Identifier
Created
Classification
Origin
06BAGHDAD48
2006-01-06 14:41:00
CONFIDENTIAL
Embassy Baghdad
Cable title:  

OIL SECTOR IN CENTER OF CONFLICT

Tags:  ECON EPET ENRG PGOV KCOR PINR EFIN IZ PO TU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 000048 

SIPDIS

RELEASABLE TO MNF-I

E.O. 12958: DECL: 01/05/2016
TAGS: ECON EPET ENRG PGOV KCOR PINR EFIN IZ PO TU
SUBJECT: OIL SECTOR IN CENTER OF CONFLICT

REF: A. BAGHDAD 0013

B. EMAIL EXCHANGES WITH ANKARA
GOLDBERGER-YOUNG-KIMMEL

C. BAGHDAD 0020

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

C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 000048

SIPDIS

RELEASABLE TO MNF-I

E.O. 12958: DECL: 01/05/2016
TAGS: ECON EPET ENRG PGOV KCOR PINR EFIN IZ PO TU
SUBJECT: OIL SECTOR IN CENTER OF CONFLICT

REF: A. BAGHDAD 0013

B. EMAIL EXCHANGES WITH ANKARA
GOLDBERGER-YOUNG-KIMMEL

C. BAGHDAD 0020

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


1. (C/REL MNF-I) SUMMARY: Deputy Prime Minister (DPM)
Chalabi, who is now the acting Minister of both Oil and
Finance, hosted a status review January 4 of energy
infrastructure protection. Fuel convoys were reported to be
delivering fuel to Baghdad. The convoys had been attacked
multiple times with casualties, but still managed to deliver
15 million liters (4 million gallons) of fuel to Baghdad.
Most pipelines to and from Bayji remained interdicted as of
January 4; however, DPM Chalabi is forming rapid repair teams
for deployment from Ministry of Oil personnel. Chalabi's
priority energy issues for Iraq are to export oil and to
deliver energy to the people of Iraq. Chalabi told us the
Kurds are withholding customs revenue and making contracts
improperly for energy projects. Chalabi acknowledged the USD
800 million debt to Turkish fuel suppliers that may again
slow product deliveries from Turkish sources. Chalabi said
he will travel to Poland. END SUMMARY.

--------------
MOVEMENT OF FUEL
--------------


2. (SBU) DPM Chalabi met the Steering Group for
Infrastructure Security on January 4, 2006 to discuss the
fuel crisis situation in Iraq. The meeting was attended by
the Acting Commander of MNF-I LTG Houghton, A/DCM, Deputy
Commander of MNC-I, MNF-I STRATOPS, IRMO Director of
Operations, and ECONOFF.


3. (C/REL MNF-I) Chalabi reported a 68-vehicle government
fuel truck convoy moved from Bayji to Baghdad on January 4.
The convoy had been attacked multiple times with casualties
and a few trucks destroyed, but it still managed to deliver
15 million liters (4 million gallons) of fuel to Baghdad. 35

additional contract civilian fuel trucks were en route back
to Bayji to load fuel and return to Baghdad, and 50 more
contracted tanker trucks were expected to be dispatched by
January 5. Chalabi's intention is to lease 300 trucks, with
an indemnification clause in the leases for damage to the
vehicles, and run convoys of 100 trucks per day to and from
Bayji until the 22-inch pipeline is repaired. (NOTE: MNF-I
reporting suggests these attacks are directly linked to the
fuel price increases and the resulting loss of profit margins
by organized criminal and terrorist elements that benefited
from smuggling and black marketing operations of subsidized
fuel. END NOTE.) Chalabi stated the price rises had
generated the
attacks because the smugglers and terrorists now had to pay 5
million Iraq Dinars (USD 3500) for a loaded truck of fuel and
could only sell the load for 8 million Iraqi Dinars (USD
5,500). Given the cost of the bribes they had to pay along
the way, profits were now minimal. (NOTE: Our calculations
are somewhat different, but our conclusion is the same. END
NOTE.)

