FUEL SHORTAGE REACHES BAGHDAD, ITG TAKES ACTION

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003550 SIPDIS E.O. 12958: DECL: 08/30/2015 TAGS: EFIN EPET ENRG ETRD PGOV TU IZ ECON SUBJECT: FUEL SHORTAGE REACHES BAGHDAD, ITG TAKES ACTION REF: A. BAGHDAD 3453 ¶B. ANKARA 4880 ¶C. MOSUL 0103 Classified By: ACTING DCM DAVID C. LITT FOR REASONS 1.4 (b) AND (d) ¶1. (C) Summary: A series of events culminating in the August 24 suspension of fuel shipments from Turkey to Iraq, due to the State Oil Marketing Company (SOMO)'s unpaid debt to Turkish firms, has caused a serious fuel shortage in northern Iraq that is cascading into Baghdad and points south. A drastic decline in domestic production in August is due largely to attacks on pipelines and a nationwide blackout on August 22 that led to a week-long break in fuel production at Iraq's three main refineries. As of August 28, none of these facilities is working at more than 50% capacity. Ministry of Finance officials were in Ankara August 28 negotiating a payment plan to address SOMO'S $845 million in arrears. Minister Allawi allocated $300 million to purchase fuel the same day. The Ministry of Oil (MOO) has requested an additional $1.7 billion to cover operating and import costs through the end of the year, and it will reportedly receive some - but not all - of its request. These 11th hour actions by the Iraqis appear to have been sufficient to allow Turkey to resume limited exports of fuel to Iraq August 29. End Summary. -------------- Fuel Shortage Unfolds -------------- ¶2. (C) A series of events in August has brought Iraq to the brink of a serious fuel shortage, cascading from north to south. A steady stream of attacks targeting oil pipelines has resulted in almost all processed oil products being moved only by truck for the last several weeks. Iraq's three refineries, working at capacity, only produce approximately 60% of Iraq's domestic fuel needs. ¶3. (C) This precarious situation was further exacerbated when successful insurgent attacks on the 400 KV electricity lines induced a major blackout in the north August 20 and a second nationwide blackout August 22, causing the entire generation system to trip and the country to go dark. While the distribution lines were quickly repaired, the generation plants required a gradual return to service over some 12-24 hours. Power was restored to essential services within about six hours, and to consumers over the next 36 hours. Oil refineries, forced to shut down completely when the electricity went down, have not yet returned to full production due to the need for gradual ramping up of operations so that systems are not overloaded. As of August 29, no refinery is operating at more than 50% of capacity. The power outage, combined with backups in distribution, has left domestic production of fuel at a virtual standstill. ¶4. (SBU) On August 24, Turkey halted fuel exports into Iraq, demanding that Iraq make good on arrears owed by the State Oil Marketing Organization (SOMO) - by some estimates as high as $1 billion - before shipments would resume. MOF confirmed that, as of August 29, SOMO's debt to Turkish companies was $845 million. ¶5. (SBU) MOO estimated August 28 that Ninewa province has no more than a two-day supply of benzene on hand; Baghdad has four. The shortage hit the north first, because Bayji and Doura refineries send their refined products south; the north is supplied exclusively by imported fuel, mostly from Turkey. The lack of production, limited ability to transport what little is produced, and the dearth of imports mean that the shortage will continue to spread southwards. The MOO is addressing the first two issues, but requires time, money, and sufficient security resources to protect work crews and the pipelines themselves. The short-term answer is fuel imports, which - even with domestic production at full capacity - are still required to meet approximately 40% of Iraq's demand for fuel. -------------- Iraq Paying Up? -------------- ¶6. (C) Following a contentious August 28 meeting of the National Energy Council (NEC) reported septel, MoF Allawi allocated $300 million for payments to Turkey for fuel. This money addresses only a fraction of the outstanding arrears, about which an MOF team was reportedly still negotiating in Turkey. MOF officials told us August 28 that MOF was negotiating with the Turks in good faith. Our MOF interlocutors said they believe that an agreement and payment plan for the arrears will be reached and fuel exports will resume to Iraq. On August 29, 892,700 liters of benzene and 664,030 liters of diesel entered Iraq through Habur Gate, after five days of zero imports of benzene and three days of zero diesel imports. -------------- Future Plans -------------- ¶7. (C) MOO has requested an additional $1.7 billion budget request to MOF to finance operations and imports through year's end. MOF officials tell us that, while the full request is unlikely to be met, MOO will receive additional financing. Allawi has maintained a tough line with MOO because SOMO persists in signing contracts for imports for which it cannot pay, in a process that bypasses the government altogether. Rather than requesting additional monies to supplement the $200 million per month allocated for fuel imports in the 2005 budget, SOMO has apparently been acting independently, signing contracts at will to meet ever-rising demand in Iraq (Note: SOMO is spending approximately double that. End Note). With the precarious state of Iraq's domestic production and the vulnerable state of its critical infrastructure, MOF appears to be working hard to ensure a steady stream of imports as an essential element of Iraq's fuel security. Khalilzad