PRT TIKRIT: BAYJI OIL PRODUCTION GRINDING TO A NEW

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000539

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/15/2017
TAGS: ECON EPET KCOR EIND IZ
SUBJECT: PRT TIKRIT: BAYJI OIL PRODUCTION GRINDING TO A NEW
HALT

REF: A. A. 06 BAGHDAD 4427

B. B. 06 BAGHDAD 4534

C. C. BAGHDAD 344

Classified By: Stephanie Miley, PRT Deputy Team Leader, for reasons 1.5
(b) and (d).


1. (U) This is a PRT Tikrit, Salah ad Din cable.


2. (C) SUMMARY. During interviews conducted on February 6-7,
officials at the Bayji oil refinery discussed continuing
production challenges which greatly hamper production and
threaten to completely shut down the facility within several
days. There are a many issues facing the refinery, however,
the continued inability to adequately distribute the
byproduct - heavy fuel oil (HFO) - is the most acute and may
cause a another closure shortly without concerted action by
the GOI. A new shutdown would likely exacerbate refined fuel
shortages throughout central and northern Iraq - where black
market prices continue to rise to new highs ) and cause an
added blow to Iraq's struggling economy. Absent effective
and immediate action by the GOI to ensure HFO distribution
and secure necessary refinery inputs, such as power and crude
oil, refinery production stoppages at Bayji are likely to
continue, undercutting strategic policies by the GOI and USG
to stimulate overall employment and achieve political and
social stabilization in Iraq in early 2007. END SUMMARY.


-------------- --------------
Lagging Production Drives Black Market Fuel Prices Higher
-------------- --------------


3. (C) The Bayji oil refinery is plagued by a number of
chronic problems which normally preclude the facility from
reaching even 30 percent of its capacity. When asked to list
the refinery's problems in priority order, Deputy Chief of
Production Abu Khassem named four: the glut of heavy fuel
oil, a by-product whose lack of storage capacity prevents
further refining but which does have market-value; a shortage
of trained engineers; erratic supplies of crude oil; and
periodic power failures due to frequent blackouts of the
nearby power station (NOTE: There was a new blackout on the
night of February 10, ending production until February 12 END
NOTE). Khassem stressed that, of those challenges, the HFO
excess supply was the most acute. This problem is not new;
the refinery has suffered from erratic HFO distribution for
several months (reftel A). Many of the fundamental
impediments to effective delivery of the HFO still remain,
including abysmal highway security, rampant AIF and IA
extortion, and an unresolved import/customs situation with
Syria (reftel B).


4. (C) The sporadic production at Bayji drove black market
prices ) the only source of refined fuel for most Iraqis -
steadily higher in central and northern Iraq throughout the
winter. Due to lagging production as well as other factors:
massive fuel theft (according to nearly every refinery and
provincial official interviewed, atmospheric reports, and
other evidence supplied by Bayji contacts such as OPF),as
well as simple mismanagement, a severe shortage of benzene,
diesel, kerosene, and liquid petroleum gas (LPG) is causing
massive hardship for nearly everyone; the shortages are
all-consuming (reftel C).


5. (C) The following data obtained from atmospheric reports
highlights a steady black market fuel price increase on the
streets of Salah ad Din:

Benzene (per liter)
-- November 26 - $.41
-- December 17 - $.48
-- January 22 - $.64
-- February 11 - $.76

Diesel (per liter)
-- November 26 - $.38
-- December 17 - $.38
-- January 22 - $.57
-- February 11 - $.68

Liquid Petroleum Gas (20 liters can)
-- November 26 - $5.38
-- December 17 - $12.69
-- January 22 - $18.90
-- February 11 - $22.73

Kerosene (per liter)
-- November 26 - $.40

BAGHDAD 00000539 002 OF 003


-- December 17 - $.45
-- January 22 - $.76
-- February 11 - $.94

--------------
Swimming in HFO
--------------


6. (C) Khassem explained that the refinery has a total HFO
storage capacity of 150,000 cubic meters, of which they were
using approximately 102,000 cubic meters as of the day of the
interview, February 6. Depending upon current levels of
production, the refinery normally produces approximately
3,000 to 7,000 cubic meters of HFO per day ) guaranteeing
plant closure within a short time if HFO distribution was not
resumed. Although a power shortage was the proximate cause
of the refinery shutdown on February 10, HFO oversupply
remains a critical long-term problem. According to data
submitted to IPAO by internal staff at Bayji, benzene
production came to a halt on February 10, then resumed at
extremely limited production on February 12.