--------------
REFINERIES AND PIPELINES
--------------


4. (C/REL MNF-I) Chalabi informed us that intimidation and
threat levels inside Bayji refinery are no longer an issue.
He provided his personal assessment after flying to visit
Bayji on January 3. He opined that the impact of government
and Iraqi Security Forces attention to Bayji had led to the
improvement in the situation there. Bayji Refinery has begun
startup of one process train and will begin the remaining
trains over the next few days. January 8 was estimated to be
the first operational day of production, as the fuel storage
tanks should be available for new product and the refinery
system would be brought on line. The 22-inch product line
from Bayji to Baghdad is still not repaired from a leak
caused by old bullet holes in the pipeline, but he estimated
that repairs would be finished soon. Chalabi reported
repairs were ongoing on the 26-inch pipeline between Kirkuk
and Bayji, as well as on the 40-inch pipeline. (NOTE: The
26-inch line is reported to be operational as of January 5.
END NOTE.) The 18-inch crude oil supply pipeline to Daura
was not yet repaired. Chalabi has ordered crews from other
regions to support these critical pipeline repairs.


5. (C/REL MNF-I) The Ministry of Oil (MOO) has developed a
plan for emergency pipeline repairs. The ministry will now
provide five emergency repair crews which will be deployed to
military camps. These 20-man crews will have their own
vehicles, equipment, security, and live at the military
camps. They will be paid 300 percent of their salaries as an
incentive for manning of the crews. MNC-I will coordinate
with MOO for the deployment, hosting, and security of these
crews. The PJCC (Provincial Joint Coordination Center) will
remain the focal point for all such coordination. Chalabi
complained that he could not expeditiously get his repair
crews to the repair sites because of all the time delays at
checkpoints, and he pointed out that the terrorists seemed to
be able to rapidly move through those same checkpoints to
destroy the pipelines. His specific words were, "My repair
crews cannot move through checkpoints, but terrorists can."

-------------- ---
FUEL PRICE INCREASES AND A FUTURE MEDIA CAMPAIGN
-------------- ---


6. (C/REL MNF-I) Chalabi asserted there would be no more
price increases for fuel for the next 6-7 months. He said
the government had increased gasoline fuel prices higher than
was required by the IMF, and he did not expect more increases
to be acceptable in the near future. (COMMENT: Chalabi
claimed no IMF-mandated increases would be necessary during
that period. In fact, the IMF Stand By Agreement calls for
further price hikes on March 31 and June 30, 2006. The DPM
may not be aware of those commitments, or he may be echoing
the idea raised earlier by Finance Minister Allawi to combine
the 1st and 2nd quarterly increases to avoid constantly
revisiting the price hike issue. END COMMENT.)


7. (SBU) There have been demonstrations across Iraq
concerning fuel shortages, and these shortages are now linked
in the public mind with the fuel price increases, due to the
critical shortage of fuel at any price. Chalabi concurred
with our suggestion that the Iraqi Government should launch a
media campaign to explain the reasons for the current price
increases and noted he intended to take the following steps:
1) Prepare a paper on subsidies for the press, 2) Publish the
reasons for the price increases in the newspapers, 3) Inform
the press of the level of imported fuel and the costs of
these imports to the Iraqi government, 4) Inform the public
about the reductions of oil exports and lost income, and the
resulting impact of lowering the budget revenues for Iraq in

2006. We also suggested he take an opportunity to brief
Western and Arab journalists on the fuel and subsidy
situation, perhaps at a refinery, so they could assist in the
education of both Iraqis and the rest of the world on the
negative economic situation caused by fuel subsidies. (See
Ref C and also septel, An Iraqi Public-Education Strategy for
Economic Reform.)

-------------- --------------
IMPORTS AND PRICE INCREASES HELPING TO SOLVE FUEL CRISIS
-------------- --------------


8. (C/REL MNF-I) Chalabi told us the key survival mechanism
for the current fuel crisis in Baghdad was the flow of 3
million liters of imported fuel per day via pipeline from the
port of Umm Qasr. These imports supplement the limited
production of fuel at the Daura refinery in Baghdad. He also
told us that the increases in prices had reduced demand for
fuel in Baghdad from 10.5 million liters (2.7 million
Gallons) per day to 6 million liters (1.5 million gallons)
per day.

