From diplomat to oilman: Khalilzad returns to Iraq

Then-KRG Prime Minister Nechirvan Barzani turns the switch as former US ambassador Zalmay Khalilzad (L) and Ashti Hawrami (R) KRG minister of natural resources, look on during the opening ceremony of the Khurmala oilfield, 10 kms south of the city of Erbil, 310 km north of Baghdad, on July 18, 2009. (SAFIN HAMED/AFP/Getty Images)

By Ben Lando of Iraq Oil Report

Published June 20, 2010

Just over a year ago in a packed auditorium in Erbil, the capital of Iraq's semi-autonomous Kurdistan region, the two top political leaders of Iraq's Kurdish population ceremoniously inaugurated a pipeline symbolizing the first oil exports from the region.

Among the hundreds watching the momentous show, as Iraqi President Jalal Talabani and Kurdistan Regional Government (KRG) President Massoud Barzani gripped the gold-painted wheel on the faux pipeline, was former U.S. Ambassador to Iraq Zalmay Khalilzad.

During his tenure in the Bush administration, Khalilzad had attempted to referee an ongoing dispute between the central and regional government over the country’s oil wealth. With oil providing 95 percent of total state revenue, such a conflict cuts to the core of the factious country's future. Khalilzad’s efforts to broker reconciliation had failed to yield a lasting agreement.

Now he was back in the country’s oil patch – this time, as a private businessman. He had just begun parlaying his diplomatic stature into a new consulting business, Khalilzad Associates. From his new vantage point, as a consultant looking to connect investors with business opportunities in Iraq, this was an optimistic image: a pipeline connecting the KRG to the rest of Iraq.

"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," Khalilzad said in a recent interview in his office down the street from the White House.

Last month he was made a member of the board of directors of RAK Petroleum, a UAE-based company with prominent Emirati and Saudi backing. On Thursday, Khalilzad was voted to a seat on the board of directors of Norwegian oil company DNO, one of the first firms to sign an oil contract in Iraq's Kurdish area, in 2004. (RAK owns 30 percent of DNO.) In fact, it was DNO's Tawke field that began feeding oil into Iraq's northern export pipeline after the promising Erbil ceremony last year.

The KRG, however, stopped exports after four months, because political progress had not caught up with the oil development. Baghdad still considers all two dozen deals the KRG has signed with foreign oil companies illegal and thus refuses to pay the contractors. Without exports, revenue, or payment to the oil companies who signed with the KRG, shareholders have been shaken and investments have slowed.

The U.S. policy before, during, and after Khalilzad's tenure as ambassador discouraged such contracts. American officials in both Baghdad and Washington said new legislation governing the oil sector was key to reconciling disputes between Iraqi Arabs and Kurds, a rift which still dominates Iraqi politics. Any oil deal signed before such a legal foundation could be set would undermine the oil law negotiations, and constituted a serious setback, according to the U.S.

Now the ex-ambassador has aligned himself with a company that helped open Kurdistan’s oil sector and widened the rift between Erbil and Baghdad.

Khalilzad either no longer agrees with U.S. policy, or never did.

A year after the auspicious Erbil ceremony leaders in Kurdistan remain at odds with Baghdad – and Khalilzad, some observers say, is partly to blame.

Iraq’s federalist debates

Since the end of the Saddam regime, Kurdish and Arab leaders in Iraq have disagreed about who should make decisions in the oil sector. During Khalilzad’s tenure as ambassador, the oil law was the lightning rod for Iraq’s own federalist debates. The KRG insists on giving oil contract authority and other hydrocarbons development rights to local governments, and Baghdad wants the country's oil sector solely under the purview of the national government.

Because the oil legislation was a proxy for the dispute over the shape of Iraq’s new democracy, the Bush administration emphasized it as one of the most important “benchmarks” it had set for Iraq’s government. The law was touted as a cure-all that would end the Arab-Kurdish fight over resources and advance the oil and gas development that would then bring much needed income into the crumbling country.

American officials therefore discouraged foreign oil firms from signing deals in Kurdistan. Any contract signed with the Kurds would undermine the good faith of the oil law negotiations – the substance of which included what types of contracts could be signed, and who had the authority to sign them.

