Ex-U.S. Ambassador to Afghanistan, Iraq and the UN, Zalmay Khalilzad, talks to local and international press in the basement of The Serena Hotel in Kabul on March 12, 2009. During his three-day trip to Afghanistan he talked to Afghan President Haimd Karzai and other Afghan officials.June 18, 2010
Local oil politics stall parliament
WASHINGTON, D.C. - On Thursday, Zalmay Khalilzad was named to the board of directors of DNO, the Norwegian oil firm producing oil in Iraqi Kurdistan.
This is the latest and highest-profile development in the former U.S. ambassador’s return to Iraq. His consulting company, Khalilzad Associates, is also providing advice and expertise to investors interested in Iraq and other countries.
Khalilzad, who is based in Washington, DC but travels extensively, was ambassador to Afghanistan (where he was born) immediately before his posting to Iraq. After two years in Baghdad he became U.S. Ambassador to the United Nations.
Prior to being named to DNO’s board, he spoke with Iraq Oil Report in his Washington office about the future of Iraq’s politics and oil sector.
Ben Lando: What is your take on post-election, pre-government-formation Iraq?
Zalmay Khalilzad: I think this election was a success. A positive step, a positive evolution in Iraqi politics. The level of violence was low. The level of participation was acceptable and the Iraqis voted in a less sectarian manner than in the previous election. The two leading parties, one is clearly a secular, non-sectarian, cross-sectarian party of Ayad Allawi that did very well. At the same time Prime Minister Maliki’s party (Dawlat Al-Qanoon) also presented itself as non-sectarian, cross-sectarian and it did very well as well. Of course still most Shia voted for Shia parties and most Sunnis voted for Iraqiya, but nevertheless it shows evolution in the attitudes of the people.
BL: You were ambassador in Iraq during a quite violent time, when there was a lot of animosity between Shia and Sunni in Iraq. There’s a fear that this could return – maybe in different ways, maybe at a lower level – but that it could. Especially after the elections, if some parties are marginalized, do you think there is a risk of this violence returning?
ZK: You cannot rule it out. It’s possible it could be reignited. It could happen in two ways. One is if there is contestation of the election results, and if takes a very long time to form a government and during this period violence increases. Or if terrorists are able to carry out operations, spectacular operations, that could once again increase insecurity. Also, violence could increase if a narrowly based and sectarian government is formed.
I think one reason for the positive change was there was a greater sense of security and people were tired of the sectarian conflict that had taken place. But my sense is unlikely to go back to the bad old days of 2006 and 2007 after the attack on the Samarra mosque, because institutions are stronger and people are largely tired of sectarianism. It will take a lot to push them back.
BL: One area of friction in the country is not religious-based but ethnic-based. And I’m referring to the ongoing stalemate between Iraq’s Arab majority and Kurdish minority and their political leaders. How do you view, in light of the elections and in the near future, how do you expect the relationship between Arab and Kurdish leadership to play out?
ZK: There are many issues affecting Kurdish relations with the rest of Iraq. There are issues of territory. There are issues of resources. There are issues of relations between the central government and the regional government. I believe that there will be an effort to deal with some of those during the formation of government. Both sides, whoever is the leading Arab party and the Kurds, will face some important choices to make, what issues should be dealt with in the process of government formation and which issues to deal with later.
BL: What issues have been discussed as being left for later and what issues need to be addressed right away?
ZK: The question is whether the territorial issues are going to be the ones to come to an agreement on first, or do you get a roadmap to deal with the territorial issues, based on the constitution, and then you make some progress in regard to the oil and energy issues?
BL: You view those as the top two issues, territorial and resources issues?
ZK: Those are the top two issues. The Kurdish issue is also a lot more complex than it was. First they’re numerically a smaller percentage of the coming parliament than they were of the previous parliament but nevertheless their presence will be significant. Also they are more divided than they were in the previous parliament because now we have got (the new political party) Goran also as a player.
BL: One thing is, Iraq in many ways both needs and is requesting investment from not only Iraqi companies and individuals but foreign investment. Now that you are in the private sector and have started this consulting firm, what type of areas of the economy do you think are the most prospective for foreign investors into Iraq???
ZK: There’s quite a large number of opportunities in Iraq. The most obvious one is in the energy sector given that Iraq is so rich in oil and natural gas. But there are related opportunities in oil services, construction, pipelines, upgrading port facilities, even developing a petrochemical industry in Iraq. Iraq has a very ambitious plan to develop the oil and gas resources.
