IRAQIS EXPECT NORTHERN OIL PRODUCTION TO INCREASE

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002517

SIPDIS

E.O. 12958: DECL: 06/15/2015
TAGS: EPET ECON EFIN ENRG IZ MASS MOPS
SUBJECT: IRAQIS EXPECT NORTHERN OIL PRODUCTION TO INCREASE
BY END OF YEAR

REF: BAGHDAD 2298 AND PREVIOUS

Classified By: ACTING ECONOMIC COUNSELOR JAMES BOUGHNER FOR REASONS 1.

4 B AND D.


1. (C) SUMMARY: Production capacity in the Northern Oil
Company (NOC) fields will increase from 450,000 bpd to
768,000 bpd by Dec 31, 2005 when NOC well workovers are
completed, according to the Director General (DG) of the
Northern Oil Company. The constriction on oil exports will
be the capacity of Al Fathah Crossing and the timing of the
completion of the 42-inch pipeline from Kirkuk to the
northern export pipeline to Turkey. The DG does not think
there will be sufficient natural gas produced in the north to
support the installed electric power generators in the North
by late 2005. Northern Gas Company will have excess
processing capacity for gas unless NOC produces gas from more
wells, and additional infrastructure is repaired. DGs of
both the Northern Gas and Oil Companies complain the
Infrastructure Security Battalions have so far not only
proved ineffective in protecting oil and gas infrastructure,
but may themselves be responsible for some attacks. END
SUMMARY


2. (U) ECONOFF traveled recently to Kirkuk and Al Fatah with
PCO, IRMO, and JCCI to meet with the Directors General of the
Northern Oil (Adil Al-Qazzaz) and Gas (Jabbar Al-liaebi)
Companies and observed the ongoing activities for repairing
the pipeline crossing and security operations at Al Fathah.
Kirkuk-area oil and gas infrastructure, repairs and
renovations undertaken by the PCO and its contractors were
observed in the field locations and then briefed in detail to
ECONOFF.

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EXPECTED OIL EXPORT CAPACITY FROM NORTHERN IRAQ
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3. (SBU) Production in the oil sector is expected to
increase according to the DG of the Northern Oil Company
(NOC) as the US contracted work is completed on the oil field
infrastructure. The DG explained how the oil and gas
production would increase with the completion of the oil well
workovers, the connection and renovations of the gas-oil
separation plants, compressor stations, pump stations and
pipeline replacements over the next six months. NOC is
drilling five new wells and two additional wells are
undergoing workovers by the Iraqi Drilling Company. He said
the new production would rise to 768,000 barrels per day
(bpd) by the end of 2005. He estimated this would provide
500,000 bpd for export via the Northern Export Pipeline
through Turkey to the terminal at Ceyhan. The DG stated the
NOC has exported up to 1.35 mbpd in the past when daily
production was 1.5 mbpd. He proudly said, "NOC has a very
good record of production." The DG of NOC was concerned with
the speed of the construction at the Al Fathah crossing,
speculating that his production increases might exceed the
capacity of the pipelines to carry crude oil over the
crossing. He said until the 42-inch pipeline is completed
and secured, exports to the north are subject to stoppages
from attacks, limited capacity in terms of through-put volume
of pipelines, and maintenance failures.

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MAINTENANCE OF OIL INFRASTRUCTURE
--------------


4. (SBU) Maintenance and availability of spare parts are the
greatest concern of the DG of NOC. He said, "we have no
spares and we have no preventative maintenance program". The
DG of NOC explained that he had "no O&M plan for NOC",
primarily because he did not have the parts or budget to
implement a maintenance operations plan. NOC did originally
host the Oil Training Institute for Iraq, however, all of the
equipment in the laboratories had been looted after the most
recent war. He told us he would like to have new laboratory
equipment provided by reconstruction funding to reestablish
the Training Institute, and he thought that would greatly
help his maintenance and training needs. He will also
forward his annual budget request which will include annual
funding for the training institute to MOO, as well as to IRMO
who are working with USAID to assess the need and available
resources.

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GAS PRODUCTION WILL NOT EXPAND FOR 2-3 YEARS
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5. (SBU) The NOC DG explained that gas production would not
expand immediately, but rather he expected additional gas
production in 2-3 years, when NOC tapped a gas field east of
Kirkuk. The DG said NOC would not provide sufficient
increases in natural gas this year for the Northern Gas
Company to process with their second train of gas processing
capacity. The DG stated, "We cannot produce more than 300
mmscf of associated gas, and we need to develop more oil
fields" to produce sufficient associated gas to fully utilize
the capacity of the plant.

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NATURAL GAS PROCESSING CAPACITY
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6. (SBU) The DG of the Northern Gas Company (NGC) provided a
briefing on the NGC production and ongoing renovations in the
Kirkuk area. Primarily he provided the information that when
the second gas train (Natural gas processing facility) is
repaired in Kirkuk, this will increase the capacity to over
500 mmscf per day. The PCO had planned this repair, but it
would provide excess capacity for processing natural gas,
beyond the 300 mmscf, which the DG for NOC said he could
produce in the NOC oil fields. The DG for the NGC said he
knew there was insufficient capacity of current gas
production, and that there was a great need to tap additional
oil and gas fields and repair the remainder of the gas-oil
separation plants in the northern oil fields to provide
sufficient natural gas to meet the demands of the electric
power sector and the fertilizer plant.

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INFRASTRUCTURE SECURITY
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7. (C) The DG of NOC was very concerned about pipeline
security deficiencies, especially at the Al Fathah crossing
over the Tigris. He made multiple negative comments about
the Oil Security Battalions and thought that these units were
responsible for many of the attacks against the pipelines,
valves, and other oil infrastructure targets. He thought the
$100 million spent on hiring tribal forces to protect the
pipeline was a resort to blackmail and extortion from the
tribes along the pipeline from Kirkuk to Al-Fathah. "We need
a reliable military guard force with 24 hour-guards, 200-300
meters apart along the entire pipeline" if we want to keep
exporting oil, stated the DG of NOC. He said, "NOC can
produce the oil, but cannot guarantee its export."

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AL-FATHAH SECURITY OBSERVATIONS
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8. (C) The Al-Fathah oil pipeline-crossing site is currently
guarded by newly recruited members of the infrastructure
security forces. There were five observable guard sites near
the crossing; two tent sites on either bank of the Tigris
with approximately five guards each, and one tent with five
guards on the highway bridge next to the three pipelines,
which are laid across the surface of the bridge. These
guards each have one AK-47 and two magazines of ammunition.
There are no communications at or between the sites, nor is
there any visible command and control presence. There are no
defensive structures, and the guards appear to have had no
training and incomplete uniforms. Their families provide the
guards meals. There are additional forces guarding the
checkpoints approaching the crossing on the two main roads.
Concertina wire is laid near the pipelines on the east side
of the river.

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COMMENT
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9. (C) COMMENT: The Northern Oil Company Director General
is very upbeat about increased oil production from the Kirkuk
oil fields. The estimates of the Director General of NOC are
in line with the PCO projections. The security situation and
the inability to export oil due to lack of finished and
secured pipelines reduces income from the northern Iraqi oil
fields. If the production does reach 768,000 bpd by December
2005, and 500,000 bpd is available for export, this Kirkuk
crude, currently selling at $44.30 per barrel at Ceyhan FOB,
would earn Iraq $1.886 billion per quarter, or $7.545
billion per year. This amount of additional income for Iraq,
if actualized, could buy a lot more than just oil
infrastructure security. END COMMENTS



Jeffrey