OIL MINISTER QUIETLY TAKING STEPS ON FUEL PRICES,

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003939

SIPDIS

E.O. 12958: DECL: 09/23/2015
TAGS: ECON ENRG EPET KCRM MOPS MARR PGOV PINR PINS PREL IZ
SUBJECT: OIL MINISTER QUIETLY TAKING STEPS ON FUEL PRICES,
RAILS AGAINST OIL PIPELINE SECURITY

REF: BAGHDAD 3876

Classified By: Deputy Chief of Mission David M. Satterfield for reasons
1.4 (b) and (d).


1. (C) Summary: Minister of Oil Ibrahim Bahr al-'Ulum told
the Embassy September 21 that there is no ministerial support
for fuel price reform prior to the December elections, but
"quieter" efforts are underway to "condition" the Iraqi
public to new prices. These include sale of fuel for private
generators at mobile fuel stations at double the normal price
and barring commercial enterprises from purchasing kerosene
and liquid propane gas at subsidized prices this winter.
Despite repeated prodding, the Minister would not officially
confirm observed gasoline price hikes in Baghdad and
elsewhere. Al-'Ulum also blamed the recent series of
pipeline interdictions in the north on the Strategic
Infrastructure Battalions (SIBs),which he alleged are
perpetrating at least some of the attacks -- described as
very intelligent efforts to isolate the capital from fuel
supplies. He pleaded for Iraqi Army and MNF-I protection of
the 100 most vulnerable kilometers of pipeline. End Summary.

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Too Soon for Official Reforms, But Quiet Efforts Underway
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2. (C) In a September 21 discussion, Oil Minister Ibrahim
Bahr al-'Ulum told Economic Minister Counselor, IRMO Senior
Advisors and Econoff that he readily agreed that the GOI
needed to reduce fuel subsidies. EcMinCouns stressed the need
for the GOI to move as soon as possible on this issue, owing
to the disinclination of the American public and Congress to
provide substantial sums of aid when they were being hit with
historically high gasoline pump prices. Al-'Ulum replied
that the GOI knows it must raise prices -- but when and how
are at issue. Evading repeated prompting, al-'Ulum would
not/not confirm an official price rise from 20 ID/liter to 50
ID/liter for regular octane fuel, despite reports that it
went into effect in Baghdad September 17 (Comment: This price
hike was reportedly introduced on the sole authority of the
MO Director General for Distribution. End Comment). No one
in the GOI, "not even me," he said, supports making price
changes under the current government. He claimed that "no
one will vote for (him)," if he pushes the government on this.


3. (C) However, the Minister said he is introducing more
realistic pricing on a number of fronts. First, he noted
that he had initiated fuel sales from "mobile stations"
(container sales for generator use) at a cost of 100
ID/liter. Over fifty such stations are operating in Baghdad,
five each in Hillah, Basrah, Kut, and Najaf, and the Minister
said he is encouraging them elsewhere. In addition to
"conditioning" Iraqis to paying more for fuel, these mobile
stations address the overall shortage of points of sale, a
factor contributing to long lines at the pumps. He
eventually hopes that mobile fuel stations will serve 8%-10%
of the market.


4. (C) Al-'Ulum also was enthusiastic about winter
distribution plans for kerosene and liquid propane gas (LPG)
used for heating and cooking. As in previous years, private
citizens will be entitled, based upon family size, to a
certain number of liters of kerosene and bottles of LPG at
subsidized prices; but purchases beyond that ration will be
higher priced. In addition, commercial enterprises such as
restaurants and shops will pay "five to seven times" the
price set for household consumers. Al-'Ulum said that people
already have accepted a higher price for home delivery, and
he expected the small commercial enterprises to acquiesce -
more or less quietly - as well.

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Garnering Public Support for Market Liberalization
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5. (C) Asked about a draft law to liberalize fuel retailing,
al-'Ulum said that it is currently being examined by the
Ministry of Justice (MoJ) and discussed in the press. (Note:
The object is to increase private sector participation, not
free prices at this point. End Note) He expects the TNA to
adopt the law with little trouble in October. With the goal
of improving the odds of acceptance by the Iraqi public,
al-'Ulum told us that he has carefully crafted several polls.
He claimed, for example, to have gotten Iraqis to request
the return of the odd/even driving scheme to reduce fuel
demand, on the basis of survey dissatisfaction with the
status quo. The Minister added that he expects to introduce
successfully limited market liberalization, with favorable
polling information to bolster his case.

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Minister Demands Protection
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6. (C) Despite increases in production over the summer,
al-'Ulum maintained that Iraq has lost 250,000 barrels per
day (BPD) in northern exports in the last three weeks owing
to pipeline interdictions. He claimed that since the
Strategic Infrastructure Battalions (SIBs) were assigned to
guard the pipeline, there have been a constant series of
interdictions, often recurring within hours of a line being
repaired. The minister vehemently denied Iraqi Army and
Ministry of Defense (MoD) assertions that the breaks are a
result of "normal" circumstances or leaks.


7. (C) The National Energy Council (NEC) has been discussing
the problem for the last 45 days, al-'Ulum said, but he
predicted no positive results unless MNF-I and regular Iraqi
Army (IA) units become engaged. Stressing that the area he
has in mind for intensive attention is not vast (some "100
kilometers"),al-'Ulum insisted that the problem is local.
The SIBs are from the area, know all the repair crews'
movements, and are likely the perpetrators in many case, he
alleged.


8. (C) The Oil Minister said that there is a "clear plan" to
isolate Baghdad. Both the Daura and the Bayji refineries are
shut down because pipeline interdictions have blocked crude
oil supplies, although refined products are still moving by
truck. Al-'Ulum complained that there are "no clear
punishments" for perpetrators, so people view carrying out
interdictions as "good business." Al-'Ulum said that the
Kurdish Republic Government (KRG) recently had offered
Peshmurga to assist in protecting both the pipelines from
attack and the repair crews from the threats, kidnappings,
and killings to which they are increasingly subject.


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Iraqis Need to Study Abroad!
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9. (C) The Minister made a case for scholarships at
undergraduate and graduate levels, as well as what he called
"training positions" at U.S. petroleum firms. Claiming that
LukOil had provided Iraqis with 1,500 trainee positions over
three years and 150 scholarships at the masters and doctoral
level over the next two years, al-'Ulum urged the U.S. to
follow suit. He said that the current crop of deputy
ministers and director generals had been able to study and
train abroad in the 70's and 80's. They are all approaching
retirement age, however, and the "next generation" has had no
such opportunities.

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Comment
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10. (C) Neither the ITG nor Minister himself are ready to
publicly take on fuel subsidy reform. That said, al-'Ulum is
taking - publicly acknowledged or not - a series of quiet
steps to "condition" the Iraqi people to paying more for
fuel. He hopes this will pave the way for action by the next
government in 2006. Given the lack of public opposition to
his initiatives to date, his strategy appears to be sound,
but not as aggressive as we have advocated.


11. (C) Comment cont'd: On security, al-'Ulum was not
inclined to accept the KRG offer of assistance from the
Peshmurga, although he was adamant that there will be little
improvement in pipeline security unless both the IA and MNF-I
become even more actively engaged in protecting the most
vulnerable "100 kilometers" of the pipeline. We note that
despite the Minister's strong views, the issue of
responsibility for pipeline interdiction remains extremely
contentious. End comment.
Khalilzad