Other sectors with very substantial potential are telecommunications, banking and insurance, the service areas, the enablers of much else that happens in the economy. The issue of opening additional cell phone competition is very important. And developing the infrastructure in some areas is offering opportunities. Then you’re talking about housing. In the election both leading parties talked about 2 million new housing units to be built in the foreseeable future. There are vast potential for companies from abroad to invest. There is also other infrastructure from roads to railways, whether up north or the rest of Iraq.
The whole area of continuing to build up Iraqi security forces to be able to do what they need to do for themselves. It used to be that a lot of the work was done through the U.S. military,. But as the role of the US military diminishes, Iraq will have to decide what sort of border security it will have with either Syria or Iran or others. How they’re going to achieve that? There will be a role for the private sector from abroad for that as well. How you do maintenance work? How do you maintain depots? How do you do a lot of the work that was being done through US contractors working through the US military? Iraqis will have to decide how they are going to carry out the tasks that are necessary.
So there is a huge potential in Iraq’s economic future whose development is likely to be the key focus of the next government, it’s likely to have a big impact not only on Iraq but a big market a big opportunity for outsiders.
BL: Where have you found the most opportunities for your clients or for yourself?
ZK: We have about a dozen clients interested in Iraq and the surrounding areas. It covers a number of different sectors. Including some in the energy sector, and telecommunication and services. I think this is the first year, we’ve just started and I’m satisfied with the progress that my company has made. I believe that economic development of Iraq is important for the success of democracy in Iraq and the buildup of security institutions of Iraq because you have to have the resources to do what’s necessary. Those resources can only be made available if there is economic development, if people find jobs, if people see benefits of this new order. And if government revenues are sufficient in terms of the services that the government is obligated to provide to the citizens of Iraq.
BL: As you mentioned, a big thing is further developing their massive oil and gas reserves which can not only help feed the basic services of the country but also bring in a lot of revenue. Where are you seeing your clients are they invested in, up north or the rest of Iraq?
ZK: The whole of Iraq. I’ve got clients interested in the north but most of my clients are interested in the rest of Iraq. It covers the entire country.
BL: Are these American clients?
ZK: I have American clients, but we also have non-American clients as well; but most of my clients are American clients.
BL: And in the oil or energy sectors?
ZK: It includes the energy sector but not exclusive to the energy sector.
BL: What deals have you reached?
ZK: We have had, we are in the process of discussions with Iraqis and these firms. There have been some progress made but I’m not in a position for reasons of confidentiality of it to say which ones we were involved in.
BL: Is this with the KRG?
ZK: No, with Iraq.
BL: There have been no deals on energy issues with the KRG?
ZK: On energy issues, no, not with the KRG.
BL: I noticed that I was seeing pictures from announcements from the KRG from two events last year, one was when they started exporting the oil and one was when they opened the refinery, and you were there in the front row of both pictures.
ZK: Well, I have good friends in Iraq in both the KRG and in Baghdad and I was a guest of the government in both instances. I had no stake in either of those two events, I was invited to attend those events but my company did not represent any of the parties involved in completing these projects.
BL: It is an important distinction then for people who follow Iraq and especially internal politics in Iraq: you were a guest of the government, but which party or which last name invited you?
ZK: The government was a single government, both PUK and KDP were part of it. I don’t think that there was an issue. I have a good relationship with many Iraqi leaders, knowing them when they were in the opposition, ‘til now, and that’s why they’ve honored me with invitations to some of their events. Success events, as they see it.
BL: These two events specifically, before I even heard that you were there, I remember thinking that these were quite potentially controversial events and it turns out they were. And some people said that it was a little confusing for the former Ambassador to be at such controversial events and that it could add to some confusion in negations between the KRG and Baghdad. Do you find it that way?
ZK: I have not found it that way. I do not believe those projects were controversial in Baghdad. I go to Baghdad often – although I have gotten more press when I’ve been in Erbil. The development of the refinery was for domestic consumption and was approved by all those concerned. On the second occasion, the start of exports of oil from the fields in Kurdistan was done – I was told with the approval of Baghdad. The president of Iraq, President Talabani was there. That’s different than some of the oil contracts that have resulted in the blacklisting by Baghdad of companies involved.
The second part of Zalmay Khalilzad’s interview with Iraq Oil Report will be published next week.
WASHINGTON, D.C. - Before being named a board member of the Norwegian oil firm DNO – one of the biggest foreign players in Iraqi Kurdistan – former U.S. Ambassador to Iraq Zalmay Khalilzad spoke with Iraq Oil Report about the country during and after his tenure.
One of the critical issues he faced as ambassador was the rift between the semi-autonomous Kurdistan Regional Government in the north and the central government in Baghdad. Their dispute over control of Iraq’s oil sector has been a major front in a battle to determine the shape of Iraq’s young democracy. Khalilzad tried to referee this fight, brokering the unsuccessful negotiations to pass legislation that would have governed the development of Iraq’s hydrocarbon resources.
