GOI SHORT AND MEDIUM TERM PLANS TO ADDRESS THE

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002965 SIPDIS SIPDIS E.O. 12958: DECL: 08/13/2016 TAGS: ECON EPET ENRG MOPS MARR PGOV PREL IZ SUBJECT: GOI SHORT AND MEDIUM TERM PLANS TO ADDRESS THE FUEL SHORTAGE REF: BAGHDAD 2933 Classified By: Deputy Chief of Mission Daniel Speckhard, for reasons 1. 4 (b) and (d). ¶1. (C) Summary: The Ambassador and Deputy Prime Minister Barham Saleh jointly chaired a meeting August 12 to identify issues and concrete steps Iraq can take to address the immediate fuel crisis. National Security Advisor (NSA) Mowafuq Rubaie said a security operation similar to the Baghdad Security Plan is necessary in the Bayji to Baghdad corridor, adding that pipeline security in the al-Fathah-Howijah area would not improve until the economic incentives for damaging the pipeline are addressed. The GOI, with U.S. Mission support as appropriate, is addressing the following issues: -- Contacting ministerial counterparts in Jordan, Turkey, Saudi Arabia and Kuwait urging them to facilitate Iraqi requests to purchase and ship additional fuel supplies; -- Re-assess government fuel distribution to state-owned enterprises and ministries; -- Develop a security plan for the al-Fathah-Howijah area; action required to end corruption there; -- Ensuring passage of fuel import liberalization legislation as soon as the Council of Representatives reconvenes in early September; establish registration and implementing procedures now on the assumption that it will pass; -- Doubling the funds available for fuel for two months; ensure funds are readily available; -- Ensuring new letters of credit are opened without delay to facilitate new fuel purchases; -- Ensuring better coordination between MoF, MoI and MoO to reduce fuel truck delays at the border, in particular Manzuriyah; -- Increasing fuel price as part of a package to include better supply and improved social safety net. -- Assessing the best way of improving Iraq's refining capacity over the medium term; develop an action plan to carry it out; -- Repairing the pipelines, ensuring that Bayji and Daura refineries work at the highest capacity possible. End Summary. ¶2. (SBU) At the Prime Minister's request, Deputy Prime Minister for Economic Issues Barham Saleh convened a meeting August 12 to develop a concrete action plan to address Iraq's serious fuel shortage. DPM Saleh was joined by National Security Advisor (NSA) Mowafuq Rubaie, Minister of Finance (MoF) Bayan Jabr, Minister of Electricity (MoE) Karim Wahid, and Minister of Industry and Minerals (MIM) Fawzi al-Hariri. MoE Karim spoke on behalf of Minister of Oil (MoO) Hussein Shahristani, who is currently in Iran. Senior Embassy staff accompanied the Ambassador. -------------- -------------- Urgent Need to Address the Economics of Insecurity -------------- -------------- ¶3. (C) MoE Karim emphasized poor pipeline security in the area between Fathah to Howijah as a primary concern. Tribes in the area have agreed to protect power lines but refused MoO Shahristani's request to protect the pipeline network, which is frequently attacked. When the pipeline nexus is breached, crude cannot reach the Bayji refinery and products cannot securely exit the refinery. In light of repairs completed on the 26" crude line August 11, MoE Karim had advised the North Oil Company (NOC) to try to rebuild a three-day reserve of crude oil immediately, and to ensure that Bayji refinery stays operational should the pipeline again go down. ¶4. (C) DPM Saleh called Howijah a "security black hole," alleging that senior Ba'athist leaders are operating in the area, producing car bombs destined for Kirkuk. NSA Rubaie agreed, adding that the entire local economy of some five villages around Howijah profits from the trucking that becomes necessary when the infrastructure is down. On a flight over al-Riyadh August 11, Rubaie said he was struck how this "poor" village is now crowded with new homes, each with four or five new cars parked out front. Large tanks in the yards ensure that fuel is always available to local inhabitants, who divert as much as they can for their own profit. Rubaie said the situation in other nearby villages is the same. Rubaie said the problem is much more than just security in this area, adding that the GOI is not tackling BAGHDAD 00002965 002 OF 003 the rampant corruption there. -------------- "I Do Not Want These SIBS" -------------- ¶5. (C) DPM Saleh said