IRAQI OIL SECURITY IN DISARRAY

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 005153

SIPDIS

RELEASABLE TO MNF-I

E.O. 12958: DECL: 12/28/2015
TAGS: ENRG EPET EFIN MASS MOPS IZ
SUBJECT: IRAQI OIL SECURITY IN DISARRAY

REF: BAGHDAD 5132

Classified By: Acting Deputy Chief of Mission David C. Litt for Reasons
1.4 (b) and (d)


1. (C/REL MNF-I) SUMMARY: The Steering Group for Critical
Infrastructure Integrity assessed the security problems in
the oil infrastructure and fuel product distribution systems
across Iraq. Intimidation of Ministry of Oil (MOO) employees
continues to be a problem for both product distribution and
repairs to energy infrastructure. Intimidation of the
refinery and distribution crews at Bayji refinery and the oil
pipeline repair crews is the most immediate problem.
Intimidation and repair problems have cut off the crude oil
and fuel product flows from the northern fields to Baghdad
and exports to Turkey and kept fuel supplies across the
nation at critically low levels. DPM Chalabi was quite upset
at the ineffective repair capacity of the MOO, the security
of the pipelines, and the ineffectiveness of the Oil
Protective Forces. Chalabi interrupted the meeting
frequently with telephone calls to key members of the
Ministry of Oil to attempt to resolve the problems and find
solutions. END SUMMARY.


2. (SBU) Deputy Prime Minister (DPM) Ahmed Chalabi chaired an
impromptu meeting of Steering Group for Critical
Infrastructure Integrity December 28, 2005 to receive an
update of infrastructure security and repair actions and the
distribution security problems at Bayji refinery. The
Minister of Oil (MOO) Director General for the Oil Protective
Forces Hassan Thwani and MOO Director of Operations Major
General Ayad Jassan, Acting DCM David Litt, Deputy Commander
of MNC-I MG Parker, IRMO Director of Operations, MNF-I
STRATOPS, and ECONOFF attended.

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BAYJI REFINERY SITUATION REVIEWED BY DPM
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3. (C/REL MNF-I) The Director General of the Oil Protective
Forces Hassan Thwani reported to DPM Chalabi that the
situation at Bayji refinery was "not good." Hassan explained
that the armed forces in the vicinity of Bayji refinery are
"terrorists who benefit from the smuggling of oil products".
These forces have threatened both refinery employees and the
drivers of the MOO fuel tankers with death if they support
the distribution of refined oil products. The threats are
delivered inside the grounds of the refinery, as well as
outside.


4. (C/REL MNF-I) Chalabi said the 36 tanker trucks sent from
Baghdad on December 27 (reftel) were not loaded with fuel and
did not return to Baghdad, but rather are all currently
locked within the Bayji refinery protective wire perimeter,
and the drivers have returned to Baghdad. On December 26,
nine tankers were sent out for local deliveries of fuel, and
all were reportedly turned back by armed blockaders. On
December 27, the nine tankers again attempted to depart;
eight were turned back and one passed through the blockade.
These fuel convoys were reported to have been guarded by the
Oil Protective Forces (OPF); however, IEDs were set off,
injuring people and turning back the convoys. The morale of
the drivers was reported to be low. All civilian trucking
firms also have halted deliveries from Bayji refinery, and
thus the refinery is effectively closed.


5. (C/REL MNF-I) The DGs requested that the DPM support their
request to MNF-I for aerial reconnaissance over Bayji to
assess the situation. Additionally the DGs requested MNF-I
forces to help guard the convoys and patrol the route to
Baghdad. We responded that guarding a convoy solves the
problem for only one day. The heart of the matter involved
criminal activities at Bayji that Iraqi authorities must deal
with. The DPM agreed and told the DGs he needed the names of
the perpetrators and those threatening the MOO employees at
Bayji, so that they could be arrested and prosecuted under
appropriate laws. (NOTE: On December 27 Chalabi had
informed us that he had called the Governor of Tikrit and
asked the Governor that the police forces be deployed to
solve the problems at Bayji. This action does not appear to
have occurred. END NOTE.) The DGs ended their report to the
DPM by stating the OPF cannot handle the situation and they
needed MNF-I/Coalition support. Specifically the DGs
requested support from the 4th and 9th Iraqi Army Divisions,
as they strongly stated the Ministry of Defense support was
required. Chalabi reiterated that security aspects of this
problem would be taken care of, but they and other Ministry
officials had to start by doing their jobs.