In Part Two of our interview (click here for Part One), Khalilzad said that passing such an oil law will be more important than ever – a crucible of Iraq’s ability to overcome a divisive election and form a cohesive government.
Khalilzad also defended the role his consulting firm, Khalilzad Associates, is playing in the country’s oil sector. U.S. policy discourages foreign oil firms from doing business directly with the KRG; Khalilzad claims that his clients, who are engaging with Baghdad, are pursuing agendas in harmony with American priorities.
Ben Lando: The U.S. is trying to help in whatever way they can to bring some sort of conclusion or agreement between Baghdad and Erbil on some of these key oil issues. Some people in the State Department and the Embassy said that they felt it could be confusing, or maybe problematic for them, to have the former U.S. Ambassador to Iraq involved in oil deals – as a private individual, but involved – in oil deals in the north.
Zalmay Khalilzad: I support that goal, obviously, of reaching an agreement between the center and Erbil and I tried very hard when I was ambassador to achieve that goal. I have not been involved in any agreement reached between companies and the KRG dealing with oil in the north.
BL: Aren’t you [involved with Kurdistan] with your clients though?
ZK: I have no clients that I have helped reach an agreement for oil contracts in Kurdistan, no.
BL: I wanted to get your thoughts on the oil law and the future of some sort of legislation governing the oil sector, which would basically get rid of the issues that we addressed, the dispute between the KRG and Baghdad. There were long, drawn-out negotiations, then there was an initial agreement in 2007 that then broke down – and it’s been almost the same status ever since. How do you see making any headway in the future?
ZK: I think that the constitution requires that there be a new law, although the constitution does give some rights to the center and some rights to the region, but it does say there has to be a new law and that the new law has to emphasize new technologies, private sector. But the constitution also says that oil resources belongs to all Iraqis in all Iraqi provinces so that the revenue sharing part is there. I feel that it is in both sides’ interest for there to be an agreement.
We were very close in 2007. There had been a basic agreement when I was there and then it broke down afterwards. One of the challenges of the next government in the formation process is how central will that be in the negotiations during the formation of government, to deal with this issue, and I believe it’s very important that this issue be resolved, but there are so many issues I think we’ll have to wait and see.
BL: How crucial of an issue is this in terms of the future of Iraq, in terms of security, of development – political development, economic development?
ZK: It is vital.
BL: Is it one of the most important? The most important?
ZK: It is one of the most important issues that need to be resolved because it is a source of tension between the region of Kurdistan and the center, it is a factor that negatively effects the development of those resources.
BL: The draft law that was agreed upon (in 2007) was more of an incomplete draft. There were some issues actually that needed to be ironed out before they could have a proper agreement, and thus it fell apart. And there are some sides who said that if they were given a little bit more time, if there wasn’t as much American insistence on passing it so quickly, on approving it so quickly, that it might have had a better chance than it had now.
ZK: We thought that it was important that at that time – and many Iraqis agreed with us – to get as many of the basic issues agreed to as possible because Iraqis needed a sort of national compact about this new Iraq and that this was important not only for the economic development in terms of this oil issue but also in terms of political development of the country.
The draft that they agreed to, which ultimately they had to agree to, but we were encouraging, was ultimately approved by the cabinet. There were some issues that had to be agreed to within a specified time frame, how revenue sharing would be implemented – everybody agreed to share but how do you do it? – and there was also some issue with regard to the role of the center vs. the region in terms of some of the contracting mechanisms. But the cabinet did approve the draft oil law.
It ran into difficulties in parliament and because they couldn’t get an agreement in a timely manner.
BL: But the first breakdown came just a few months after the agreement and it gets to the meat of the disagreement between the two sides, which is control over fields. There were the four different annexes of the fields – those that are producing, those that are discovered, etc – those weren’t addressed in the oil law. And the oil minister, Shahristani, basically presented these annexes as if these were the final draft, and the KRG disputed that.
ZK: The agreement was that these would be negotiated by the two sides. There was also revenue sharing implementation that was part of that. As I said the agreement was made in principle when I was there in February, and then I left in March to go to the United Nations, and the deadline was in May, to complete the rest.
Sometimes you can’t agree to everything at once. You agree to what you can agree. And what will be left for later. That’s what they all agreed was a good way to proceed but at the same time there was a timeline because the Iraqis had been doing well when there was a timeline, whether it was about the constitution or some of the elections, to meet the deadline.
