IRAQ ENERGY UPDATE -- THE INADEQUACY OF MUDDLING

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000611

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/27/2016
TAGS: ECON EFIN ENRG EPET MOPS MARR PGOV PREL TU IZ
SUBJECT: IRAQ ENERGY UPDATE -- THE INADEQUACY OF MUDDLING
THROUGH

REF: A. (A) ANKARA 0775

B. (B) KIMMEL-YOUNG-GOLDBERGER-REID EMAILS 2/06

C. (C) YOUNG-DELARE E-MAIL 2/21/06

D. (D) BAGHDAD 495

Classified By: Economic Minister Counselor Tom Delare for reasons 1.4 (
b) and (d).



1. (C) SUMMARY: Fuel supplies are very low across the
country and are critically so in Baghdad. Imports of refined
products and domestically produced fuels both dropped during
the first two months of 2006. Turkey and Iraq have come to
agreement on arrears payments and, in time, the resumption of
imports. Some key oil pipelines remain cut and natural gas
lines supplying power plants have been interdicted
intermittently, reducing electricity production. Oil exports
have been varying wildly in recent days, with ship loadings
at Umm Qasr reaching 1.8 mbpd during February 12-15, but
dropping to zero on other days in February. While the policy
by default for the GOI appears to be "muddling through," if
the government holds to the budget ceilings it has for fuel
purchases, more drastic steps will be necessary, particularly
market liberalization and/or rationing to distribute fuel and
electricity equitably among consumers. END SUMMARY.

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FUEL AVAILABILITY
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2. (C) Iraq is falling behind "just in time" deliveries for
fuels. As of 26 February, Baghdad had only 0.6 days of
supply for gasoline and 0.4 days of LPG (gas for cooking).
Diesel supply was marginally better at 1.0 days of supply.
Only kerosene (used for heating) is at more comfortable
level, with 10.9 days of supply. Nine days earlier (February
17),Baghdad fuel stocks in days of supply were: gasoline -
0.9, LPG - 0.7, diesel - 1,3, and kerosene - 13.6.
Nationally, the days of supply for gasoline as of 26 February
were at 1.4, diesel at 3.1, kerosene at 5.9, and LPG at 14.4.
Fuel shortages would be worse were it not for the current
curfew and curtailment of inter-provincial travel imposed
following sectarian disturbances following the bombing of the
Golden Mosque in Samara.

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STATUS OF IMPORTS
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3. (C) Fuel imports have slowed considerably since early
January from Turkey as a result of unpaid arrears to Turkish
suppliers. Turkey and Iraq agreed February 15 to settle some
$653 million in arrears by monthly installments beginning in
March with 3% interest on any unpaid balances (Refs A and B).
The monthly payments will be charged against the 2005
budget, in view that the arrears were from purchases made
during the 2005 fiscal year. To prevent new arrears from
accumulating, the Turks agreed to sell only against Iraqi
letters of credit (Ref A). It will likely be several weeks
before Iraq sees substantial increases in tanker trucks
crossing the border. Only then (Ref C) will the loading and
shipping system gear up again.


4. (C) DPM Chalabi informed the Embassy (Ref D) that the
GOI intends to shift a considerable portion of its fuel
imports to seaborne fuel cargos imported through the South.
In fact, imports by ship through Khor al-Zubayr from the UAE
have made the key difference in fuel supplies during the past
month. The bulk quantities of fuel are fed into the product
distribution lines for delivery in southern Iraq and can be
pumped north as far as Baghdad.

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FUEL PRICES
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5. (C) In his first press conference after being nominated
by his party for a second term as Prime Minister, Ibrahim
al-Ja'fari said the government has no intentions to raise
fuel prices further. This announcement was widely reported
on radio, TV and newspapers. (NOTE: The next price increase
according to Iraq's agreement with the IMF is scheduled for
March 31. However, a number of stations -- at least six in
Baghdad -- are already selling gasoline for $.63/gallon at
the instigation of the MOO Director General for Distribution.
This is $.25/gallon above the price set in December under
Iraq's agreement with the IMF. END NOTE).