"Every deal signed is another wedge between the two ministries," a senior U.S. official said recently, restating the American policy that has been in effect since the first KRG deal. "We’d rather there aren’t wedges."

Despite the uncertain legal climate and considerable controversy, DNO blazed the trail into Kurdistan. Their willingness to begin investing serious capital in the region lent credibility to the Kurds’ development plans and signaled to other companies that, although Baghdad hadn’t yet put the more-lucrative southern oil patch up for auction, Iraq’s oil sector was open.

In this climate of urgency and contention, Khalilzad played a prominent role facilitating the creation of an oil law. A small committee of Iraqi technocrats went through draft after draft, with the goal of bringing both sides to compromise. By the end of 2006 the technocrats ended their work and politicians took over.

According to numerous Iraqi and American officials, Khalilzad arranged countless face-to-face meetings and phone calls. But time was running short on the ambassador’s tour, which ended in March 2007. In February that year, he turned up the heat, bringing a compromise agreement to Erbil for Kurdish leaders to sign, according to people close to the meetings.

"He was a bully. He was trying to push them through and get them done," said one well connected, Iraq-based academic, who noted that Khalilzad wasn't trying to influence the content of the law, but merely wanted an agreement that would satisfy both sides. (Many observers consider this an important nuance, which they emphasize to mitigate the perception that the U.S. was trying to control Iraq's oil sector).

Khalilzad and his closest advisors gathered Kurdish and Iraqi leaders at Iraqi President Jalal Talabani's resort home on Lake Dokan in the KRG's Suleimaniya province. It was another in a series of Khalilzad-led meetings that included various officials threatening to quit their post if certain language was kept in or taken out of the law.

At last, the sides reluctantly put pen to paper. And, to the chagrin and confusion of some, the deal was announced not by the Iraqi government, but by Khalilzad, who a month later would leave for the United Nations.

"He said he had an agreement; however the agreement turned out to be an incomplete law," said a State Department official. "They tried to check a box in what the Americans wanted but it didn't move the ball anywhere."
The draft law had passed the Council of Ministers, but negotiations combusted before it could reach Parliament.

The Khalilzad agreement included a May 31, 2007, deadline for the draft to become law, giving it an unrealistic three-month window. At a conference in April in Dubai held by Iraqis – due to growing anger about Washington meddling, no Americans were invited –negotiations among current and former oil officials devolved into shouting. The draft law was killed, and with it three companion laws, including one governing oil revenue sharing.

"When (Khalilzad) started to push hard for it, it was already dead," the longtime Iraq-based academic said.

Soon after, the KRG passed its own regional oil law and started announcing a series of oil deals, which created an even bigger impasse between the KRG and Baghdad.

"Sometimes you can't agree to everything at once. You agree to what you can agree. And what will be left for later. But it did not work out," said Khalilzad.

"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."

From diplomat to businessman

The 59-year-old Khalilzad – or “Zal,” as he is called by Kurdish and American friends and colleagues – was born in Afghanistan, but after moving to the United States held numerous posts in the Reagan and George H.W. Bush administrations.

In the 1990s, Khalilzad also worked for U.S. oil company Unocal (which merged into Chevron in 2005), which was attempting to build a natural gas pipeline from Turkmenistan, through Afghanistan, to Pakistan.

Details of his role are unknown but he's alleged to have been Unocal's negotiator with the Taliban government.

Under President George W. Bush, Khalilzad held a string of high-profile diplomatic postings: he was ambassador to Afghanistan, then served in Baghdad from June 2005 to March 2007, and then represented the U.S. at the United Nations, until President Barack Obama took office.

Khalilzad can still be found advising political leaders in both of the warzones.

In Afghatnistan, he meets with President Hamid Karzai (and fends off rumors that he aspires to political office there); in Iraq, he is often a guest in Talabani’s Baghdad palace.

"I have a good relationship with many Iraqi leaders, knowing them when they were in the opposition, till now, and that’s why they've honored me with invitations to some of their events," Khalilzad said.