--------------
HFO TO TURKEY AND DEBT PAYMENT
--------------


9. (C/REL MNF-I) Chalabi suggested that he would like to
change the contracts of the Turkish firms which deliver
refined fuel to Iraq, adding a requirement to accept Heavy
Fuel Oil (HFO) from Bayji refinery to offset the price of the
refined fuels and to reduce volume of HFO stored at the
refinery. The HFO fills much of the storage space at Bayji
and needs to be exported or sent to be burned in power
generation plants. (Note: Interdictions of electrical lines
from Bayji have reduced the power demand, thus lowering usage
of HFO at the Bayji thermal units. End Note.) Chalabi
opined this take-away of fuel oil would be a good method to
get rid of the HFO from Bayji and perhaps make additional
money through the process. His goal was to move 4500 tons of
HFO per day to Turkey. At that volume of shipments, 15 days
could clear out the backlog of HFO at Bayji refinery. He
acknowledged that the Iraqis would have to price the HFO at
an attractive price level as an inducement to the trucking
companies. (NOTE: It is not likely that fuel haulers will
backhaul HFO to Turkey as it contaminates the tanks and they
cannot haul clean fuel without extensive cleaning to remove
the HFO from their tanks. Use of rail, if available, would
be preferred. END NOTE.)


10. (SBU) We asked Chalabi about the GOI paying the imported
fuel debts to Turkey (Ref B). He said that the $800 million
was over one-third of the total funds left in Iraqi accounts.
He did not say if he was going to pay the bill or not, but
he indicated that the bill was very high.

--------------
INTELLIGENCE SUPPORT KEY
--------------


11. (C/REL MNF-I) Chalabi was concerned about the lack of
viable intelligence on the saboteurs, terrorists and
smugglers. He said we needed to identify the people involved
in the intimidation, smuggling, and other illegal activities,
arrest them, and bring them before the court. He requested
MNF-I support on intelligence. He said he would set up a MOO
intelligence unit to support protection of oil infrastructure
and operations.

--------------
WHO IS RESPONSIBLE FOR SECURITY COORDINATION?
--------------


12. (C/REL MNF-I) Chalabi said he was uncertain who is
responsible for coordination among the various security
forces. He explained that during his Bayji visit he had
deliberately asked that the Salah Ad Din Police, the Oil
Protection Forces, and the 4th Iraqi Army all be present, to
support the Bayji refinery security problem and to provide
protection for the fuel convoys to Baghdad. He said it
became evident that no one present knew who was in charge.
There needed to be a better system for national coordination.
MNF-I responded that it was responsible for the coordination
of security for infrastructure, but that the Iraqi ministries
were responsible for the fixed installation security at their
facilities, such as power plants and refineries. Chalabi
said that the Ministry of Electricity could not provide
security for the electrical lines and the Ministry of Oil
could not provide security for the oil pipelines or for fuel
convoys. Chalabi added that Ministry of Interior (MOI) could
not support infrastructure security effectively at the
present time. Chalabi then concluded that his priority for
protection was oil exports and oil products, then electricity
distribution. He argued that government-provided electricity
was important, but, as long as fuel was available, the public
could provide its own electricity from generators if the grid
were down. Chalabi observed the highest threat to the energy
infrastructure is the vulnerability of linear infrastructure,
as the fixed facilities were well protected.

--------------
ENERGY CHALLENGES FOR CHALABI
--------------


13. (C/REL MNF-I) Chalabi informed the steering group that
his priority issues were 1) to export oil, and 2) to deliver
energy to the people of Iraq. He said refined products were
in shortage across the country. The electricity crisis was
part of the fuel crisis. He said "we cannot use all of our
new gas turbines because we do not produce enough gas, the
thermal plants are outmoded, decrepit and inefficient, and we
cannot even fix them properly because of the security
issues." He also alluded to a few corruption issues in the
Ministry of Electricity involving construction contracts.

--------------
CUSTOMS AND LEGAL PROBLEMS IN KURDISTAN
--------------


14. (C/REL MNF-I) Chalabi related that there was an added
problem in Kurdistan with the regional government. He said
the PUK/KRG were collecting customs moneys on the border with
Turkey and not giving them to the government of Iraq. He said
this was a huge loss of over USD 700 million from the Iraqi
national budget. He also related that the Kurds were signing
BOO (Build, Own, Operate) contracts for electrical generation
plants in Irbil and Sulamaniyah. His concern was that there
might be implicit legal obligations of the national
government to support these contracts, signed by a regional
Iraqi entity without coordination with the national
government.

--------------
UPCOMING TRAVEL FOR CHALABI
--------------


15. (C/REL MNF-I) DPM Chalabi said he would be leaving in a
few days to go to Poland. Chalabi referred to Polish
interest in participating in the Iraqi oil industry and
discussions on the prior purchase of old military equipment
from Poland by the Ministry of Defense.
KHALILZAD