SOUTHERN OIL EXPORT PIPELINES: IRAQ'S ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 003381 SIPDIS E.O. 12958: DECL: 10/22/2018 TAGS: EPET ENRG EINV PGOV PREL SENV EWWT IZ SUBJECT: SOUTHERN OIL EXPORT PIPELINES: IRAQ'S ECONOMIC LIFELINE Classified By: EMIN Ambassador Marc Wall, reasons 1.4(b,d) ¶1. (SBU) Summary: More than ninety percent of Iraq's revenues come from its crude oil exports. Iraq's southern export pipelines account for greater than eighty percent of that total. The two 48-inch pipelines feeding the Al Basrah Oil Terminal (ABOT) platform were installed in 1975 with a 20 year design life. Between 2004 and 2008 the USG invested more than USD100 million into infrastructure and security upgrades for ABOT. Through the Infrastructure Security Program (ISP) the USG funded an engineering feasibility study to examine the most expeditious way to rebuild the pipelines. Foster Wheeler Energy Limited (FWEL) teamed with the USG and the Ministry of Oil to complete the study in December 2007. The Minister of Oil reviewed the results of the study and declared the resulting export redundancy project as the Oil Ministry's top priority project in January 2008. The first phase of the project will include two surveys of the area in the northern Gulf where new pipelines and Single Point Moorings will be installed. These surveys are scheduled to begin at the end of November 2008. FWEL estimates the offshore component of the project will require two years and the entire project will take five years to complete. While the GOI is moving ahead with a long-term fix for the risks posed by the aging pipelines, it still needs to put in place better contingency measures to respond to the environmental and economic damage an undersea leak would create. End summary. Pipelines Past their Prime -------------- ¶2. (U) Eighty percent of Iraqi crude exports flow through two 48-inch undersea pipelines built in 1975 with a design life of 20 years. The South Oil Company's (SOC) last maintenance (pigging and inspection) on the pipelines was done in 1990. After this inspection the SOC de-rated the capacity of both pipelines, and the pipelines currently run at approximately twenty five percent of their design capacity. SOC managers have warned of potential pipeline failure since a 1999 Iraqi study to determine the pipeline integrity and replacement. When the pipelines run under greater pressure oil has leaked out and been observed on the water's surface. Possible Environmental Impact -------------- ¶3. (SBU) In addition to the economic impact, if one or both of the undersea pipelines in the south rupture there is a real potential for an environmental disaster. A rupture of one line could release up to 22 million gallons of oil into the northern Persian Gulf. This could create problems for Kuwait and Saudi Arabian desalinization plants in addition to the environmental impact on the ecology of the northern gulf. Previous studies predicted clean-up costs could reach into the tens of billions of dollars and impede shipping in the gulf. Currently the GOI does not have the capability to address any spill in the gulf and certainly not one of this magnitude. Iraq belongs to the Gulf regional organizations, Marine Emergency Mutual Aid Centre (MEMAC) and Regional Organization for the Protection of the Marine Environment (ROPME),but is not currently paying their dues. USG Takes up the Rebuilding Cause -------------- ¶4. (U) In 2005 USG experts identified several necessary upgrades to the ABOT platform and spent approximately USD65 million to renovate various systems, including installing meters, improving fire fighting and safety equipment, and repairing the loading arms. In 2007 the ISP program within ITAO identified further security improvements and spent a further USD39 million. These two programs greatly enhanced the conditions on the ABOT platform itself, but did nothing for the undersea pipelines. Using ISP funds, ITAO commissioned FWEL to initiate a feasibility study in August 2007 to recommend the most expeditious plan for replacing the undersea pipelines to ABOT. The USD700,000 survey was completed in December 2007. Pipeline Building Project -------------- ¶5. (SBU) FWEL recommended replacement of the two existing 48-inch pipelines. FWEL, working closely with the SOC and understanding their future objectives, presented six possible options to replace the existing infrastructure offshore in the northern gulf. The SOC chose to install three new 48-inch pipelines and four single point moorings (SPM). The SPMs would offer greater ability to continue loading tankers in heavy seas, although they would also present a potential BAGHDAD 00003381 002 OF 003 problem due to the restricted space in the Iraqi territorial waters. The offshore construction would provide full redundancy for ABOT and meet the SOC goal of 4.5 million barrels a