--Feb. 7 ) 4611 cubic meters
--Feb. 8 ) 5079 cubic meters
--Feb. 9 ) 4334 cubic meters
--Feb. 10 ) 1331 cubic meters
--Feb. 11 ) 0 cubic meters
--Feb. 12 ) 0 cubic meters
--Feb. 13 ) 1759 cubic meters


7. (C) In January, the MoO awarded three Iraqi trucking
companies ) Erehad Al Nakleen (Ramadi),Al Jowal (Mosul),
and Anwar Al Motakel (Bayji) ) contracts to transport HFO to
Syria where it can be further refined or utilized as fuel for
power plants. Although daily shipping manifests arrive from
the MoO in Baghdad, they are routinely ignored; in practice
tankers have not appeared at the HFO distribution gates since
January 29. During a February 7 interview, Anwar Al Motakel
manager Abo Ahmed stated that the company is still refusing
to send its drivers to the refinery for two reasons: the
appalling highway security (especially in Anbar province) and
continuing import documentation problems at the Syrian
border. Ahmed told IPAO that while his drivers were ready,
the GOI has not delivered on promises of increased highway
security or provided proper import documentation to allow
entry into Syria. (NOTE: Confidentially, the security
officer with the 12th Strategic Infrastructure Battalion
(SIB),LTC Khatab, told IPAO on February 7 that his sources
reported Ahmed's fears were not only general but also
specific. According to Khatab, local AQIZ elements actually
threatened Ahmed ) warning that any tanker drivers sent out
would be killed and their trucks blown to pieces. END NOTE.)


8. (C) Although Chief of Production Abdel Khader claimed on
November 19 that 500 tankers would be needed for HFO
transport in order to sustain full production (reftel A),the
present distribution infrastructure does not appear to be
capable of supporting even 50 percent of this total. Usama
Sabah, HFO Pump Manager, told IPAO on February 6 that of his
eight pumps only four or five regularly functioned, resulting
in a theoretical maximum of 150 tankers being fueled per day.
Sabah also admitted that employee motivation was an issue,
since someone employed at the refinery was often "hired for
life."

--------------
Shia Gone
--------------


9. (C) Another less obvious but also critical impediment to
sustained refinery production in Bayji is the dearth of
trained petroleum and maintenance engineers. During an
interview conducted on January 3, Assistant Manager of the
North Refinery (of the three in Bayji ) North, Salah ad Din
1, and Salah ad Din 2 ) the North is the only refinery still
in operation) Salum Jassim said that half of his employees
regularly do not show for work. Jassim explained that many
of his engineers are Shia; since the execution of Saddam
Hussein execution, most do not feel safe in Bayji, which is
located in the heart of Sunni Iraq.

--------------
Comment
--------------


10. (C) COMMENT. The present oversupply of HFO coupled
continued electrical power supply disruptions means that
future, frequent shutdowns in production at the Bayji oil
refinery are likely. This in turn ensures that the scarcity

BAGHDAD 00000539 003 OF 003


of refined fuel in SaD (and most of central-north Iraq) will
remain critical, perpetuating a thriving black market.
Evidence of the all-consuming fuel shortages can be seen
everywhere: the kilometer-long lines in front of the
government fuel stations; the heated debates within the
Provincial Council; and, the frustration expressed by
residents on the street. Stimulating discontent, the fuel
shortages remain a critical obstacle precluding legitimacy of
the provincial and national governments in the eyes of many
of the province's residents.


11. (C) Concerted action ) rarely seen from the GOI - will
probably be necessary to improve the dire situation. This
action could take many forms: HFO convoys escorted by the IA,
coordination with provincial governments to help provide
additional security (including for the Shia engineers),
and/or placement of three or four of the
"Mother-of-All-Generators" (MOAGs) at the refinery, giant
generators which not only could provide a consistent source
of electricity but also burn HFO, thereby removing a
significant amount of the oversupply.


12. (C) The mere stationing of SIB units at the front and
distribution gates will probably not be sufficient; this
approach is being tried currently to no avail (septel).
While the new security plan being led by the IA holds
promise, the GOI and MoO in Baghdad will need to recognize
the situation for what it is ) an emergency which not only
threatens economic development but also their own legitimacy
) and continue to act accordingly to make certain improved
distribution of supplies of refined fuel to their
constituencies.


13. (C) On February 14, the new Refinery Director, Ali
Obeydi, briefed PRT members regarding new initiatives - such
as the repair of the long-defunct hydro cracker (thereby
disposing of much of the excess HFO and simultaneously
increasing efficiency) and the acquisition of a dedicated
electric power supply. These would be giant steps that, if
realized, would raise the level of production significantly.
Septel to follow. END COMMENT.


14. (U) PRT Tikrit thanks the soldiers of the 1st Battalion,
505th Paratroop Regiment, 82nd Airborne Division for their
invaluable contributions and support that make this reporting
possible.


15. (U) For additional reporting from PRT Tikrit, Salah ad
Din, please see our SIPRNET reporting blog:
http://www.intelink.sgov.gov/wiki/Tikrit.
SPECKHARD