OIL SECTOR IN CENTER OF CONFLICT

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