day of export capacity. The offshore piece of the project would cost under USD2 billion. To increase export capacity to 4.5 million barrels a day would require a significant amount of new construction on shore including tanks, pipelines and control equipment. Total cost of both off shore and on shore work to achieve the 4.5 million barrels of capacity would exceed USD5 billion. USG Helps the MoO Effort -------------- ¶6. (SBU) In order to help the Oil Ministry with expediting the project, ITAO funded USD1.5 million to keep FWEL engaged on the project. This funding ended in late September 2008. The bridging funds completed the task at hand. In September 2008 the MoO agreed on contract terms for two surveys of the northern Gulf to identify any unexploded ordnance (UXO), perform a detailed mapping of the contour of the sea bottom, and take core samples. The MoO completed the letters of credit for the first two contracts in October 2008. The first two contracts comprise the bathymetric/geotechnical and UXO surveys. A third Front End Engineering and Design (FEED) contract remains in final negotiations between the SOC and FWEL. This contract will retain FWEL as the lead consultant on the entire project. As part of the FEED contract FWEL will assist the SOC in identifying a contractor for emergency repairs while the construction is being completed. Maritime Border Issues -------------- ¶7. (C) The first survey ships are expected to arrive in the northern Gulf by late November 2008. The surveys will require approximately six months to complete. The MoO, with assistance from the Energy Fusion Cell (EFC) and Embassy advisors, recognizes the need for some level of communication with their neighbors about the survey activity. The surveys will come close to the Iranian border and may need to cross over the Kuwait border. With assistance of the Office of the Transportation Attache the MoO produced a draft Memorandum of Understanding (MOU) to present to the Ministry of Foreign Affairs (MFA). Deputy Minister Hamoud told Embassy Officials that the GOI was engaging the Iranians on the maritime border issue and downplayed potential problems with Iraq's eastern neighbor over the survey. While both the MFA and MoO agree that they need to engage the Kuwaiti government on the survey ship activity, this does not appear to have happened yet. MoO Deputy Minister Shamma has also emphasized the need for close communication between the U.S., Kuwaiti and Iraqi navies. Moving Forward -------------- ¶8. (C) Direct USG involvement in the actual contract ended in September 2008. The two signed contracts and the third FEED contract constitute an approximately USD80 million investment by the MoO. The Government of Japan through the Japan Bank for International Cooperation (JBIC) has pledged more than USD400 million in soft loan assistance for the project. Progress on the JBIC loans proceeded slowly, but they are now in their selection process for a consultant on the contract. Mr. Takamoto of the Japanese Embassy informed EconOffs that FWEL would be eligible to compete to serve as a consultant on the JBIC portion of the project. Potential Alternative Export Routes -------------- ¶9. (SBU) At this time the MoO does not have an alternative to the southern export pipelines. The Iraq Pipeline through Saudi Arabia (IPSA) closed in 1990, but is not a viable alternative since the Saudis currently use the pipeline (to transport natural gas) and the Iraqi side is in disrepair. The Iraq Strategic Pipeline used to connect with the northern pipeline network and go to Syria. This pipeline can no longer carry crude north of Karbala and requires extensive repairs. The MoO has extremely limited export capacity through the Khor Al Amaya Oil Terminal (KAAOT) platform, but the pipeline feeding KAAOT are estimated to be in worse condition than those feeding ABOT. Some limited export capacity remains in the southern ports, but this would not be a viable alternative logistically or financially for the GOI. There are no pipeline connections to Kuwait or Iran. Comment -------------- BAGHDAD 00003381 003 OF 003 ¶10. (C) The application of USD2.2 million effectively facilitated the expenditure of USD80 million in Iraqi funds, with the potential of nearly USD5 billion in total expended on the project. The new southern pipelines will be the largest single building project the MoO has taken on since 2003 and, when complete in 2013, will go a long way towards improving the security of Iraq's economic lifeline. Short-term risks remain, as they have for years. While the MoO is attentive to these risks and has taken measures to reduce them, we will continue to urge the GOI to put in place contingency measures to confront a possible leak from the pipelines, as well as to work more closely with its neighbors to prevent disputes from slowing work on the project. CROCKER