One such event was in July 2009, when the KRG inaugurated a refinery in Erbil that was fed by a pipeline from Khurmala Dome, a section of the disputed Kirkuk oil field that is in KRG territory. Kurdish security forces had prevented employees of the Ministry of Oil from working on the field numerous times over recent years.

"This process that we are celebrating began when (Khalilzad) was in Baghdad," Barzani said in his speech. During the ribbon cutting, Khalilzad stood smiling beside Barzani.

Khalilzad showed a diplomat’s sensitivity and was careful to distance himself – and his influence – from the new oil developments.

"My company (Khalilzad Associates) did not represent any of the parties involved in completing these projects," he said, emphasizing that his oil clients were active elsewhere in Iraq, not Kurdistan.

Khalilzad also drew a distinction between the refinery and export deals, which had the tacit approval of Baghdad, and the disputed oil field contracts, emphasizing that these deals were “different than some of the oil contracts that have resulted in the blacklisting by Baghdad of companies involved."

Khalilzad once might have worried about taking sides too starkly in the KRG-Baghdad dispute, but his new presence on the DNO board is an unambiguous message. The former ambassador is now with the Kurds.

A breath of fresh air

Khalilzad’s new DNO board seat complicates and clouds American efforts in Iraq now. Before the occupation winds down at the end of next year, the U.S. is trying to tie up a few loose policies, such as oil governance and its inherent reconciliation implications. The official U.S. position is to disavow Khalilzad.

"He doesn’t seek our counsel," said a senior U.S. official, who said Khalilzad is regarded on record as a "private citizen."

But in formal meetings with government officials, he is still addressed as “Ambassador,” and the rolodex from his diplomatic career is his consulting firm's golden ticket. He's considered a friend of both of Iraqi Kurdistan's ruling families, and he has had at least one recent one-on-one meeting with Iraqi Oil Minister Hussain al-Shahristani, on the sidelines of an Iraq investment conference in Washington in October 2009.

"If I am an investor, I call Zalmay Khalilzad and it is better for me, to have connections," said Salar Mohammed Ameen, vice chairman of the National Investment Commission (NIC). "Of course, it is very important to the NIC and Iraq, one famous guy is promoting Iraq. It's also good for us."

Although Khalilzad’s presence in Iraq is widely visible, his clients are kept secret. “I am sure he tried to get the best names to Baghdad,” said Ameen.

"We have had, we are in the process of discussions with Iraqis and these firms," Khalilzad said, referring to his work on behalf of clients. "I'm not in a position for reasons of confidentiality of it to say which (projects) we were involved in." He said most of his clients are American companies and none of the energy-related clients are involved in deals with the KRG.

His fingerprints have not been found on any of the major oil deals that Baghdad has signed so far.

“I did not hear that Khalilzad has any role in any of the foreign companies and the Oil Ministry," said a top Iraqi oil official involved in contracting. The official noted the 11 major contracts signed to foreign firms since November were auctioned in public, cutting out any role for a middle man. Khalilzad said none of the winning companies are his clients.

"Regarding the other service contracts, like to drill wells or extend pipelines, these contracts are done by bilateral deals between the ministry and the companies through tenders, and whichever company has a better tender gets the contract," the oil official said. "I do not thing there is any role that Khalilzad or any other person could do."

How much Khalilzad can do for DNO, now that he’s a board member, is not yet clear either. The Norwegian firm wants desperately to resume exports and receive oil revenue – and so does the KRG.

"It is counterproductive" for the Kurds to have Khalilzad on their side, said the long-time Iraqi academic. "It doesn't endear them to Iraqi nationalists or the current U.S. administration. I don't know who they think Khalilzad will charm for them."

John Sickman, a senior U.S. advisor to Iraq's Oil Ministry during Khalilzad's tenure, said that as ambassador Khalilzad was “a breath of fresh air, a problem solver.” Sickman said he was “surprised” to hear that Khalilzad had joined DNO, but “employment is employment.”

"I don't think it's going to help them a lot, but it's not going to hurt them," Sickman said. “DNO needs help. They are stuck there in Kurdistan."

Ben Lando reported this story from Washington D.C., Baghdad, Houston and Erbil.
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