PRT TIKRIT: BAYJI OIL REFINERY: WHERE ARE THE

C O N F I D E N T I A L SECTION 01 OF 05 BAGHDAD 000882

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/13/2017
TAGS: ECON ENRG EPET KCOR EIND IZ
SUBJECT: PRT TIKRIT: BAYJI OIL REFINERY: WHERE ARE THE
TANKERS?

REF: A. A. BAGHDAD 682

B. B. 06 BAGHDAD 4427

C. C. BAGHDAD 539

D. D. BAGHDAD 775

E. E. BAGHDAD 681

F. F. BAGHDAD 677

G. G. BAGHDAD 462

Classified By: Stephen Buckler, PRT Team Leader, for reasons 1.5 (b) an
d (d).


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


2. (C) SUMMARY. A new breakdown in the distribution system
of refined fuel from the Bayji oil refinery is exacerbating
already dire shortages in many areas of north-central Iraq.
This is occurring several weeks after the commencement of
Operation "Honest Hands", the military "invasion" of the
Bayji oil refinery by the 4th IA. The initial objective of
the operation - occupation of the refinery facility by the
12th Strategic Infrastructure Battalion (SIB) and a reduction
of onsite fuel smuggling ) was largely accomplished.
However, the principal goal of increasing fuel supplies for
the general population has not been attained, and in fact may
be worsening. Assigned fuel tankers, especially from Mosul
and Kurdistan, are failing to report in sufficient numbers to
the refinery. There are many possible causes of the
distribution system breakdown; however, according to sources
at the refinery, the primary cause appears to be financial.
Increased monitoring of the refinery fuel pumps has limited
opportunities to overfill tankers, thus possibly eliminating
the incentive ) surplus fuel to sell for higher margins on
the black market - for many gas station and trucking company
owners to send their tankers through the gauntlet of Iraq's
highways to Bayji (especially from distant locations).
Solving Bayji's fuel distribution problem in a new (largely)
corruption free environment will require a comprehensive
approach by the GOI which addresses the security ) but more
importantly - the economic issues that may underlie the
situation. END SUMMARY

--------------
Low Allocations, Few Tankers
--------------


3. (C) Responsible for producing most of the refined fuel
consumed across a broad swath of Iraq - from Diyala to Dohuk
) the Bayji oil refinery has long suffered from rampant fuel
smuggling, technical problems, and interruptions in crude oil
and energy supplies (reftel A). Operation Fair Play, the
"invasion" of the facility directed by the 4th IA ) though
actually carried out by the SIBs promised to eliminate local
fuel smuggling by increasing overall security as well as
closely monitoring activities at the distribution pumps.
Although onsite fuel smuggling appeared to be substantially
reduced, the 4th IA deliberately limited the number of
tankers fueled per day from an average of over 200 to 143 )
likely more than necessary - slashing provincial allocations.



4. (C) The Ministry of Oil's more generous allotments - which
nearly double the amount of fuel distributed to the provinces
) were reinstated on February 28. However, simultaneously,
the number of tankers turning up at the distribution terminal
each day to pick up fuel for delivery to the provinces began
to dwindle on February 24, until by March 2 several
provinces, such as Kirkuk and Mosul, received no refined fuel
at all from Bayji (their primary source). Multiple factors
play a role: the abysmal highway security situation,
mismanagement by the Distribution Company (and their agents
in the field) in organizing deliveries, etc. Yet economic
factors interrelated with security issues may be the primary
cause of the quagmire. Long considered to be customary
"profit", the surplus fuel by and large supplied to tanker
drivers - typically 3000-5000 liters ) would often be sold
for a tidy sum on the black market by their patrons. As fuel
smuggling at the refinery distribution pumps became a more
difficult proposition in February, the enthusiasm of many to
distribute fuel from the refinery appears to have waned.
According to one tanker driver interviewed at the refinery,
extortion at IA checkpoints on the highway to Mosul is
rampant, making the dispatch of a tanker to Bayji an
expensive and dangerous proposition, especially for distant
locations, such as Mosul, Kirkuk, and Kurdistan. This
observation is often made at Bayji by drivers, refinery
officials, and even members of the IA themselves (reftels B,
F). (COMMENT: The situation at the Bayji oil refinery is
illustrative of the complexities and challenges of
stimulating economic growth in Salah ad Din, where it is
difficult to divorce security and economic issues. END
COMMENT.)

