STATUS REPORT ON THE ENERGY FUSION CELL

UNCLAS SECTION 01 OF 03 BAGHDAD 003129 SIPDIS SIPDIS E.O. 12958: N/A TAGS: EPET ENRG ECON EFIN EINV PGOV PREL IZ SUBJECT: STATUS REPORT ON THE ENERGY FUSION CELL ¶1. SUMMARY: The Energy Fusion Cell has revised its original strategy on infrastructure integrity in Iraq, and is helping Iraq maximize its petroleum export revenue; meet domestic fuel needs; meet domestic power needs; transition to market-based energy policy decisions; and transition to self-capacity. END SUMMARY ¶2. The Energy Fusion Cell (EFC) was established in March 2007 under DCS STRATOPS and works alongside the Gulf Regional Division of the Army Corps of Engineers. The EFC provides a focus within HQ MNF-I for the conduct of all oil and electricity infrastructure related activities. It has both planning and operational capacity. The EFC includes representatives from all relevant elements of MNF-I and the Embassy, as well as from the Iraqi Ministries of Oil, Electricity and Defense. In addition, the EFC when necessary can call on the resources of the Ministries that may be involved in the planning, support, funding, repair, security or delivery of strategic infrastructure, e.g., Planning and Finance. The EFC staff focuses on planning, coordination, de-confliction and execution. Key to achieving this function is the link established with the MoD Infrastructure Coordination Centre. The EFC has recently revised its strategy along four separate but related lines of operation: -- Developing Capability -- Increasing Energy Capacity -- Increasing Security -- National Engagement ¶3. Over the past four months, Iraq has taken important steps toward improving the level of energy infrastructure stability needed to provide for the basic needs of the Iraqi people. The EFC has engaged the Ministry of Electricity (MoE) and Ministry of Oil (MoO) to develop their capacity, capability and ability to coordinate with other Coalition and Iraqi agencies. The Joint Staff directed the work of the EFC along five areas: maximizing export revenue; meet domestic fuel needs; meet domestic power needs; transition to market-based energy policy decisions; and transition to self-capacity. Maximize Export Revenue -------------- ¶4. The largest success with an imminent impact on Iraq is the repair and operation of the 46" crude oil export line to Turkey. Coupled with the repair and sustained operation of the pipelines that make up the Kirkuk to Bayji corridor, this has allowed for a 20 percent increase in export capacity of crude oil. Over ninety percent of the GoI budget is from crude oil exports, and any increase in exports translates into a significant increase to gross domestic product (GDP). ¶5. The Northern Oil Company (NOC),part of the Ministry of Oil, has maintained the ability to repair pipelines in the region. The EFC has recognized that the greatest challenge to the NOC for both the Kirkuk to Bayji corridor and the 46" export line has been maintaining the line once repaired. In consultation with the EFC, the NOC began placing Oil Protection Force (OPF) personnel along the 46" pipeline in August of 2007. These protection forces decreased the number and effectiveness of attacks against the line. Prior to the emplacement of security, the severity of interdictions routinely required one to two weeks to repair. With the addition of the OPF to the 46" crude oil pipeline repairs typically require only one to two days to complete. ¶6. The success of the 46" export line is principally a NOC and GoI success. The EFC did not create the security nor did it identify to the NOC that scrutiny was a problem on the line. The NOC was already well aware that security was the lynch pin for successful exporting. The EFC's success in this project came in crafting a timeline for securing the pipeline and facilitating the placement of those assets. The Ministries appear to understand the challenges they face. Their two greatest challenges are their inability to coordinate and expedite projects. Without constant pressure being placed on the NOC by the EFC to implement a security plan, weeks and months of exporting would have been lost, at a cost of approximately 200 million dollars per day to the Iraqi people. ¶7. The recent successes by the NOC are in addition to the continued success of the Southern Oil Company (SOC) exports out of the Al Basra Oil Terminal (ABOT). ABOT continues to export about 1.5 million barrels per day (MBPD),accounting for over 85% of national exports. Meet Minimum Fuel Needs -------------- ¶8. While Iraq is able to use its abundance of crude oil to support the nation financially, it must also satisfy its own BAGHDAD 00003129 002 OF 003 fuel needs. The most basic is providing fuel to its electrical generation capacity. Roughly 250 MW of generation are idle due to fuel shortages. The long term solution to this problem is to modernize Iraq's refining technologies to international standards. In the interim, the EFC is facilitating the importation of fuel from Kuwait. ¶9. Because the GoI understands recognizes its short-term inability to refine enough product to meet its generation demand, the MoO identified and began contract negotiations for fuel sources to augment national fuel stores. One major source was identified in Kuwait. This contract met with delays when the Governments of Iraq and Kuwait suffered repeated impasses over details of the contract and rules concerning border crossings. The EFC is assisting both the GoI and the MoO to overcome the obstacles of the contract, for example by obtaining proper security for the movement of fuel and negotiating with United States Central Command for use of an alternate border crossing. In this case, the EFC is serving as the catalyst to free Iraq and Kuwait from contract mire, and expedite the movement of