OIL MINISTRY MOVES ON ADDITIONAL SOUTHERN OIL

UNCLAS SECTION 01 OF 03 BAGHDAD 001469 SENSITIVE SIPDIS DOE FOR GEORGE PERSON; STATE ALSO FOR EEB AND NEA/I E.O. 12958: N/A TAGS: EPET ENRG EINV PGOV SENV KCOR KU IZ SUBJECT: OIL MINISTRY MOVES ON ADDITIONAL SOUTHERN OIL EXPORT PIPELINES REF: 08 BAGHDAD 3381 ¶1. (SBU) Summary: The Ministry of Oil's South Oil Company continues to make some progress on a project to replace aging underwater pipelines through which three-quarters of Iraq's crude oil is exported. Two surveys, one to identify unexploded ordnance and a second to collect bathymetric data, are underway. The South Oil Company, however, has not provided the necessary authorizations to the company carrying out a Front End Engineering Design study. Recent changes in Oil Ministry and South Oil Company leadership could also lead to a slowdown in project execution. Failure of one of the pipelines would be an ecological disaster and potentially disrupt Government of Iraq (GOI) revenues for an extended period. We will continue to press the GOI leadership to place the proper emphasis on timely project completion. End summary. A Critical Need for Safe Oil Exports -------------- ¶2. (U) In reftel, we detailed the condition of the two 48-inch pipelines feeding the Al Basrah Oil Terminal (ABOT) platform, which were installed in 1975 with a 20-year design life. ABOT is a critical Iraqi facility, since three-quarters of Iraq's crude oil exports are shipped through it, with the remainder passing through Turkey's Ceyhan port. (Although the Khor Al Amaya Oil Terminal (KAAOT) could supplement ABOT, the pipeline feeding KAAOT is in worse condition than ABOT's.) After the South Oil Company's last maintenance inspection, the Ministry of Oil decided to operate the pipelines at approximately twenty-five percent of their design capacity. The rupture of one line could release up to 22 million gallons of oil into the northern Persian Gulf, creating problems for Kuwaiti and Saudi Arabian desalinization plants and to the northern Gulf's ecology. USG Role in Security Upgrades -------------- ¶3. (SBU) Between 2004 and 2008, the USG invested more than $100 million into infrastructure and security upgrades for ABOT. Through the Infrastructure Security Program, the USG funded a $700,000 engineering feasibility study to examine the most expeditious way to rebuild the pipelines, which Foster Wheeler Energy Limited (FWEL) completed in December ¶2007. As a result of the study, the Ministry of Oil (MoO) South Oil Company (SOC) elected 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 be difficult to emplace due to the restricted space in Iraqi territorial waters. The offshore construction, at a cost of almost $2 billion, would provide full redundancy for ABOT and meet the SOC goal of 4.5 million barrels per day (bbl/d) of export capacity. To increase export capacity to the target level, however, SOC also needs to carry out on-shore construction of tanks, pipelines, and control equipment. The total cost of both offshore and on-shore work will exceed $5 billion. Current Status - Surveys -------------- ¶4. (SBU) The U.S. Embassy's Iraq Transition Assistance Office (ITAO) funded $1.5 million to keep FWEL engaged on the project. In September 2008, the MoO agreed on contract terms for two surveys of the northern Gulf to identify any unexploded ordnance (UXO),to perform a detailed mapping of the sea-bottom contour, and to take core samples. In October 2008, the MoO completed the letters of credit to fund the Q2008, the MoO completed the letters of credit to fund the first two contracts. The MoO eventually awarded the UXO survey to London-based Maritime and Underwater Security Consultants, or MUSC, a specialist maritime security consulting company, and the bathymetric/geotechnical survey to an Indian company, Coastal Marine Construction and Engineering Limited, or COMACOE. ¶5. (U) MUSC commissioned the MV Theresa to begin the UXO survey at the end of February and will send a second vessel, Seagull I, to join MV Theresa for an 80-day period. The survey has detected several anomalies. Further work is required to identify the nature of the anomalies and whether items will need to be cleared before construction. COMACOE contracted the Soha Folk, which initiated the bathymetric survey, and will dispatch a second vessel, Logo Surveyor, to BAGHDAD 00001469 002 OF 003 speed up completion of the Qhymetric survey. A third vessel will join them in June to start the geotechnical work. Both surveys have been conducted in the vicinity of ABOT. Additional vessels will carry out surveys along the planned pipeline route from shore to the vicinity of ABOT. ¶6. (SBU) Embassy and MNF-I had earlier engaged the MoO to urge communication and coordination with Iran and Kuwait to ensure that the surveys would not elicit a hostile reaction from the border and security services of Iraq's neighbors. In the event, the survey vessels have not sighted patrol vessels from either country. The SOC also modified the project to delete a pipeline to KAAOT so that survey work close to KAAOT, near Iran, would not be needed. In addition, work on the western edge of the survey area is well within the agreed-upon patrolling areas of the Coalition Navy and far to the east of the location where the Kuwaiti Navy stopped wreck removal activity in December 2007. Current Status - Front End Engineering Design -------------- ¶7. (U) The USG-funded engineering feasibility study recommended that SOC award a Front End Engineering Design (FEED) contract to act as the lead consultant on the entire project. FWEL won the contract in December 2008 and started work in March 2009. In addition to the FEED activity, the scope of the contract includes procurement of major materials/services and supervision of survey work. SOC and FWEL are also discussing a project management proposal that would allow FWEL to continue on the construction phase after the FEED is completed. ¶8. (SBU) Work under the FWEL contract progressed well for the first two months, but has now encountered difficulties. SOC approvals have not been forthcoming or provided slowly. The approvals required include: -- Authority for FWEL to contact prospective suppliers and issue requests; -- Dispatch of SOC employees to the UK to work with FWEL counterparts and engineering firms; -- Use of the modified FWEL procurement process; -- Approval of the modified design; and -- Funding approval. We judge that the difficulties arise from personnel changes at both the MoO and SOC. If all goes well, FWEL has scheduled phase-one completion, construction of two 48-inch pipelines and two SPMs, for the first half of 2011. Phase two comprises construction of a Central Metering and Manifold Platform and one more SPM. Future Uncertainties -------------- ¶9. (SBU) The recent appointment of a new Deputy Oil Minister for upstream activities and SOC director general may cause a review of previous decisions regarding the project; any changes would likely have a negative impact on scheduling and costs. In addition, project execution will continue to suffer due to the very slow MoO approval process, which results partly from an over-centralization of authority. The GOI's budget woes resulting from the steep drop in crude oil prices has also affected the project, leading to a decreased capital budget. Qe SOC recently modified the project to a phased approach with only $700 million earmarked for phase one and nothing presently budgeted for phase two. Finally, the MoO and SOC suffer from human resource constraints. While the current SOC project manager is competent, he has no "back bench" to take over if he should move on. There is only one other person assigned permanently to the project. Qonly one other person assigned permanently to the project. In our view, at least five full-time staff should be devoted to project management and implementation. Comment: Pipeline Failure Means Disaster -------------- ¶10. (SBU) Failure of one of the southern oil pipelines would not only be a massive ecological disaster, it would critically disrupt the GOI's revenues for a prolonged period. The GOI and MoO, however, distracted by more immediate crises, have not provided sustained attention to the project, nor given it the priority required to have replacement for the aging infrastructure put in place in the shortest possible time. We will continue to engage with the MoO and BAGHDAD 00001469 003 OF 003 SOC in an effort to emphasize the project's importance and keep it moving forward. HILL