that paying off local people to protect infrastructure had proven ineffective in the past. He warned that it would lead to a cycle of increasing payments to address increasing insecurity. NSA Rubaie added that the very troops assigned to protect the infrastructure are complicit in its destruction. The Strategic Infrastructure Battalions (SIBs) were all recruited from tribes living in the areas they are assigned to protect. According to Rubaie, there is general agreement that several companies are "totally not trusted," and there is an entire battalion (NFI) that "is not right." In fact, Rubaie said, the latest explosion on the 26" crude line occurred between two manned guard towers and, in light of the size of the blast, required two to three people at least an hour to prepare the explosives. SIB commanders routinely claim that leaks are to blame despite expert assessments to the contrary. -------------- GOI Assigns Action -------------- ¶6. (C) Turning to specific things that can be undertaken immediately, DPM Saleh said that senior GOI officials should speak directly to their Turkish counterparts to address the limited amount of fuel coming into Iraq via Habur Gate. Senior GOT officials have agreed to help Iraq, Saleh said, but lower level functionaries fail to comply. The GOT accuses Iraq's Kurds of being unhelpful, Saleh said, and undertook to talk to KRG officials about Turkish concerns. He asked that the U.S. follow up Iraqi calls to their ministerial counterparts in Turkey via our embassy, and sought U.S. support with governments in Saudi Arabia, Jordan, and Kuwait as well. The Ambassador agreed to relay the request (reftel). PM Maliki told the Ambassador subsequently that he had been promised "full support" in conversations with Turkish PM Erdogan, King Abdul Aziz and Crown Prince Sultan of Saudi Arabia, and the Emir of Kuwait. The PM also said that MoO Hussein Shahristani is currently in Iran attempting to resolve transportation and border issues to facilitate fuel shipments through Iran to Iraq. ¶7. (C) Minister of Finance Jabr said that the Council of Ministers decided the week of July 31 to double Iraq's monthly fuel expenditures from $213 million/month to $416 million/month. Jabr stressed that these funds will come from money budgeted for fuel purchases in November and December. Regular payments of $72.5 million will continue on schedule until Iraq's agreed-upon debt to Turkish shippers is fully paid. DPM Saleh agreed to aggressively follow up to ensure additional letters of credit are quickly opened to fund new purchases, a process that often takes as long as two weeks. We urged the GOI to stick to its plan of negotiating resolution of the disputed Turkish arrears in August. ¶8. (C) Recognizing the importance of unleashing private sector businesses to help fill demand, DPM Saleh said that he intends to see the fuel import liberalization legislation passed "the very first day" of the new session of parliament -- a victory he hopes to bring to the IMF simultaneously with the news of Iraq's budgetary transgressions. Anticipating the law's rapid passage, Saleh agreed to immediately begin drafting regulations and licensing requirements, thereby shaving off an estimated two months before the first shippers can be licensed and fuel can begin to move. Future fuel price increases must coincide with increased supply, in Saleh's view. Jabr disagreed, saying that the people are already paying $3.80/gallon for fuel on the black market in Baghdad and more than four times that in the Kurdish areas. ¶9. (C) The GOI agreed with us that Iraq's state-owned enterprises (SOEs) still receive an inordinate amount of fuel, much of which is sold on the black market instead of being used in (in some cases) defunct factories. Minister of Industry and Minerals al-Hariri protested that there were 180,000 jobs at stake in Iraq's SOEs, and that SOEs would function better if they got more than the fraction of their fuel and electricity needs than they currently receive. He backed down, however, after admitting that he too understood the state sector was rife with individuals who siphon off official fuel supplies for sale. Al-Hariri acknowledged, however, that no one had a real grasp of the scope. The BAGHDAD 00002965 003 OF 003 Ambassador agreed to DPM Saleh's request for Embassy assistance in assessing the problem and developing an action plan to distribute effectively and equitably the limited fuel supplies. KHALILZAD