BAYJI OIL REFINERY DEALING WITH HFO AND CORRUPTION

C O N F I D E N T I A L BAGHDAD 002997 SIPDIS C O R R E C T E D COPY (TWO PARAGRAPHS MARKED ELEVEN) E.O. 12958: DECL: 08/17/2018 TAGS: ENRG EPET ETRD IZ PREL SY TU SUBJECT: BAYJI OIL REFINERY DEALING WITH HFO AND CORRUPTION Classified By: CETI Ambassador Marc Wall, reasons 1.4(b,d) ¶1. (C) Summary: On September 10, 2008, senior Ministry of Oil (MoO) officials, accompanied by Embassy and MNF-I staff, visited Bayji Oil Refinery (BOR) and discussed the situation at the refinery, including measures to cope with a build-up of heavy fuel oil (HFO) levels, which currently restricts production at the refinery. In recent weeks BOR production has dropped from near 100% capacity to approximately 30% capacity due to a halt in the previous practice of injecting HFO into the crude oil export pipeline to Turkey and an increase in HFO export prices that caused Syria, Iran and Jordan to stop their HFO purchases. Additionally, the MoO officials addressed the issue of combating corruption in distribution of products from the refinery. Smuggling from BOR is considered an important source of funding for Sunni insurgent groups in Iraq. MoO and BOR have taken steps to reduce corruption and diversion of petroleum products by reallocating control of the products loading facility from the Oil Products Distribution Company (OPDC) to BOR. In addition, they have adopted the use of meters at the loading facility. End summary. MoO Officials Travel to BOR -------------- ¶2. (U) On September 10, Embassy transported Deputy Minister of Oil for Downstream Mo'tasim Akram Hassan; Inspector General for the Ministry of Oil Abulkareem Luaibi Bahedh; and OPDC DG Karim Jaffar by helicopter to BOR, where they met with North Refinery Company (NRC) DG Ali Al-Obaidi. Energy Fusion Cell (EFC)Director Brigadier General McNinch and EFC Oil Sector Director Col. Freeland, along with EconOff, accompanied the MoO officials and were joined by representatives of MND-N at BOR. The trip was originally planned to discuss HFO levels at BOR, but, instead, Mo'tasim used the trip mainly to discuss corruption. HFO Shutting Down BOR -------------- ¶3. (U) In recent weeks BOR production has dropped from near 100% capacity to approximately 30% capacity. Previously the GOI injected approximately 15,000 bbl/day of HFO into the export line through the north, but the Minister of Oil halted that practice near the end of August. Increased export prices charged by the government for HFO and reduced purchases decreasing another outlet for the HFO. Maintenance issues with some of the Bayji Power Station's generators reduced its demand. All these taken together reduced BOR's capability to produce refined products for Iraq, since HFO storage tanks were filled to capacity and refinery operations would result in additional HFO. BOR is Iraq's largest refinery with 310,000 bbl/day design capacity, as large as Iraq's two other large refineries combined. Reduced capacity at the refinery limits GOI's ability to provide refined products to the Iraqi population, especially kerosene for heating during the coming winter. This increases the need for imports of refined product, putting greater strain on the already pressed distribution system within the country. HFO Prices -------------- ¶4. (C) In July, August, and September, the Iraqi State Oil Marketing Organization (SOMO) increased the export price for HFO. Deputy Minister of Oil Mo'tasim stated these increases represented an effort by the GOI to bring the export price closer in-line with the market price for HFO. He stated that customers bought HFO at the reduced Iraqi export price, then resold the HFO at a higher price with the profits going to fund the insurgency in Iraq. Mo'tasim noted that, although Jordan, Syria and Iran had canceled contracts for HFO, Turkey had not. The GOI believed that the other countries would eventually purchase Iraqi HFO as their stocks ran down. (Comment: Iraq raised the price of HFO several times in the past and usually brought it back down after a period of time.) He acknowledged that there had been some issues with the trucking of HFO to Turkey. The trucks had been stopped along the route to Turkey. This had not resulted from GOI security forces or the KRG Peshmerga, but rather a third unknown party. Mo'tasim did not expect the problem to recur. ¶5. (C) The Deputy Minister stated that Iraq currently prices crude at a $150 per metric ton discount for HFO from the Mediterranean price. He noted transportation costs to Jordan at $165, Iran with re-transport to the Gulf at $70, and $129 to Turkey, but did not specify what amount of HFO this referred to. He said the Syrians currently charge a $75 tax on Iraqi HFO imports. Mo'tasim believes the Syrians will reduce this tax and make Iraqi prices more competitive as their stockpiles reduce. The Deputy Minister said the HFO price increase was a political decision and not a business decision. (Comment: In conversations with other Ministry of Oil (MoO) officials, none have supported the decision to increase the HFO export price. All stated that Minister Shahristani increased the price himself against the advice of other MoO officials. HFO Injection into the Export pipeline -------------- ¶6. (C) DG Obaidi stated that he had authorization to inject 20,000 bbl/day into the northern export pipeline. (Comment: This is a reversal of a previous decision by the MoO to stop the prior practice of injecting 15,000 bbl/day. On September 14, DG Sameer of the Technical Directorate gave EmbOffs a letter from the MoO authorizing up to 10% HFO injection into the export line which would amount to between 30,000 bbl/day and 40,000 bbl/day injection.) This practice allows BOR to process approximately 