But it did not work out. I do not know all the details since I was gone when it happened. But I felt that the fundamental agreement was an important milestone on something important to Iraqis – we’re talking trillions of dollars, how to develop that resource for the benefit of all Iraqis.
BL: This milestone was a difficult milestone to reach.
ZK: It was.
BL: Not only were the two sides very, very far apart on it, but it took some arm twisting, which may be too harsh, may be too soft of a word, you tell me.
ZK: These are important issues. They were and continue to be important issues. A lot is at stake and there are clearly differences of view as to how much is the role of the center, how much is the role of the region in regard to these issues. Also different, analytically, different approaches as to how you do these sort of things. In order to make more progress, it needed to have more senior people than the ministers involved, in order to make some of the decisions, including President Talabani, President Barzani and Prime Minister Maliki, on the telephone at one stage, to discuss and make decisions.
BL: All four of you were on the phone like a conference call, or with the ministers as well?
ZK: With the others as well but with the four principles involved. These things are not easy. It’s about a lot of resources, not only about economics. It is very important but it is also about politics, personalities. So you have to get more senior people involved at some times to explain the issue, what the differences are, how maybe there is a way to bridge those differences and only principals sometimes can make the decision that they needed to make.
BL: Who was there?
ZK: (KRG Natural Resources Minister Ashti) Hawrami was there. Prime Minister Nechirvan Barzani was there. The team from Baghdad was there.
BL: Who led that? Was it Shahristani or Thamir Ghadhban?
ZK: Thamir was there. But people were in contact with each other and Minister Shahristani was very much kept in the picture. But ultimately there had to be a discussion on the telephone. And that’s why the cabinet approved it. It wasn’t that the deal was only struck in Kurdistan without the center and other parties being in the picture. It was approved rather quickly after the agreement had been done by the cabinet. But as I said there were other requirements that had to be done with regard to steps that had to be taken and that they were not met.
BL: Did you foresee that there would be such a split between Ashti Hawrami and Hussain Shahristani?
ZK: Personalities are very important in all negotiations and I wouldn’t be surprised if they were important in this regard as well. That would be unique if not the case. But I also have to say that these were important and complicated issues. Some people knew a lot about the issues, some people didn’t know a lot about this whole issue of energy and oil. There were political constraints that they all have faced. These are difficult issues.
But I think the key thing is the mechanism through our help – which our help was just to facilitate, we didn’t go with a view that it must be resolved this way, that it must be resolved that way but to help them we saw it as a partnership with them, and to offer them the benefit of our experience, knowledge – was a way to offer bridging formulas from our point of view, always recognizing that the decision was theirs, but recognizing that an agreement on something as important as oil would have a positive impact for Iraq.
BL: Obviously, Iraq has a lot of prospects in many sectors, the possibilities are almost endless. A lot of people in various industries they see these big risks, especially in security, that the future isn’t certain and the way that they’ll get to the future isn’t certain either. So how would you explain this to clients, that the benefits would outweigh the risks in investing in Iraq?
ZK: Iraq has huge potential. There are risks associated with it, obviously. The benefits are great. I believe that Iraq will ultimately work. That in many other countries that have had political instability and some unresolved issues, very good deals have been made and in fact economic development has had a positive impact on the political development of the country. And sometimes if you are there early on, the kind of relationships you establish pays dividends down the road in terms of your market position, in terms of the quality of the relationship.
BL: You are talking about you or your clients? Maybe both?
ZK: I’m talking about my clients. My judgment is that if you look around the world at some of the places where there is a lot of oil and energy, they are places where there has been instability and yet companies have done very well there.
My motivation besides making money has been to focus on the countries that I spend a lot of time on to see what can be done from outside to assist with the economic development. But at the same time I spend my time on the side on other issues that are non-profit. For example I’m on the board of the American University of Iraq because I think education is very important. I’m also on the board of the American University of Afghanistan. I’m creating an education foundation that will deal with how you assist the next generation and prepare them for success. So it is in my case the focus is on a region that I know and care about it and its economic development and ultimately its future but my activities are for profit but also nonprofit.
BL: One question that people have raised, and it’s important to allow you to respond: the issue of oil and Iraq and the U.S. motivations for going to war in Iraq. Do you think there is any kind of conflict, for such a top-level American official to be involved in the oil sector in Iraq, now that he is in the private sector? Kind of the revolving door issue?
ZK: I don’t see a conflict if you behave consistent with the law and regulations and you are facilitating the development of the sector. You’re not doing it yourself. I’m not seeking oil fields for myself from the Iraqi government, and I’m very careful about the kind of businesses I select to make sure they are reputable people and companies and that they will do a good job. This is what they need. The businesses need it and also the Iraqis need it. So this idea has no particular standing in my view.
