ELECTRICITY MINISTER OBTAINS RUSSIAN SUPPORT;

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002770

SIPDIS

USDOE FOR PERSON

E.O. 12958: DECL: 08/28/2018
TAGS: ENRG EINV PREL RS IZ
SUBJECT: ELECTRICITY MINISTER OBTAINS RUSSIAN SUPPORT;
EXPLAINS GE, OMS CONTRACT ISSUES

REF: BAGHDAD 1695

Classified By: CETI Ambassador Marc Wall, reasons 1.4(b,d)


1. (C) SUMMARY: Outgoing Coordinator for Economic
Transition in Iraq (CETI) Ambassador Charles Ries and
incoming CETI Ambassador Marc Wall met with Electricity
Minister Karim Wahid al-Hasan on August 24. Karim, who had
just returned from Moscow, reported that the Russians would
be sending a team to evaluate conditions before continuing
negotiations to resume or complete work that they had been
awarded previously, but he thought they would begin work on
the Yusufiya power plant but not the Hartha power plant in
Basra. He defended the GOI's track record with GE and
expressed his willingness to meet with GE representatives at
any time. Karim was waiting for a modified Parsons
Brinkerhoff offer to continue its operations, maintenance,
and sustainment operations. END SUMMARY

Moscow Fruit
--------------


2. (C) Karim reported on his August 18-20 trip to Moscow,
saying that the primary purpose of the trip was to revive
projects begun with Russians in the 1980s and 1990s. The
Russians had agreed to send a team to Baghdad and to Basra to
assess current conditions at the sites where they had
contracts to build power stations. The team would submit a
report, and then the Iraqis and Russians would negotiate
contracts, adjusting terms to compensate for increased prices
of raw materials, additional security, and other changes.
The negotiations focused on two power plants: Yusufiya and
Hartha.


3. (C) Karim said Yusufiya was planned to consist of 8 X
210MW generators, work on which stopped in 1991, resumed in
2001, and then stopped again in 2003. (Note: Yusufiya was
never completed.) He said the construction had been planned
in two stages. Work still needed to be carried out to
install three units, for an original cost of $110 million.
The Russians now were demanding more, to cover a higher cost
for parts and including compensation. Turning to Basra and
the Hartha power plant, Karim said the Russians had agreed
initially to $24 million to build Hartha, but had recently
upped the price to $144 million to renovate the facility.
The World Bank had agreed to finance $124 million, with the
Ministry of Electricity providing $20 million. When the
Russians revised the price again, to $183 million including
$13 million for security, Karim said he had refused, telling
the Russians that the Iraqis would not pay more than the
agreed $144 million. On the next day, the Russians agreed to
send a team to Basra to evaluate conditions and with the aim
of amending the statement of work to keep the price down.


4. (C) Karim commented that the Russians appeared to be
willing to resume work only on Yusufiya and said they were
concerned about security at Basra. Karim opined that the
Russians actually lacked the workers and technical experts,
such as engineers, to carry out both projects simultaneously.
The Russians had committed to a number of contracts in Iraq
and, Karim suggested, the best approach might be to resolve
each problem one by one.


5. (U) Despite misleading news reports, Karim affirmed that
he had not changed the GOI approach to Lukoil's claims
regarding a Saddam-era contract. Lukoil had qualified to
participate in a licensing round and could bid to do work in
the West Qurna field on the same basis as other bidders.
Karim noted that, although Lukoil's knowledge about the field
might give it an advantage, the Saddam regime had terminated
the contract and there was no basis to renew it. Although
the Russians had attempted to link renewal of the Lukoil
contract to a debt forgiveness package, Karim said he had
resisted the linkage.


6. (U) Karim said in passing that the Russian Minister of
Energy (Sergei Shmatko) had inquired why he had not received
an invitation to visit Iraq, a request which had caught Karim
off guard. Karim said he would brief PM Maliki (suggesting
that he would seek permission to extend the invitation).

General Electric and Siemens
--------------


7. (C) Karim said he had a good relationship with both
General Electric (GE) and Siemens, having signed contracts
with both firms. While the contracts had not yet been
implemented, Karim noted that GE and Siemens products would

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be essential if the Ministry of Electricity (ME) were to
reach its goal of increasing generation capacity by
6,000-8,000 megawatts (MW) each year over the next two years.
Later in the meeting, Amb. Ries said GE had been concerned
by recent events, including the Prime Minister's visit to
Germany and his statements there and Karim's failure to
appear for a meeting with GE representatives in Amman.
Agreeing that he needed to speak with GE, Karim asserted
that, two weeks previously, he had telephoned GE's
representative in Amman to offer to meet GE in the U.S., in
Houston or some other city. Prime Minister Maliki
appreciated the capabilities of both GE and Siemens. In
meetings with Siemens, the company had been provided with the
details of prospective power projects, including the location
and fuel specifications. In separate meetings, Ministry of
Oil representatives had also provided information on their
planned developments to Siemens.