BAGHDAD 00000882 002 OF 005



--------------
An Overly Aggressive Plan
--------------


5. (C) After assuming responsibility for refinery security
and distribution on February 19, the 4th IA immediately
reduced the number of tankers filled from the usual quota of
200-300 to 143 per day in order to eliminate onsite fuel
theft and ensure efficiency. Operations were streamlined;
tankers were admitted to the refinery in a more orderly
manner and were closely monitored at the distribution pumps
to prevent corruption. However, the sharp fall in the total
amount distributed quickly brought charges of sectarianism
from SaD, a predominantly Sunni Arab province. During a
March 5 meeting, the Governor and Deputy Governor of Salah ad
Din province, Hamad Hamoud al Shakti and General Abdulla
Hussein Muhammed, accused LTG Aziz and his deputy, BG Nabil,
of unfairly allotting a disproportionate amount of fuel
originally destined for Sunni provinces to Kurdistan.
Although Abdulla provided IPAO documentation which allegedly
proved that an unfair amount of fuel was being directed
north, closer examination indicates that the recent decline
in fuel distribution in SaD ) which was not as drastic as in
other provinces - is probably not the result of a deliberate
attempt to route additional fuel supplies north, but rather
an unavoidable consequence of the reduction of the number of
tankers fueled. When compared to the Ministry of Oil,s
(MoO) allocation plans from November and February (reftel B),
the 4th IA,s distribution plan would have allotted fuel to
the provinces in a very similar proportion:

--November 19 MoO gasoline daily allocations, provincial
shares:
-------------- Kurdistan, 39%
-------------- Mosul, 23%
-------------- Kirkuk, 7%
-------------- Anbar, 14%
-------------- SaD, 17%

--February 7 MoO gasoline daily allocations, provincial
shares:
-------------- Kurdistan, 35%
-------------- Mosul, 20%
-------------- Kirkuk, 8%
-------------- Anbar, 18%
-------------- SaD, 18%

--4th IA proposed March gasoline daily allocations,
provincial shares:
-------------- Kurdistan, 31%
-------------- Mosul, 20%
-------------- Kirkuk, 14%
-------------- Anbar, 18%
-------------- SaD, 17%


6. (C) Recognizing who has ultimate power on the ground in
Bayji, Governor Hamad told IPAO on March 5 that he met with
LTG Aziz in Erbil in order to come to "an understanding"
regarding the number of tankers that Aziz would allow to be
fueled daily at the refinery. While the details of this
"understanding" were not forthcoming, Hamad stated that Aziz
agreed to accept the MoO provincial allocations in place of
his own. (NOTE: During a January 29 meeting in Baghdad,
Prime Minister Maliki tasked LTG Aziz and the 4th IA with
securing the refinery and fuel distribution process at Bayji.
Although the facility is ostensibly controlled by the MoO,
this mandate effectively allows Aziz to greatly influence
events in Bayji now and in the future, possibly explaining
the need for the Governor to consult with him. END NOTE.)
According to memoranda provided by Abdulla, the MoO plan
supplanted the 4th IA plan on February 28, considerably
raising the total projected amount of fuel to be distributed
(even considering the lower production totals due to the
heavy fuel oil glut at the refinery, reftel C):

--4th IA proposed daily total allocations from March 1 ) 31.
-------------- Gasoline, 2450 cubic meters
-------------- Kerosene, 1550 cubic meters
-------------- Diesel, 2350 cubic meters

--MoO daily total allocations from February 28 ) March 4.
-------------- Gasoline, 4195 cubic meters
-------------- Kerosene, 2230 cubic meters
-------------- Diesel, 4194 cubic meters

--------------
Security a Convenient Excuse?
--------------


7. (C) Representing a significant departure from their

BAGHDAD 00000882 003 OF 005


previous posture, the managers of the trucking companies and
gas stations throughout Nineveh and Kirkuk now claim to be
prevented from sending tankers because of the poor security
situation. (NOTE: Security on Iraqi highways is an
omnipresent concern; fuel tankers have long been the target
of intimidation campaigns by AIF and AQIZ (reftel 7),as well
as frequent victims of extortion at ISF checkpoints.
However, transport of refined fuel has been disrupted far
less than HFO distribution. While inconsistent HFO
distribution shuts down the refinery due to a lack of storage
capacity for the HFO, refined fuel deliveries have usually
occurred - albeit at a reduced level - in the past. END
NOTE.) During interviews conducted at the refinery on March
6, members of the 12th SIB and various tanker drivers voiced
skepticism with this assertion. The gradual drop off in the
number of tankers sent to Bayji throughout the month of
February coincided with the reduction of opportunities to
receive and later sell the extra fuel (not stipulated on
their manifests) on the black market for fuel.