6. (C) Black market prices vary widely, with the highest

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prices in the Kurdish north, where there is the greatest
shortage of fuel. In Kirkuk, the street price for gasoline
is $1.26-$1.52 per gallon, while in Tikrit the price is only
$.56 per gallon. Black market prices in Baghdad are
reportedly about $.76 per gallon. LPG has skyrocketed in
price on the black market and is reportedly being sold at
$10.00 per 12 kilogram (kg) container in Kirkuk and $12.00 in
Baghdad, where only 32,000 12 kg containers of 120,000
container daily demand can be filled from available supplies
due to a series of pipeline interdictions. LPG is reaching
Baghdad by truck. Fuel is most readily available in southern
Iraq, as the Basrah refinery is still operating, albeit at a
reduced level, with supplies supplemented by imports coming
in from Kuwait, Iran, and the UAE.

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REFINERIES
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7. (C) Refining at Bayji restarted on February 13 with the
delivery of crude via the repaired 26-inch pipeline from
Kirkuk. Bayji is currently processing 142,000 bpd of crude
oil per day (49% of capacity). The Daura Refinery is
processing 62,000 bpd of crude oil and operating at 57% of
capacity. Production at Daura may increase at the end of
February with the repair of the Unit #1 reformer, adding
another 25,000 bpd of capacity. Basrah Refinery remains at
81,000 bpd, as half of the plant is down for long term
maintenance. The refinery will also be at 50% capacity later
this year, as remaining processing units are taken down in
succession and the entire plant is eventually retrofitted,
improving production and output.

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PIPELINES AND FUEL DISTRIBUTION
--------------


8. (C) The key oil link between Kirkuk and Bayji, the
26-inch pipeline, was reported operational February 16. The
40-inch pipeline in the same corridor is scheduled for repair
completion in early March. The 22-inch product line from
Bayji to Baghdad remains interdicted, requiring repairs at
multiple sites along the corridor. The 22-inch pipeline will
again become critical for providing fuels to Baghdad with the
restarting of the Bayji Refinery, particularly with full
production expected in late February. The main LPG line to
Baghdad was interdicted on February 17, cutting off Baghdad
from LPG deliveries by pipeline until repairs completed.


9. (C) The interdiction of two gas pipelines, the 16-inch
dry gas line to the Taji and Daura power plants and the
30-inch sour gas line from Ageel to the Bayji and Mulla
Abdullah power plants, resulted in a reduction of natural gas
deliveries to these gas fired power plants and the loss of
280 MW of power on the national electrical grid.

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OIL EXPORTS
--------------


10. (C) Crude oil export volumes remain below forecast. The
early-February attack on the new oil stabilization plant at
Kirkuk reduced processing capacity there from 1,000,000 bpd
to 500,000 bpd -- and that only when the old stabilization
plant becomes fully operational in about 30 days. The
current limit to production from Kirkuk remains the 26-inch
pipeline, which can only carry 270,000 bpd across the Tigris,
an amount less than the daily demand of the Bayji refinery
(290,000 bpd). Export capacity would increase when the
40-inch pipeline is in service, but still will be limited to
exports of roughly 200,000 bpd by the capacity of the old
stabilization plant to process only 500,000 bpd. Thus, crude
oil exports from the North are not expected to reach
substantial levels in the immediate future. In the South,
exports have dropped appreciably from the average of 1.1
million bpd in January to 0.69 million bpd during the period
18-25 February. Inclement weather and a lack of tug boat
support have caused Iraq to miss multiple days of loading
crude oil tankers.

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MUDDLING THROUGH AT AN END?
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11. (C) COMMENT: Despite interdictions and the clearly
mounting pressure on the GOI (particularly the acute shortage
of LPG and gasoline in Baghdad),the GOI remains indecisive,
resulting by default in a "muddle through" policy in hope
that the quantities of imports and domestic production will

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increase. Iraqis have long been used to shortages as they
wait in lines for LPG and gasoline and temperate springtime
weather in February has helped to lower needs for heating.
However, the 2006 budget for fuel appears to permit no more
than approximately $213 million per month for fuel imports,
considerably below the $450 million per month the GOI was
spending at the end of 2005. Given that fuel imports met
approximately 40% of Iraqi domestic needs in 2005 (including
power generation),the fall off in import purchases may force
the Iraqis to look at radical coping measures quite quickly
-- import liberalization, rationing or the breaking of budget
targets seem the only likely candidates. END COMMENT.
KHALILZAD