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