8. (C) Karim then launched into a discussion of GE and
Siemens' comparative advantages. He said Siemens turbines
were cheaper and more reliable, and that Siemens' terms of
payment were easier. When Amb. Ries observed that GE offered
multi-fuel turbines, Karim rejoined that Siemens did also.
ME was in discussions with Siemens to provide 10 X 165MW and
6 X 265MW generators, very large generators which meant that,
on the basis of kilowatts produced, the Siemens machines were
cheaper. The contract, however, included a provision that
Siemens would be the sole source for spare parts; spare parts
for GE equipment were more generally available and thus
cheaper. Karim noted that ME planned to purchase 20 GE
units, but not directly from GE. The Kuwaiti government had
originally contracted to purchase the gas turbines, but,
since it did not need them, ME was preparing to acquire them.
ME needed them modified to run on a variety of fuels, but
GE's offer for the modification had been quite expensive.


9. (C) In response to Amb. Ries' question, Karim said GE
could improve its competitive position first of all by
opening a representative office in Baghdad. In addition, GE
should be more responsive to ME requests for assistance. In
addition to equipment purchases, ME could use GE's assistance
in providing operations, maintenance, and sustainment (OMS)
services and holding workshops to train ME personnel. ME had
also asked GE for spare parts contracts for existing GE
equipment, such as the Frame 9 generators. GE generally
refused to provide the other services, although ME was
waiting for the OMS contract. Karim complained that GE had
prepared its equipment sales offers under USG pressure, but
that it was not really interested in doing business in Iraq.
He welcomed Amb. Ries' offer to pass on Karim's interest in
having a meeting with GE. (Note: Ambassador Wall informed GE
of Karim's interest in a meeting during an August 27 telcon
with GE representatives.)

Parson Brinkerhoff OMS Contract
--------------


10. (U) Amb. Ries asked Karim about the status of Ministry of
Electricity discussions with Parsons Brinkerhoff (PB) to
extend an OMS contract. (Note: The U.S. Mission's Iraq
Transition Assistance Office (ITAO),together with the U.S.
Army Corps of Engineers, Gulf Region Division (GRD)
established the OMS program to introduce modern inspection,
operations and maintenance protocols at six of the ME's major
power plants. Since becoming fully operational, this program
has increased plant production output by 30 percent per
month, and plant availability (days per month a plant
operates) and reliability (hours per day a plant operates) by
nearly 20 percent per month. The cost of this improved
capacity is less than 20 percent of the cost of the
equivalent amount of electricity gained by constructing new
generation plants. The OMS program will begin to cease
operations on September 9, unless the Ministry of Electricity
acts to pick up the costs of the program. See reftel.)


11. (SBU) Karim said he normally could not extend a
sole-source contract to PB, but he had sent a letter to the
Prime Minister to request an exception. He did not want PB
to continue its work at all of its current locations,
however, since he felt that the OMS program was most
beneficial in improving operations at gas turbine plants, but
not so much at thermal power plants. He had asked PB for a
new offer, with a revised and lower price, particularly the
mark-up for security. Ries stressed that he did not disagree
with an open tender, since many companies had the capability
to provide the service, but an extension of the current
contract would provide time to carry out a tender and ensure
that the program continued without a break.

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12. (SBU) Karim continued to complain about the cost of the
PB contract. Most of PB's $49 million contract went to
security, with only a small fraction going to actual
operations. Since PB did much of its work through
sub-contractors, Karim speculated that ME could economize by
going directly to the sub-contractors. In addition, he
noted, the GOI had hired 13 Russians at a total cost of $1.25
million for operations at Bayji and at different fields. For
its $49 million, PB had provided fewer than 13 people. Karim
stressed that he was still waiting, saying "give me an offer,
so that I can take it to the Cabinet." He said he was
waiting for two contract proposals, one for a monitoring
system at Baghdad South and second for OMS for all
gas-powered plants in Iraq. The contract would be for an
additional year, to cover the maintenance season that would
be needed before the summer of 2009. Amb. Ries stressed that
the program should continue, so that recent increases in
electricity production would be maintained.
BUTENIS