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CONFRONTATION AT BAYJI CAUSED BY PRICE RISE FOR FUEL
-------------- --------------


6. (SBU) The DPM explained that there was not/not a
groundswell of revolt against the new prices for fuel across
Iraq; however, "the threats and the blockade of the Bayji
distribution system came as a direct result of the fuel price
increases instituted by the government to reduce subsidies
and discourage smuggling and black market activities in Iraq.
The rise in cost of a truckload of fuel from $400 to $4000
has greatly reduced the profitability of the chain of
smuggling and black market operations. The resale value of a
truckload of fuel remains at $8000." Thus price increases
had greatly reduced the profit margins for smuggling and
black marketing. The DPM stated that the government had done
the right action in raising prices of fuel and would hold
firm on the price increases. The DPM commented there were
continued discussions in Basra over the fuel price increases.
He said that the A/DCM's information from Basra that the
governor would enforce the price increases January 1 was
consistent with his information.

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FUEL SUPPLIES
--------------


7. (SBU) The DPM stated that there were 80 million liters (20
million gallons) of fuel in the storage tanks at Bayji
Refinery, while Baghdad and the rest of the country were
almost out of fuel. He said Bayji was capable of producing
15 million liters (almost 4 million gallons) of fuel per day,
and this production could save Iraq millions of dollars per
day over the costs of imported fuel. Chalabi said that,
fortunately, demand in Baghdad had dropped from 10.5 million
liters (2.75 million gallons) per day to 5.5 million liters
(1.5 million gallons) per day. If the fuel from Bayji could
be transported to Baghdad it would solve supply constraints
in the capital and show that the government was a responsible
and capable entity. He told the DGs from the MOO that "This
is our exam-- can we Iraqis take care of our problems?"

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INFRASTRUCTURE PROTECTION AND PIPELINE REPAIR STATUS
-------------- --------------


8. (SBU) The 22-inch product pipeline from Bayji refinery to
Baghdad was suggested in discussion as the more important
alternative to the trucking of fuel to Baghdad. This is the
pipeline that was found to be leaking in the vicinity of the
Thar Thar Canal on December 25. Fixing this line must be a
priority. The DPM said repairs were underway; however, the
repair crews were not scheduled to complete it in the near
future, and intimidation of the repair crews had been
reported. The DPM called the DG of the Oil Pipeline Company
and directed him to bring in crews from "outside the area" to
complete the repairs on the 22-inch product line to Baghdad
as well as to repair the newly broken 26-inch Kirkuk-to-Bayji
pipeline, which provides oil feedstock to Bayji refinery as
well as for northern exports. (NOTE: The 26-inch pipeline
was the only current path for moving oil from the Kirkuk
oilfields to Bayji or for export. This pipeline was reported
leaking on December 26 and on fire in the area near the
break. It is expected that it will take several days for the
pipeline to drain before repairs can begin. Until the
pipeline is repaired, no oil will flow out of Kirkuk by
pipeline. END NOTE.) "Out of area" crews were requested to
avoid intimidation of repair crews from the local areas. The
local repair crews will no longer go out and repair the
pipelines. We suggested it would also be important to repair
the crude oil pipeline to Daura refinery, as it is operating
at only 30 percent capacity due to a lack of crude oil
normally supplied by the 18-inch line from the south.


9. (C/REL MNF-I) The DGs from MOO complained to the DPM that
some officials in the PJCCs (Provincial Joint Coordination
Centers) were not responsive to their requests for security
support for repair operations. The DPM suggested that the
problem may be at the Ministry of Oil; the leadership does
not care about doing their job, and they are not being held
responsible or accountable for the tasks of repairing the
pipelines. This was clearly the case from the various phone
calls Chalabi had made in our presence to the relevant MOO
officials. The DPM informed the participants at the meeting
it was embarrassing not to be able to solve this problem
internally within the Ministry of Oil. Chalabi then told the
OPF DG that the Iraqi MOD must assist in solving the security
problems of the oil infrastructure protection.