8. (C) COL Yessin, the commander of the 12th SIB, flatly
stated to IPAO that, "these criminals use security as an
excuse to cover their corruption. They will not return to
the refinery until they are able to steal again there",
intimating that they would find more creative methods of
obtaining fuel to sell on the black market. Yessin also
highlighted the fact that the SIBs have been ready throughout
the operation to provide security by escorting tankers;
however, their services have not been desired nor requested
by the trucking companies. (NOTE: There may soon be enticing
opportunities for black market "entrepreneurs" to siphon the
pipelines to acquire additional product to sell. Although it
appears that the previously proposed redeployment of the 4 )
2/4 IA from Salah ad Din to support the Baghdad surge at the
end of April after all may after all not occur; the prospect
of vast stretches of the crude and refined fuel pipelines
being left unguarded has probably not been lost on tanker
owners throughout north-central Iraq, especially in Kirkuk
and Mosul. END NOTE.)

--------------
A Business Decision
--------------


9. (C) Driving a fuel tanker in Iraq in 2007 is risky
business. This is especially true in the wild-west
atmosphere of north-central Iraq, where truck drivers brave
highways infested with criminal organizations that are run by
area sheikhs that could rival the Godfather, the AIF, and IA
checkpoint shake-downs. The incentive necessary to make the
perilous journey was a "profit" paid in the form of filling
the tanker in excess of the legal, manifested amount. This
inducement may outweigh other considerations; for example,
the standard payment for transporting a full tanker 290
kilometers from Bayji to Mosul is approximately 400 USD.
(NOTE: This estimate is calculated using the standard
transportation rate paid by the MoO, which is metric tons )
about 1,273 liters ) times the number of kilometers ) 270
from Mosul to Bayji and back, times 60 ID. END NOTE.) By
contrast, according to black market fuel prices in Nineveh,
3000 liters of fuel sold on the black market would gross
approximately 3000-3500 USD. (NOTE: According to data
obtained from atmospheric reports on February 11, a liter of
benzene sold on the black market in Nineveh cost 1.21 USD.
END NOTE.) (COMMENT: Of course, it is likely that many
tanker owners sell their entire supply on the black market,
not merely an 11th of it. This example is being used as a
point of comparison. Considering that the total revenue
reaped from legal transport and sale of 30,000 liters of
benzene at the government-set price is approximately a third
(roughly 1200 USD compared to 3500 USD) of the income earned
from the expeditious sale of 3000 at the nearest street
corner, it is not difficult ) from an economic perspective -
to identify the priority for most tanker owners. The profit
lost by "sitting out" ten distribution days can probably be
recouped by one busy day at the black market. END COMMENT.)


--------------
Extent of Problem Varied
--------------


10. (C) The breakdown of the distribution process is not
uniform. Deliveries of refined fuel to Mosul, Kirkuk, and
Kurdistan virtually ceased by March 2 due to the lack of
transport, while SaD and Anbar provinces were affected to a
lesser extent. This trend has continued; according to CF
reporting on March 10, Mosul and Kurdistan are being starved
of refined fuel. (NOTE: While the highways in Kurdistan
themselves are generally considered safe, tankers from Bayji
have to pass through a significant stretch of hostile

BAGHDAD 00000882 004 OF 005


territory ) the provinces of SaD, At Tamim, and Nineveh -
before making it to the safer areas. END NOTE.) The
following data represents the percentage of the tankers that
were allotted for each province according to the 4 IA's
reduced schedule, over a period of three distribution cycles
(March 4 ) 10). For example, SaD was apportioned 25 tankers
per day (each province has two specified days per week).
According to the data, an average of 18 tankers have reported
per day from SaD, thus the province is receiving
approximately 73% of its allocation. Mosul is receiving less
than 2% of its allotment.

