for Europe,
Africa and the Middle East, David McDonald, told RRT Erbil's Team
Leader on September 5 that the envisioned "Dohuk area" of operations
under the PSC consists of the administrative districts of northern
Ninewa province. McDonald did not disclose the exact areas in
northern Ninewa to be initially targeted for exploration by Hunt Oil
but he mentioned Shekkan and Akra as areas they had visited. While
the land to be explored by Hunt Oil has been behind the Green Line
of KRG control for many years and is occupied by a majority Kurdish
population who considers itself part of Dohuk Governorate, the area
falls within the legal boundaries of Ninewa province. Northern
Ninewa is "disputed territory," according to the Iraqi federal
constitution, and the legal boundaries of the area are eventually to
be decided by a public referendum pursuant to Article 140 of the
federal constitution.

¶3. (SBU) During discussions with RRT Erbil's Team Leader, McDonald
seemed less than fully informed about the potential ramifications of
Article 140 on Hunt Oil's negotiations with the KRG. He did not
express concern about the potential controversy surrounding
signature of a PSC with the KRG that covers areas of operation
currently outside the KRG's legal control. He said, "This is a
significant opportunity that outweighs the legal ambiguity." Hunt
Oil CEO Ray Hunt also discounted the fact that the northern Ninewa
districts targeted under the PSC are not yet within the KRG's
legally defined borders. He expressed satisfaction on September 8
that his company was "actively participating in the establishment of
the petroleum industry in the Kurdistan Region of Iraq."

¶4. (U) Enactment of the KRG's new oil law may have spurred
completion of the PSC with Hunt Oil. The PSC was announced shortly
after publication of the English translation of the new oil and gas
law on the KRG's website. Before the law was enacted, only one PSC
had been signed for the Dohuk area - with DNO of Norway. That PSC
covered operations only within the legal boundaries of Dohuk
Governorate. Enactment of the KRG oil law and the subsequent
announcement of the deal with Hunt Oil may accelerate the signing of
PSCs with other international oil companies. Several are
reportedly on the verge of signing PSCs with the KRG during coming
weeks. Article 19 of the KRG law states that "the Federal
Government must not practice any new Petroleum Operations in the
disputed territories without the approval of [the KRG] until such
time as the referendum required by Article 140 of the Federal
Constitution is conducted." Article 20, however, allows the KRG to
sign PSCs with foreign oil companies in disputed territories, based
on articles 112, 115 and 121(3) of the Federal Constitution.

Potential Bonanza Trumps Legal Ambiguity
----------------------------------------

¶5. (SBU) While McDonald said Hunt Oil must conduct further
assessments about the speed and scope of their operational
activities in northern Ninewa, with decisions regarding the focus of
initial seismic tests to begin "by the end of October," he was
optimistic about the oil potential of the region. McDonald said
portions of the topography in all three districts of northern Ninewa
bode well for oil exploration. He said, "It's like shooting fish in
a barrel." A Hunt Oil company spokesman in Dallas said the company
will begin geological survey and seismic work by the end of 2007,
with plans to be in a position to drill an exploration well in
¶2008.

KRG Boldly Enacts Regional Hydrocarbons Law...
---------------------------------------------

¶6. (U) The KRG deal with Hunt Oil marks the first PSC signed with a
foreign oil company following KRG enactment of the Oil and Gas Law
of the Kurdistan Region on August 6, 2007. Speaking of the KRG's
rationale in passing a controversial regional hydrocarbons law while
a draft national oil and gas law remains intensely debated, KRG
Prime Minister Nechirvan Barzani told reporters on August 7,
"Successive governments in Iraq have deliberately left our oil in
the ground as an effort to keep our people [ethnic Kurds] poor and
to deny our aspirations for a better way of life. Today, with the
passage of this new Kurdistan Law in a federal Iraq, we know that
those days are gone."

¶7. (U) While espousing the benefits of foreign direct investment in
the Kurdistan Region's oil producing areas, Nechirvan acknowledged
federal constitution provisions that require any oil revenues
generated under the KRG's hydrocarbons law to be shared equally with
all Iraqis. He confirmed the KRG intends to limit itself to its
constitutionally mandated share of national oil revenues, regardless
of whether the oil is sourced inside or outside the Kurdistan
Region. He said, "We will receive 17 percent of all revenues from
all oil production in all of Iraq."

¶8. (U) KRG Minister of Natural Resources Ashti Hawrami echoed those
comments. Hawrami said on September 9, "We believe that the [KRG's]
production-sharing agreements are the best way to move swiftly
forward and help not just the Kurds but all Iraqis." He envisions
that the Kurdistan Region will produce one million barrels of oil
per day within five years. To achieve this goal, the KRG intends to
sign PSCs with other large international oil companies. On
September 9, Hawrami told Dow Jones, "I think we'll be having an
announcement with a blue-chip company soon."

While Criticizing Central Government Paralysis
--------------------------------------------- -

¶9. (SBU) Following passage of the KRG hydrocarbons law, KRG
officials recommitted themselves to the February 2007 national
hydrocarbons framework agreement. Nechirvan told RRT Erbil's Team
Leader on August 28 that he hoped the new KRG law "would spur
movment in Baghdad" to enact a national hydrocarbons law. During
that meeting, however, Nechirvan expressed disappointment with
political developments in Baghdad and pessimism about "whether the
Sunnis and the Shi'a want to live together." He said the KRG does
not want Iraq's central government to "hold up development of
regional resources for another ten years."

Arab Leaders Critical of KRG Oil Law
------------------------------------

¶10. (U) Senior central government officials in Baghdad condemned the
oil deals signed by the KRG in advance of enactment of national
hydrocarbons legislation. Abdul Hadi al Hasani, Deputy Chairman of
the national parliament's Energy Committee, said recently that such
contracts may be overturned by the federal government, though he
conceded that such a move could discourage potential foreign
investments in Iraq's oil sector. Sami al Askari, a parliamentarian
and senior advisor to Prime Minister al Maliki, told reporters on
September 7 that a federal oil and gas council to be formed under
the national hydrocarbons law could decide whether to rescind the
KRG's handful of oil contracts with foreign investors. In a
concession to the reality that foreign direct investment in Iraq's
oil infrastructure remains both valuable and scarce, the
parliamentarians said the private firms that signed deals with the
KRG should not be blocked from winning future oil contracts in
Iraq.

COMMENT

¶11. (SBU) USG policy has discouraged companies from signing oil
deals with the KRG until Iraq enacts its national hydrocarbon
framework law, as such regional contracts could act as an impediment
to negotiations toward a comprehensive national settlement that
equitably distributes Iraq's oil wealth. Such contracts also remain
subject to significant legal ambiguity. This has not deterred Hunt
Oil and the other handful of companies that have signed PSCs with
the KRG. Their concerns about the nebulous political environment
and possible eventual dissolution of their PSCs have been overridden
by the prospect of huge profits - from getting first access to the
choicest oil exploration fields in northern Iraq, and from
establishing productive relationships with key KRG and central
government officials. The potential pitfalls are especially acute
in cases (e.g. Hunt Oil and its junior partner IEC) where investors
will commence operations in disputed territories. It remains
doubtful that the KRG was legally entitled to enter into a binding
contract with Hunt Oil that covers oil exploration and eventual
hydrocarbons production in an area (i.e. northern Ninewa province)
that the KRG does not legally control. Legal considerations aside,
the KRG's actions complicates enactment of a national hydrocarbons
law.
BUTENIS