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REPAIR PRIORITIES
--------------


10. (C/REL MNF-I) The DPM then prioritized the tasks for
repair of the pipelines. First priority is the 22-inch
product pipeline from Bayji to Baghdad. The second priority
is to fix both the 26- and 40-inch pipelines from Kirkuk to
Bayji, thus providing some redundancy on that critical
corridor. The final high priority repair is the 18-inch
crude oil pipeline to Daura refinery south of Baghdad. The
DPM directed double pay for the repair crews who are deployed
to these critical sites. MNC-I deputy commander said that
security for the repair crews was in place; the PJCC should
coordinate the security requirements for each crew as it is
identified.

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MOD INVESTIGATION REPORT
--------------


11. (SBU) Chalabi reported to the committee that the MOD had
completed an investigation led by General Abadi on the
director of the Strategic Infrastructure Battalions (SIBs) Al
Jabouri. Al Jabouri was charged with the illegal activities
of skimming 900,000,000 Iraqi Dinars (USD 600,000) from the
salaries and life support funds of the SIBs. Al Jabouri
would be prosecuted and ordered to repay the stolen funds.

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EXPORT AND IMPORT CONCERNS AT THE PORT
--------------


12. (SBU) Chalabi informed the committee that the GOI had
decided to buy three additional tugs to use in the southern
port of Basra. These tugs would support the requirements of
maneuvering ships in adverse weather, enabling better use of
the export oil facilities. They are often shut down at
present during bad weather due to a lack of tug boat support
to move ships safely in and out of berths. Chalabi also said
the addition of these tug boats would reduce the risk
premiums foregone by the buyers of Iraqi oil, thus increasing
the revenue for the GOI. He also said the GOI had
successfully broken the back of the gangs which had
controlled the wheat shipments at the port-handling
facilities in the south at Umm Qasr.

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EXPANSION OF OIL PRODUCTION
--------------


13. (SBU) Chalabi emphasized to the committee the importance
of bringing 300 additional oil wells in the Basra region on
line. He said that bringing these wells on line would add an
additional 600,000 barrels of oil per day to Iraqi exports.
These additional exports were required due to the falling
price of oil and his concern for stability of the GOI budget.


14. (SBU) We suggested that privatization of the oil sector
and encouraging foreign direct investment in Iraq would also
increase oil production and revenues for the GOI. We
explained to the DPM that foreign firms, including U.S.
companies, would be likely to invest in Iraq even with the
ongoing security problems if the legal framework for
investment was established. Chalabi agreed, saying the
Council of Ministers had forwarded to the National Assembly a
law authorizing the privatization of downstream oil
activities in Iraq, especially retail sales and refining
operations. The legislation approved by the Cabinet had not
passed the legislature because of the adjournment for the
election. However, the budget for 2006 was based on passage
of the privatization of the downstream oil sector law. (NOTE:
Chalabi did not specifically mention any progress on a
general petroleum law. END NOTE.)

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CONCERN FOR OIL EXPLORATION AND FAIR PLAYING FIELD
-------------- --------------


15. (SBU) Chalabi described his concern for maintaining a
fair playing field for foreign investors. He said 38
contracts had been let by the previous government for oil
field and reservoir studies. The firms which had these study
contracts would have a very unfair advantage over other firms
competing in the Iraqi upstream oil sector. He stated the
firms which had this knowledge would know exactly what
reserves were in those fields they had studied and would not
share that information with competitors. This would make for
unfair competition.


16. (SBU) Chalabi closed the meeting by saying the Bayji
issue must be rapidly solved. It was agreed by the committee
that a helicopter would be provided on December 29 for an
assessment to be made on-site at Bayji refinery by an Iraqi
team consisting of the DGs from the MOO and a representative
from the MOD. Chalabi said he needed support from MNF-I and
that visible ground presence in the vicinity of Bayji would
be of great assistance. A follow-up meeting was designated
for January 4, 2006.

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COMMENT
--------------


17. (C/REL MNF-I) COMMENT: The infrastructure security
meeting was a reflection of the frustrations of the DPM with
the state of his own oil ministry's capabilities and
commitment. He openly discussed and characterized the
weaknesses of the Ministry of Oil senior management. His
disappointment over the ability of the GOI to commit reliable
repair crew assets to the critical infrastructure and to
coordinate security and repair operations was evident. END
COMMENT.
KHALILZAD