40,000 bbl/day of crude oil and inject the residual HFO into the export pipeline. HFO injection into the export stream reduces the API rating (i.e., increasing the density to make it "heavier") of the export crude, which reduces the export price. Increases in the volume of export crude and the sale of HFO as crude within the export stream coupled with the extra production from BOR should more than offset the decrease in price for the exported crude oil. MoO officials have noted that this appears to be a sound business decision to make. ¶7. (SBU) DG Obaidi commented that the best way to deal with HFO ultimately was to operate the hydrocracker unit at the refinery. He stated that the unit was 100% mechanically operational at this time, but the refinery did not have the trained personnel to operate it. BOR had teams in Egypt training to operate the unit, but Obaidi said he required at least 100 employees trained to operate the hydrocracker. The DG said that with the hydrocracker online the BOR would operate at an approximate 25%-75% HFO to other refined products ratio as opposed to the current 50%-50% ratio. Additionally, the DG stated that BOR was creating a possible bid for a 100MW HFO burning generator to provide all the electricity needs for the refinery. Combating Product Distribution Corruption -------------- ¶8. (C) Deputy Minister Mo'tasim said the product distribution center associated with BOR had been relocated within the refinery. He added that the refinery now controlled all loading of product from the refinery and the OPDC no longer had any part in the loading of their trucks. In response to Mo'tasim's invitation for comment, MND-N Officer CPT Desilva, in attendance at the meeting, said that, since changing the loading facilities control to the refinery from the OPDC, corruption and smuggling from that point had practically disappeared. Previously, sticks had been used to measure the amount of product loaded, but now meters on site had begun to be used. DG Obaidi added that he plans on adding more meters. ¶9. (C) DG Obaidi complained about the Iraqi Army (IA) unit currently stationed within the refinery. The unit had outlived its usefulness and an Oil Protection Force (OPF) unit needed to be raised to take its place. He asked Capt Desilva for support on this contention. Capt Desilva stated that the IA unit had been introduced into the refinery to combat corruption, but, after more than a year in the refinery, they had possibly become part of the problem, rather than part of the solution. Deputy Minister Mo'tasim said the PM's office had issued an order to remove the IA unit from BOR. DG Obaidi said the IA unit could still be useful for security, but that they should establish a perimeter around the refinery rather than be posted inside the refinery. His employees could maintain security for the refinery with minimal support from the OPF. Although his employees were not armed, they could properly control the entry gates. Shipments to the provinces -------------- ¶10. (C) Deputy Minister Mo'tasim shifted the conversation to the amount of product delivered to the provinces. DG Karim produced a document showing the official figures from the OPDC showing amounts of product delivered to the provinces. Mo'tasim spoke with Brigadier General (BG) Thomas, assistant commander of the 1st Armored Division, about the amount of product received by Ninawa province where the 1st Armored HQ is located. The BG stated Ninawa province's figures were nowhere near the same and that Ninawa had not received its allocation as reported in the official documents. It was agreed that the BG would work with DG Obaidi to verify shipments in the future. (Comment: Inspector General Bahedh became engaged in the discussions about discrepancies between the official figures and the amounts actually delivered. He seemed most concerned about this issue in all the discussions.) Second meeting with managers from OPDC and NRC -------------- - ¶11. (C) In a second meeting Deputy Minister Mo'tasim noted previous changes from Saddam era laws. He stated that, under Saddam, gasoline (benzene) stations had to be at least 20km apart. Under the rules passed in 2003, gasoline stations no longer had any distance requirements. He said many stations had licenses to open, but had never opened, and most existing stations lacked security. He could buy black market fuel a few meters in front of just about any station. Mo'tasim said that there are 162 gasoline stations in Salah ad Din province and only 80 in Baghdad. The Deputy Minister stated that gasoline stations should be located to reflect population densities. He complained that, in a recent raid on a black market operation in Fallujah, all the counterfeit documents seized were from BOR. He encouraged his staff to fight corruption and asked DG Karim to regularly update him on any corruption found in his OPDC. Lastly, he said that they needed to invest in areas of recent conflict. The people in those areas needed to see assistance from the GOI. Comment: -------------- ¶12. (C) We are impressed with the attention to fighting corruption at BOR demonstrated by the MoO officials. That said, it appeared to us that most of the Deputy Minister's focus on the issue was designed to impress embassy/coalition officials present, the Ministry's Inspector General, and OPDC DG. The meetings had a definite staged feel to them. Deputy Minister Mo'tasim picked his MoO travel companions well for a discussion of anti-corruption efforts. He repeatedly complained about letters and emails he received about corruption at BOR. Each instance MND-N officers mentioned any success against corruption at BOR, the Deputy Minister, asked that they report it to the media and their superiors. CROCKER