Anbar
--Gasoline, 56%
--Diesel, 50%
--Kerosene, 113%

SaD
--Gasoline, 73%
--Diesel, 56%
--Kerosene, 103%

Kirkuk
--Gasoline, 128%
--Diesel, 73%
--Kerosene, 134%

Sulaymaniya
--Gasoline, 80%
--Diesel, 25%
--Kerosene, 75%

Dahuk
--Gasoline, 59%
--Diesel, 16%
--Kerosene, 221%

Irbil
--Gasoline, 53%
--Diesel, 18%
--Kerosene, 94%

Mosul
--Gasoline, 2%
--Diesel, 1%
--Kerosene, 0%

--------------
Where the Rubber Hits the Road
--------------


11. (C) During a February 19 meeting at the refinery, BG
Nabil announced a general distribution strategy which
assigned the principal responsibility for organizing and
securing provincial fuel deliveries to the (reftel E)
governors. Yet in practice the distribution process is
controlled by the Oil Products Distribution Company (OPDC),
represented in Bayji by Chief of Distribution Taha Mahmoud
and his network of "agents" throughout the provinces.
Responsible for organizing tanker convoys on the two days
assigned to their province per week, the agents are the
critical link in the supply chain. The role of the governors
may vary by province, but it is probably manifested more by
indirect influence rather than official responsibility.
(NOTE: According to multiple contacts, Governor Hamad may
exert a considerable amount of influence at the Bayji
refinery and likely knows and/or participates in various fuel
smuggling schemes in SaD, reftel G. During multiple
interviews conducted in February and March, however, he
showed little inclination to take and active role in helping
to organize legal fuel distribution. END NOTE.)


12. (C) Both Hamad and Abdulla likely exercise significant
influence behind the scenes (both own fuel stations and are
believed to engage in fuel smuggling); however, distribution
agent Amar Mudher is technically responsible for organizing
deliveries of fuel from the refinery to SaD province. It is
also possible that this has resulted in confusion in the
provinces. On March 5, Mudher alluded to the difficulties
faced by provincial agents organizing fuel deliveries, such
as sporadic telephonic communications (cellular telephone
coverage has been sporadic recently in SaD) and frequently
changing directives emanating from the OPDC.

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


13. (C) The recent breakdown in the distribution of refined
fuel is exacerbating a crisis throughout north-central Iraq,
particularly in Mosul and Kurdistan (although Kurdistan may

BAGHDAD 00000882 005 OF 005


possess other remedies, such as increasing imports).
Clear-cut data showing the precise difference in the amount
of fuel which was delivered north compared to today is not
available. However, it is clear that less fuel is reaching
certain of these provinces than before Operation Honest
Hands. There are many factors which seem to lead to this
conclusion: the number of tankers arriving from Mosul is a
fraction of pre-operation totals, black market fuel prices
continue to rise, and anecdotal evidence. (NOTE: The 2007
import budget by the GOI is planned to import less fuel than

2006. The KRG must pay for all the imported fuel they desire
and it will be imported by SOMO. A revolving fund made up of
refined product and HFO sales is to be used for imports into
Iraq during 2007. SOMO received a $300M loan from the MoF at
the start of the year and this has to be paid back. There is
no attempt to supplement production to meet demand by the
GOI. It is going to be up to the private importers. END
NOTE.) In addition, reporting from the ground illustrates
that the latest crisis may be unparalleled in its severity
(reftel D).


14. (C) Production disruptions in Bayji leading to general
shortages of refined fuel in northern Iraq are commonplace;
moreover, the facility has long suffered from sporadic crude
oil supply, intermittent power failures, and an security
issues of transporting HFO to Syria recently. However,
unlike power outages, the HFO glut, and other technical
problems, the root causes of the present distribution failure
at Bayji are economic and security related. For many Iraqis,
the costs of sending a truck from Mosul or Erbil to Bayji and
back ) considering IA extortion and the constant threat of
terrorist attack ) currently outweigh the benefits. A
massive self-correction of the market for refined fuels
throughout Iraq is occurring, forcing most Iraqis to operate
(whether by selling fuel or buying it) in the black market
(some even refer to it as a "gray market"); a market whose
existence is guaranteed by the artificially low government
fuel prices and the constant disruptions of production in
Bayji.


15. (C) The previous distribution system, with all of the
corruption attached to it, served an essential purpose; it
met the needs of the black market, which in turn met the
needs of the population ) albeit unfairly - and provided
incentives for "entrepreneurs" to capitalize on growing
demand. Operation Honest Hand disrupted many of the market
forces previously at play. A key facet of the ultimate
solution ) though difficult politically - is correcting the
imbalances that presently exist by raising government fuel
prices to a level closer to their natural equilibrium,
thereby providing much greater incentives for the legal
transporting and sale of refined fuel. In addition, higher
payment by the MoO for fuel deliveries would likely help.
Other short-term initiatives by the GOI which would likely
improve the distribution situation include an effective crack
down on black marketers of fuel (raising the disincentive to
engage in the practice),reduction of IA checkpoint extortion
(which will probably require greater CF efforts, given the IA
and SIBs track record),mandatory tanker convoys, improved
highway security, and improved management of the Distribution
Company,s fuel distribution network. END COMMENT.


16. (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.


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