fuel for power generation to Iraq. In doing so, the EFC is developing a sustainable capacity for the MoO to import large quantities of fuel from its neighbors. ¶10. The EFC continues to recommend to the GoI that Iraq needs to modernize its refining capabilities to be able to fuel domestic power generators, provide strategic reserves, and maintain sufficient quantities for public consumption. This type of strategic planning is a key capacity that the EFC is attempting to develop throughout the Iraqi energy sector. Meet Minimum Power Needs -------------- ¶11. The three greatest challenges to electrical stability in Iraq are maintaining current generation, adding new generation and maintaining the stability of the electrical grid. The greatest successes in maintaining current generation have come through the Gulf Region Division (GRD), United States Army Corps of Engineers, which is a member of the EFC. GRD trains electrical generation operators to better maintain and care for their equipment. This maintenance and correct operation of current generating capacity has lead to an Iraqi electrical grid that has succeeded in putting out more power in megawatt-hours than at any point in Iraqi history. ¶12. While generation is at its highest point, the demand on the system has nearly doubled since 2003. To balance this demand challenge, the Government of Iraq has begun purchasing new generation. Every step of this process, from contracting to security planning for delivery, has been aided by the Iraqi Transition Assistance Office (a State Department organization which has membership in the EFC) and the EFC. Currently there are 450 MW of generation in Mussaib that are in various stages of commissioning and another 350 MW of generation in Jordon awaiting finalization of delivery plans. ¶13. Equally important to meeting demand is equitably distributing the generation throughout Iraq. The EFC is in daily contact with the MoE in an effort to expedite repair of 400KV transmission lines. Not only has the EFC coordinated the repair of these lines, but it has also developed a process through which the MoE creates its repair plans in coordination with Iraqi Army security. ¶14. Electrical repair and development are Iraqi successes which have been facilitated by the EFC and its member organizations. In all of these projects the EFC has been the single point of coordination for the US State Department, Coalition Forces and the Government of Iraq. Transition to Market Based Energy Decisions -------------- ¶15. The Iraq energy sector remains state controlled, with the government fixing prices for oil and electricity. The decision to release the state's control over the energy sector is one that is solely in the hands of the Government of Iraq. While that decision is being made, the EFC has been able to monitor and aid in the development of the tools needed for a market-based economy. ¶16. The Al Basra Oil Terminal recently received metering upgrades that elevate its operations to international standards, allowing for more accurate sales of Iraqi crude oil on the open market. Other metering upgrades planned throughout the country will allow the MoO to accurately account for the oil from Iraqi crude fields. BAGHDAD 00003129 003 OF 003 ¶17. A similar project is being discussed in the electrical sector. Currently the MoE charges residents and businesses that have working meters an approximate collection rate of fifty percent. The EFC and ITAO have been working to assist the GoI improve both metering and collection processes. The first step to qualifying the electrical sector to be market-based is to update its ability meter and collect revenue from the sale of its product. ¶18. An important indicator that the MoO is willing to move toward free market principals was identified when the EFC presented the Minister with a pricing scheme to reduce the purchase price of heavy fuel oil (a refinery byproduct which Iraq's outdated refineries overproduce and do not have enough space to store, causing refinery shutdown). Although the Ministry did not ultimately accept the dynamic pricing model, it did agree to lower the price, and did witness as a result a reduction of its heavy fuel oil stocks. The repeated efforts by the EFC to introduce market principles to both the Ministers of Oil and Electricity are beginning to receive increased interest. Transition to Self-Capacity -------------- ¶19. The Energy Fusion Cell does not consider that the measure of its long-term success will be found in its ability to expedite projects or create lines of communication. Success is and will be defined by its ability to assist the GoI and its Ministries in creating enduring processes that the Ministries of Oil and Electricity can manage and execute without the aid of Coalition Forces or USM-I. ¶20. The Ministries of Oil and Electricity must develop the critical capability to formulate and engage in long-term integrated strategic planning. Currently, both the Ministries of Oil and Electricity spend much of their time and effort reacting to line interdictions and infrastructure outages. The ministries have demonstrated some capacity to conduct mid-term planning, but much of this planning is limited to prioritizing repair projects in isolation from other projects ¶21. The Energy Fusion Cell has recognized that the Iraqi oil and electrical sectors are inextricably linked and require collaborative planning for both to achieve success. To facilitate this effort the EFC is developing a strategic framework for a national energy plan that includes recovery, development and optimization of the energy sector. It is hoped that this effort will attract the participation of representatives of the Ministries of Oil and Electricity and lead to complete Iraqi ownership of the resulting plan. BUTENIS