IRAQ-IRAN PIPELINE PROJECT AND OIL/FUEL SWAP

C O N F I D E N T I A L BAGHDAD 001393

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/22/2027
TAGS: ECON ENRG EPET IR IZ
SUBJECT: IRAQ-IRAN PIPELINE PROJECT AND OIL/FUEL SWAP

Classified By: ECONOMIC MINISTER-COUNSELOR DANIEL WEYGANDT, REASONS 1.4
(b)(d)


1. (C)In an April 21 meeting, the State Oil Marketing
Organization's head of the Crude Oil Marketing Commission
told econoffs that he was under pressure to conclude a
contract with Iran to swap crude oil for refined fuel
products. The contract stems from Memoranda of Agreement
signed by Oil Minister Husayn Shahristani and his
predecessor, Ibrahim Bahr al Uloum. The Memoranda also call
for the construction of a pipeline from southern Iraq to the
Iranian refinery at Abadan. Prior to installing the
pipeline, the commission head said that the crude oil and
product would be shipped by truck. He added that Iran was
aggressively seeking a "very cheap" price for the crude.
Econoffs familiar with circumstances at the time of the
memoranda negotiations stated that Shahristani pressured SOMO
to include a crude oil price substantially below market value
in the agreement. One SOMO official claimed that when he
refused to put the lower numbers in several drafts of the
agreement, Sharistani simply lined out the market prices and
entered the lower values.


2. (C)Comment:The deal makes no sense on a purely commercial
basis. Iran does not have adequate refinery capacity to meet
domestic demand for fuel. It therefore cannot refine the
Iraqi crude and cannot produce the refined product to fulfill
its half of the swap. Iran would have to export the crude
and import additional refined product for Iraq. Iraq
directly exporting the crude and directly importing the
refined product would be a more efficient transaction. The
low price is the only logical explanation for the deal, and
that price would appear to have more illegal opportunity than
valid economic rationale.
CROCKER